Credito Valtellinese S.p.A. Registered Offices in Piazza Quadrivio 8 - Sondrio, Italy Tax code and Sondrio Company Registration No.

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1 Credito Valtellinese S.p.A. Registered Offices in Piazza Quadrivio 8 - Sondrio, Italy Tax code and Sondrio Company Registration No Register of Banks No. 489 Parent of the Credito Valtellinese Banking Group - Register of Banking Groups No Website: creval@creval.it Data at 30 June 2017: Share Capital EUR 1,846,816, Member of the Interbank Guarantee Fund CONDENSED INTERIM CONSOLIDATED REPORT AT 30 JUNE 2017

2 COMPANY OFFICERS OF CREDITO VALTELLINESE in office at 4 August 2017 Board of Directors Chairman Deputy Chairman Miro Fiordi Michele Colombo Directors Board of Statutory Auditors Chairman Standing Auditors Substitute Auditors General Management General Manager Substitute Deputy General Manager Deputy General Managers Elena Beccalli Mariarosa Borroni Isabella Bruno Tolomei Frigerio Gabriele Cogliati Giovanni De Censi Flavio Ferrari Maria Elena Galbiati Paolo Stefano Giudici Gionni Gritti Livia Martinelli Tiziana Mevio Paolo Scarallo Alberto Sciumè Angelo Garavaglia Giuliana Pedranzini Luca Francesco Franceschi Edoardo Della Cagnoletta Giorgio Sangiorgio Mauro Selvetti Umberto Colli Saverio Continella Vittorio Pellegatta Enzo Rocca Heads of the Main Corporate Functions Chief Risk Officer (CRO) Chief Operating Officer (COO) Chief Lending Officer (CLO) Chief Financial Officer (CFO) Chief Commercial Officer (CCO) Enzo Rocca Umberto Colli Vittorio Pellegatta Ugo Colombo Roberto Tarricone Manager in charge of financial reporting Simona Orietti Audit Company KPMG S.p.A. 2

3 Contents COMPANY OFFICERS OF CREDITO VALTELLINESE... 2 CONSOLIDATED HIGHLIGHTS AND ALTERNATIVE PERFORMANCE INDICATORS AT 30 JUNE ORGANISATIONAL MODEL AND BREAKDOWN OF THE CREDITO VALTELLINESE BANKING GROUP... 7 REPORT ON OPERATIONS... 9 Events of bank operations during the first half of the year The operational structure, the customers and the commercial performance indicators Performance of Credito Valtellinese shares Information on the main statement of financial position items and on consolidated income statement figures Related party transactions, risks and going concern prospects Events after the close of the half-year Current-year outlook CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Condensed interim consolidated financial statements Notes to the condensed interim consolidated financial statements CERTIFICATION OF THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO ARTICLE 81-TER OF CONSOB REGULATION NO / REPORT OF THE AUDITORS

4 CONSOLIDATED HIGHLIGHTS AND ALTERNATIVE PERFORMANCE INDICATORS AT 30 JUNE 2017 STATEMENT OF FINANCIAL POSITION DATA 30/06/ /12/2016 Change (in thousands of EUR) Loans and receivables with customers 16,857,488 17,429, % Financial assets and liabilities 5,061,749 5,159, % Non-current assets held for sale and disposal groups 507,709 1,498 n.s. Total assets 25,393,944 25,469, % Direct funding from customers 20,023,354 21,108, % Indirect funding from customers 11,715,846 11,602, % of which: - Managed funds 7,504,682 7,290, % Total funding 31,739,200 32,711, % Equity 1,548,538 1,753, % SOLVENCY RATIOS 30/06/ /12/2016 Common Equity Tier 1 capital / Risk-weighted assets (CET1 capital ratio) 10.5% 11.8% Tier 1 capital / Risk-weighted assets (Tier 1 capital ratio) 10.5% 11.8% Total own funds / Risk-weighted assets (Total capital ratio) 12.5% 13.0% FINANCIAL STATEMENT RATIOS 30/06/ /12/2016 Indirect funding from customers / Total funding 36.9% 35.5% Managed funds / Indirect funding from customers 64.1% 62.8% Direct funding from customers / Total liabilities 78.9% 82.9% Customer loans / Direct funding from customers 84.2% 82.6% Customer loans / Total assets 66.4% 68.4% CREDIT RISK (*) 30/06/ /12/2016 Change Net bad loans (in thousands of EUR) 609,244 1,272, % Other net doubtful loans (in thousands of EUR) 1,760,193 1,881, % Net non-performing loans (in thousands of EUR) 2,369,437 3,154, % Net bad loans / Loans and receivables with customers 3.6% 7.3% Other net doubtful loans / Loans and receivables with customers 10.4% 10.8% Net non-performing loans / Loans and receivables with customers 14.1% 18.1% Coverage ratio of bad loans 61.0% 54.4% Coverage ratio of other doubtful loans 28.4% 27.6% Coverage ratio of net non-performing loans 41.0% 41.5% Cost of credit (**) 3.48% 2.68% (*) Loans and receivables with customers classified under assets held for sale are not included. (**) Calculated as the ratio between the net impairment losses due to deterioration of loans and year-end loans. 4

5 INCOME STATEMENT DATA (in thousands of EUR) 1st half of st half of 2016 Change Net interest income 198, , % Operating income 365, , % Operating costs (255,880) (261,152) -2.02% Operating profit 109, , % Pre-tax profit (loss) from continuing operations (190,523) 7,679 n.s. Post-tax profit (loss) from continuing operations (193,000) 21,291 n.s. Profit (loss) for the period (194,828) 19,136 n.s. ORGANISATIONAL DATA 30/06/ /12/2016 Change Number of employees 3,938 4, % Number of branches % OTHER ECONOMIC INFORMATION 1st half of st half of 2016 Cost Income ratio (*) 69.4% 69.7% 63.2% Personnel expenses (**) / Number of employees Basic earnings (loss) per share (1.757) (3.004) Diluted earnings (loss) per share (1.757) (3.004) (*)First half of 2017 figure calculated net of contributions paid for SRF (EUR 7,922 thousand), of DTA fees (EUR 1,077 thousand) and of non-recurring profits related to the implementation of the "Solidarity Fund" (EUR thousand); 2016 figure calculated net of ordinary and extraordinary contributions paid for SRF, NRF and DGS (EUR 32,110 thousand), of DTA fees (EUR 4,200 thousand) and of non-recurring expenses related to the implementation of the "Solidarity Fund" (EUR 60,995 thousand); first half of 2016 figure calculated net of nonrecurring expenses related to the contribution to the SRF (EUR 7,594 thousand) and the DTA fee for EUR 3,170 thousand. (**)Costs non chargeable to employees and non-recurring profit related to the implementation of the Solidarity Fund (EUR 6,816 thousand). With reference to the financial highlights and alternative performance indicators represented above, the amounts used for their calculation, if not specified in the notes to the tables, are indicated in the Interim Report on operations Information on the main statement of financial position items and on consolidated income statement figures. These indicators, prepared by the management, provide additional information to investors since they facilitate the understanding of statement of financial position and income statement, they should not be considered as a replacement of those required by IAS/IFRS and are not always comparable with those provided by other banks. 5

6 ASSIGNED RATINGS Fitch Ratings Long-term IDR Short-term IDR Outlook Last "rating action" on 22 June 2017 BB- B Negative Moody's Ratings Long-term Ratings Short-term Ratings Outlook Last "rating action" on 25 January 2016 Ba1 Not-Prime Stable DBRS Ratings Senior Long-Term Debt & Deposit BB (high) Short-term Debt & Deposits R-3 Trend Stable Last "rating action" on 13 June 2017 INFORMATION ON SHARES 30/06/ /12/2016 Number of ordinary shares 110,887, ,887,236 Listed price at end of the period Average listed price for the period Average stock-market capitalisation (millions of EUR) During the first half of 2017, the reverse split of Creval ordinary shares was carried out according to a ratio of 1 new ordinary share for every 10 existing ordinary shares. The total amount of the share capital remained unchanged. The figures at 31 December 2016 were restated. 6

7 ORGANISATIONAL MODEL AND BREAKDOWN OF THE CREDITO VALTELLINESE BANKING GROUP The Credito Valtellinese Banking Group currently consists of territorial banks, specialised companies and special purpose companies for the provision of services - with a view to achieving synergies and economies of scale - to all the companies of the Group. The current group structure is graphically represented below. MARKET SPECIALISED COMPANIES CORPORATE CENTRE Credito Valtellinese Global Assicurazioni * Creval Sistemi e Servizi Credito Siciliano Global Broker * Stelline Real Estate Creval Piùfactor** (*) Insurance companies subject to management and coordination by Credito Valtellinese pursuant to Articles 2497 et sequitur of the Italian Civil Code. (**) The Company will be operational as soon as the authorisation for carrying on the granting of loans is obtained pursuant to Article 107 of the Consolidated Banking Act and of the current Supervisory Provisions for the Financial Intermediaries of the Bank of Italy. Creval PiùFactor, as finance company, after registering in the Sole Register as set forth in Article 106 of the Consolidated Banking Act, will become part of the Creval Group. At 30 June 2017, the Credito Valtellinese Group is present in Italy with a network of 438 Branches, in eleven regions, through the territorial banks characterising the Market Segment : - Credito Valtellinese S.p.A., the Parent, present with its own network of 319 branches, most of which are in Lombardia, as well as in Valle d'aosta, Piemonte, Veneto, Trentino Alto Adige, Emilia Romagna, Toscana, Lazio, Marche, as well as in Umbria. - Credito Siciliano S.p.A. is present in all the provinces of Sicilia with 119 branches and in Roma, Torino, Milano and Firenze with four branches dedicated to loans against pledges. The following companies characterise the "Specialised Companies Segment : - Global Assicurazioni S.p.A. 1, a multifirm insurance agency specialised in the brokerage and management of standard insurance policies in favour of individuals and household customers. - Global broker S.p.A. 2, insurance broker specialised in the brokerage and management of insurance policies in favour of companies. The companies providing services complementary to banking business characterising the "Corporate Centre Segment" complete the Group: 1 Companies subject to management and coordination by Credito Valtellinese and therefore included in the consolidation scope, even if not included in the Group, pursuant to the supervisory provisions, in that they carry out insurance activities. 2 See previous note. 7

8 - Creval Sistemi e Servizi S.c.p.A., is the Group's centre for ICT management and development, organisation, back office, real estate services and support processes. - Stelline Real Estate S.p.A., R.E.o.Co. (Real Estate Owned Company), Group company exclusively dedicated to asset repossessing. 8

9 REPORT ON OPERATIONS The general economic framework 3 The recovery of the world economy is consolidating. Trading, supported by the trend in investments in most economies, is accelerating since the end of In financial markets, volatility is at very low levels. However, uncertainty about global economic policies that could have a negative impact on the valuations of investors remains high. In the United States, the timing and details of the tax expansion measures announced at the beginning of the year have not yet been defined. Any commercial protection initiatives may affect international trade. After an overall decline in spring, developed countries Government bonds yield increased starting from the last week of June, albeit remaining low, also reflecting the consolidation of monetary conditions expected to be less accommodating in the United States and the signs of strengthening of the economic activity in the Eurozone. In the Eurozone, sovereign risk premiums decreased, also as a result of the outcome of the French elections. In the Eurozone, the last indications are conflicting: the favourable signs on the growth of the economic activity increased, whereas the downward trend in inflation was surprising compared to the expectations of the previous months. The Governing Council of the ECB believes that maintaining a high level of monetary adjustment is still required to ensure a lasting adjustment of inflation to the target. According to the estimates of the Bank of Italy, the growth of GDP in Italy, revised upwards by Istat in the first quarter, continued in spring, reaching around 0.4 percent. The product should have benefited from the favourable trend in the services sector, in line with the indications from the companies, and from the recovery of added value of the industry, after the temporary decrease recorded at the beginning of the year. In the first part of the year, exports continued to expand to a greater extent in non-eu markets. Prospects on foreign orders are positive. The surplus of the current account of the balance of payments remains high (2.6 percent of GDP) and contributes to the significant reduction in the foreign net debt position of the Country, down to 13.5 percent of the product. In the first quarter, the growth in employment and hours worked continued, despite the fact that incentives for new hires on permanent contracts have come to an end. The preliminary data of Recognition on labour force indicates that on the average of April and May the number of employees further increased by 0.2 percent compared to the previous two-month period. In winter, the contractual salaries of the private sector continued to grow modestly (0.5 percent compared to the previous year); those actually increased at a higher rate, in compliance with the cycle improvement. In the second quarter, average consumer price inflation in Italy rose slightly, affected in particular by the trend in regulated energy prices. In June, however, according to provisional data, it was still slightly above 1 percent. The underlying price trend remains low as well. Households and businesses revised inflation expectations upward, but a 3 Bank of Italy Economic Bulletin no. 3/ Updated with the figures available on 7 July 2017, unless otherwise indicated 9

10 significant strengthening is not expected in the next twelve months compared to the current levels. The macroeconomic scenario incorporates market expectations for a gradual adjustment of long-term interest rates and overall relaxed credit conditions, in compliance with the assumption that there are no particular tensions in the financial system, or episodes of significant increase in volatility and risk premiums. The growth projections are subject to mainly downward risks: the uncertainties associated with financial markets are accompanied by those related to the development of global economic and commercial policies. For inflation, downward risks could derive from a wage trend lower than foreshadowed, whereas the change in prices of energy raw materials in the near future continues to be characterised by high uncertainty. The Italian banking system The growth in loans granted to the private non-financial sector continued, supported by the trend in loans to households. Corporate lending recorded different trends depending on the business segment and the size of the company. In the three months ending in May, the growth in loans to the private non-financial sector continued (1.3 percent, net of seasonal effects and year on year) supported by loans to households (up by 2.8 percent). Growth in mortgages slightly decreased (to 2.5 percent) as consumer credit increased. In May, loans to businesses were at a standstill over three and twelve months (0.2 and 0.3 percent, respectively). In connection with the lower level of the cost of credit and the gradual strengthening of prospects for growth, applications for bank credit by companies are curbed by their wide availability of liquidity. The trend of credit for businesses remains very heterogeneous among the different sectors of economic activity: higher in the services segment (2.3 percent over twelve months ending in May), slightly positive for manufacturing companies (0.6 percent), still negative for property developers (-5.4 percent). The trend in loans is also more favourable for large businesses (0.7 percent) than for smaller ones (-3.1 percent). From February to May, total funding of Italian banks increased; the increase in resident deposits and the increased use of refinancing through the Eurosystem more than offset the drop in wholesale funding and bonds placed with the branch. In May, the average rate on new loans to businesses was 1.6 percent, at historically low levels. The dispersion in the cost of loans between borrowers with different creditworthiness decreased, but remains high compared to the past. The cost of new mortgages decreased by a tenth for those with a floating rate (1.7 percent) and remained stable for those with a fixed rate (at 2.3 percent). The differential with the Eurozone was close to zero for loans to businesses and confirmed very limited values for households (29 basis points). The rate of impairment of the credit of Italian banks, benefiting from the most favourable macroeconomic scenario, turned to pre-crisis levels for exposures to households, whereas it came to slightly higher values for loans to businesses. In the first quarter of 2017, the flow of new non-performing loans to total loans, net of seasonal effects and year-on-year, came to 2.4 percent; for loans to businesses, to 3.6 percent and for households to

11 The financial market in Italy In the second quarter, the Italian financial market conditions improved, in line with those of other countries of the Eurozone. The decline in uncertainty in the area after the French presidential election, the publication of macroeconomic data more favourable than expected and the easing of concerns about the Italian banking sector contributed to this. In the period as a whole, the yields of Italian Government bonds remained virtually unchanged; they were not affected by Italy's downgrading from BBB+ to BBB by the Fitch rating agency in April. The yield of the ten-year bond, which dropped albeit with fluctuations until mid-late June, rose to 2.34 percent. The yield spread of the ten-year bond compared to the German one decreased by 22 basis points, reaching 177. From the end of March, the general Borsa Italiana index increased by 2.5 percent against a 0.4 percent change in the index of the main companies of the Eurozone. The improvement of expectations concerning the growth of company profits mainly contributed to this. The expected volatility derived from the prices of the options on the stock market indexes decreased after the political elections in France, reaching values lower than longterm average values. During the same time space, share prices of Italian banks increased by 15 percent (against a 7 percent increase in the area) whereas the corresponding premiums on credit default swaps (CDS) decreased on average (by 82 basis points). The capital strengthening of the banking system as well as the definition of the interventions for intermediaries in a crisis situation in Italy contributed to this. 11

12 Events of bank operations during the first half of the year The most important events that characterised the management of the Creval Group during the first half of 2017 and that, if necessary, were the subject-matter of specific disclosures to markets are mentioned below Action plan In line with established times, activities aimed at achieving priority objectives set out in the Action Plan, approved in November last year, continued. Initiatives for the management and valuation of non-performing loans - The Elrond project The securitisation of bad loans portfolio originated by Credito Valtellinese and Credito Siciliano ("Originator") for a gross book value ("GBV") of approximately EUR 1.4 billion at the cut-off date (30 November 2016) was completed on 14 July 2017 by transferring to a securitisation vehicle Elrond NPL 2017 S.r.l. - established pursuant to Italian Law 130/99, and issuing by the latter of three different classes of ABS securities: - a senior tranche of EUR 464 million, with Baa3/BBB- rating by Moody s and Scope Ratings, in line with the requirements of the regulations relating to the State guarantee (GACS), - a mezzanine tranche with B1/B+ rating by Moody s and Scope Ratings - and a junior tranche, without rating, of EUR 42.5 million and EUR 20 million, respectively. For the securities of the senior tranche with a yield of Eu6m + 50bps the State guarantee GACS was requested (request being analysed by the MEF) and are fully considered by Credito Valtellinese, whereas the mezzanine and junior tranches were placed by 95% with an institutional counterpart at the end of a competitive process. The special servicing activities of the portfolio will be carried out, without interruption, by Cerved Credit Management, which will also continue to manage in outsourcing the residual bad loans book of Creval. Therefore, the Elrond operation further affirmed the strategic partnership between Creval and Cerved started in 2015 and intended to maximise the collections on non-performing positions, as part of the NPL strategy of the Group. The transaction ended on 14 July 2017, i.e. after the end of the half-year. The economic effects of the transaction recognised in the condensed interim consolidated report were recorded in Net impairment losses on loans and receivables and other financial assets. The Elrond portfolio was classified in "Non-current assets held for sale and disposal groups. Accounting and prudential derecognition of the portfolio will be recognised in the third quarter as well as the positive effect by means of risk substitution of the expected obtaining of a GACS over senior notes. The deconsolidation of the bad loan portfolio determines a significant improvement in asset quality indicators. The impaired loans / total gross loans and receivables ratio (NPL ratio) decreased from 27.2% as at 31 March 2017 to 21.6% as at 30 June. The coverage ratio of total impaired loans decreased from 41.6% as at 31 March 2017 to 41%, while the coverage ratio of bad loans increased from 54.4% to 61%. The operation one of the priorities of the Action Plan is a fundamental step in the de-risking plan in progress, sets the asset quality indicators of the Group at a level 12

13 close to direct peers and closer to the overall average of the Italian banking system and, looking ahead, sets the stage for better market positioning. - Sale of a non-performing loan portfolio (GBV equal to EUR 50 million) During the half-year, an agreement was reached for the sale of a portfolio of nonperforming secured loans, classified as unlikely to pay (UTP) and bad loans, for a book value of approximately EUR 50 million, against a total value of the portfolio approximately equal to 44% of the GBV. The portfolio consists of credit exposures mainly towards companies in the real estate sector, with mainly residential underlying. Initiatives aimed at increasing operational efficiency - Rationalisation plan of the operating network and Trade-union agreement for redundancy management The objective of branch network rationalisation was fully reached, in advance compared to the timeframe expected: more than 90 "traditional" branches were closed between December and June. Some of these were transformed in digital branches, bringing to 7 the total of the format "Bancaperta" operating units. The objective of reducing the workforce was fully reached through the use of the Solidarity Fund for the credit sector, making use only of voluntary schemes. 234 employees subscribed to the plan of redundancy incentives and early retirement packages, agreed with the trade unions signed in December The first 160 employees left on 1 April 2017, while the others will be terminated on 1 December The decrease in the workforce will cut costs for about 9 million in 2017 and, when fully implemented, for about 18 million a year, from Valuation of a portfolio of real estate assets of the Group, by means of a sale & lease back transaction On 29 June 2017, Creval and Beni Stabili Siiq S.p.A. leading company in Italy in the real estate market concluded a sale & lease back transaction concerning a portfolio of properties in furtherance of the company s purpose, consisting of 17 property units for a total gross floor area of approximately 21,700 square meters (the Property Area ). The Property Area consists of properties mostly for the use of offices and branches of the Creval Group, mainly located in Milan and in the rest of Lombardy, as well as some real estate portions located in Rome and Sicily, which will remain available to the companies of the Creval Group in accordance with lease agreements with duration ranging from 9 to 12 years, liable to extension at the lessee's discretion, for an additional 6 years. For the Creval Group, the transaction determined in the consolidated financial statements a capital gain of approximately EUR 70 million, considering the price defined for the Property Area - of approximately EUR 115 million - and the relevant carrying amount as at 31 December 2016 of approximately EUR 46 million, with a positive contribution in terms of CET1 of approximately 50 basis points and limited recurring effects at the level of the Income Statement. The transaction is part of the Action Plan initiatives envisaged by the Action Plan and prearranged to strengthen the capital ratios. 13

14 Creval Piùfactor - new company for the development of the factoring activity Creval PiùFactor S.p.A., company fully controlled by Credito Valtellinese, was set up on 10 May 2017 for the development of the factoring without recourse and with recourse, both direct and indirect, in favour of the group s customers. The initiative falls within the objectives defined by the Action Plan in relation to the optimisation and innovation of the service model, and will allow to strengthen the offer for the SMEs, with potential positive effects in terms of profitability, thanks to the increase in the Group revenues, with low capital absorption, in line with the targets of the Plan. The start-up is expected to reach a turnover volume greater than EUR 1,500 million within the next three years. The Company, set up with share capital of EUR 30,000,000, will be operational as soon as the authorisation for carrying on the granting of loans is obtained pursuant to Article 107 of the Consolidated Banking Act and of the current Supervisory Provisions for the Financial Intermediaries of the Bank of Italy, and after registering in the Sole Register set forth in Article 106 of the Consolidated Banking Act, will become part of the Creval Group. Strategic partnership for the development of the factoring activity with Generalfinance On 29 June 2017, Credito Valtellinese, GGH Gruppo General Holding S.r.l. ( GGH ) and Generalfinance S.p.A. ( Generalfinance or GF ), company 100% controlled by GGH, finalised the agreement, signed in November 2016, for developing a strategic partnership in the factoring sector, which envisages among other things - the entry of Creval in the share capital of Generalfinance with a qualified non-controlling interest (equal to approximately 47%). In particular, on the same date, the purchase by Creval of GF shares owned by GGH was completed, totalling EUR 4 million, as well as the subscription and the paying-up, always by Creval, of a reserved share capital increase of Generalfinance, for an equivalent value of EUR 7 million, including share premium. Generalfinance is an intermediary authorised to the registration in the Sole Register of Financial Intermediaries held by Bank of Italy operating in the field of loans to businesses, with an annual turnover of approximately EUR 275 million and a net profit at the end of 2016 of approximately EUR 2 million. The Business Plan shared with the management of Generalfinance envisages a significant development of the business of GF and achieving a target turnover of EUR 510 million in 2019 (CAGR +23%, compared to the end of 2016) and a net profit of EUR 4 million in 2019 (CAGR +26%). There are also potential synergies in the management of NPLs, thanks to the specific expertise acquired by Generalfinance in the financing of companies under procedure or in "special situations". This transaction is also consistent with the objectives of the Action Plan on managing and reducing the impaired loans of the Group and developing new business lines aimed at strengthening the offer dedicated to the SMEs present in areas not served by the Group, thanks to the distinctive skills of Generalfinance, with positive effects in terms of profitability. 14

15 The operational structure, the customers and the commercial performance indicators The territorial network At 30 June 2017, the branches forming the territorial network of the Credito Valtellinese Group are 438 as represented below. 192 BRANCHES CREVAL 191 CREDITO SICILIANO 1 8 BRANCHES (CREVAL) CREDITO VALTELLINESE 319 CREDITO SICILIANO BRANCH (CREVAL) 12 BRANCHES (CREVAL) CREVAL GROUP BRANCHES CREVAL 22 CREDITO SICILIANO 1 11 BRANCHES CREVAL 10 CREDITO SICILIANO 1 6 BRANCHES (CREVAL) 30 BRANCHES (CREVAL) 2 BRANCHES (CREVAL) 38 BRANCHES CREVAL 37 CREDITO SICILIANO BRANCHES (CREDITO SICILIANO) 15

16 Other distribution channels The following other distribution channels complete the operational structure: ORGANISATIONAL DATA 30/06/ /12/2016 Change Number of ATMs % Number of POS 26,997 27, % Bancaperta line users 280, , % Interbank Corporate Banking contracts 17,752 17, % At the end of June 2017, "active" Internet users in the Creval Group - customers who have performed at least one transaction in the last six months - total 280,468, compared to 273,551 at the end of December of the prior year, with an increase of 2.53%. Customers and commercial performance indicators At 30 June 2017, the Group's customers numbered 969,851. They numbered 982,174 at the end of 2016 and 974,596 at the end of the first quarter of The retention rate is equal to approximately 95.98%, whereas the cross selling indicator - equal to 4.13 products on average per customer (calculated on the basis of the "ABI method"), attests also a high degree of optimisation of commercial relations. The personnel At the end of June 2017, the registered workforce of the companies included in the consolidation scope of the Group consisted of 3,957 collaborators (compared to 4,081 resources at the end of 2016). These include 19 collaborators employed by companies or entities outside the Group, among them Fondazione Gruppo Credito Valtellinese, Global Assistance, the Pension Fund for the Employees of the Credito Valtellinese Group and Cerved Group. In terms of professional categories, the total workforce of 3,957 can be broken down as follows: - 53 executives; - 1,501 middle managers; - 2,403 workers in other professional categories. 16

17 Workforce by contract category at 30 June 2017 EXECUTIVES 1.4% MIDDLE MANAGERS 37.9% OTHER PROFESSIONAL CATEGORIES 60.7% EXECUTIVES MIDDLE MANAGERS OTHER PROFESSIONAL CATEGORIES 17

18 Performance of Credito Valtellinese shares In the first part of the year, the Italian banking system was affected by a certain weakness. The negative overtone of institutional investors was affected, in addition to the already known issue of non-performing loans still present in the Italian banks, by the systemic risk that hung over Monte dei Paschi di Siena and over the survival of the banks of the Veneto-based banks, as well as the turnaround of Unicredit, positively resolved in spring, with a massive increase in capital and the disposal of assets that allowed to definitively close the many questions on the equity condition of the bank. In the following months, the improvement of Italian economic indicators for households and businesses led to repeated developments in the growth forecasts in our economy and in Europe. Therefore, the Italian stock market and the lending department, in particular, benefited from these positive factors together with the maintenance of the ECB's ultraaccommodative policies and with the acceleration of the process of NPL disposals by the banks. The general index of the Italian stock market closed the first half up by 8.6% whereas the banking sector recorded a 17% increase. The Credito Valtellinese share outperformed the market in the first two months of the year, after which the performance of the share was affected by the lack of confidence on the credit sector. These many changes allowed the share to close the first six months par. After this date, also as a result of the announcement to the market of the finalisation of the securitisation of the NPLs, described above, the share benefited from a quick re-pricing on the market. During the half year, the average listed price for the Credito Valtellinese share was EUR , with a minimum of EUR recorded on 18 April and a maximum of EUR 5.19 on 27 January (at daily closing values). The average listed price in the half year slightly decreased by 1.06% on the closing price of 2016, while the FTSE Italia All Share index recorded a 5.69% increase for the same period. The Italian banking index increased by 6.08%. At the end of the half year, Credito Valtellinese, in line with the trend in prices, recorded a market capitalisation of EUR 413 million, substantially unchanged compared to the end of In the first half of the year, the volumes of Credito Valtellinese shares on the Italian Stock Exchange increased significantly compared to the same period in The daily average volume of shares traded on the stock exchange listing of Milan in the first six months of the year stood at approximately 1.5 million shares. The presence of institutional investors in the share capital is constantly growing; the coverage by financial analysts remained constant. Currently, seven brokers express recommendations - the majority of which positive - on the Creval share. The charts below show the trend of Credito Valtellinese share prices comparing at the same time with the main indexes of reference in the first half of

19 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Credito Valtellinese FTSE IT - All Share FTSE IT - Banks Source: Bloomberg, adjusted values 19

20 Information on the main statement of financial position items and on consolidated income statement figures The interim results are commented upon in summary format, drawn up on a consolidated basis, reclassified according to the presentation criteria considered most appropriate for presenting a fair view of the Group's operating performance. The aggregates and reclassifications regarding items of the financial statements as envisaged in Bank of Italy Circular no. 262/05 as amended are detailed below. The reclassified consolidated statement of financial position is shown below. (in thousands of EUR) ASSETS 30/06/ /12/2016 Change Cash and cash equivalents 156, , % Financial assets held for trading 20,280 18, % Available-for-sale financial assets 4,495,735 5,436, % Held-to-maturity investments 810, Loans and receivables with banks 916, , % Loans and receivables with customers 16,857,488 17,429, % Equity investments 23,268 9, % Property, equipment and investment property and intangible assets (1) 449, , % Non-current assets held for sale and disposal groups 507,709 1,498 n.s. Other assets (2) 1,155,950 1,097, % Total assets 25,393,944 25,469, % (1) Include the items "120. Property, equipment and investment property" and "130. Intangible assets"; (2) Include the items "140. Tax assets" and "160. Other assets". (in thousands of EUR) LIABILITIES AND EQUITY 30/06/ /12/2016 Change Due to banks 2,655,250 1,661, % Direct funding from customers (1) 20,023,354 21,108, % Financial liabilities held for trading 674 1, % Hedging derivatives 263, , % Other liabilities 727, , % Provisions for specific purpose (2) 171, , % Equity attributable to non-controlling interests 3,378 4, % Equity (3) 1,548,538 1,753, % Total liabilities and equity 25,393,944 25,469, % (1) Includes the items "20. Due to customers" and "30. Securities issued"; (2) Include the items "80. Tax liabilities", "110. Post-employment benefits" and "120. Provisions for risks and charges"; (3) Includes items "140. Valuation reserves", "170. Reserves", "180. Share premium reserve", "190. Share Capital", "200. Treasury shares" and "220. Loss for the period". 20

21 Loans and receivables with customers At 30 June 2017, loans and receivables with customers amounted to EUR 16.9 billion compared to EUR 16.7 billion at the end of December 2016, re-determined net of the Elrond portfolio. The new loans totalled EUR 1.1 billion. The quality of the loans is clearly improving (EL "expected loss" on loans equal to 32 basis point for the "individuals" segment, 47 bps for the "corporate" and 59 bps for the "retail" segment ). (in thousands of EUR) 30/06/ /12/2016 Change Current accounts 2,346,748 2,654, % Reverse repurchase agreements 649, ,858 n.s. Mortgages 9,360,974 8,971, % Credit cards, personal loans and salary-backed loans 278, , % Finance leases 418, , % Other loans 1,384,599 1,746, % Debt instruments 48,841 57, % Total net performing loans and receivables 14,488,051 14,275, % Bad loans 609,244 1,272, % Unlikely to pay 1,607,399 1,683, % Past due non-performing loans 152, , % Total net non-performing loans and receivables 2,369,437 3,154, % Total net loans and receivables 16,857,488 17,429, % At the end of the period, Non-Performing Exposure (NPE), net of impairment losses, were EUR 2.4 billion compared to EUR 3.2 billion at the end of December The reduction is essentially attributable to disposals made during the period and mainly to the Elrond operation. The coverage ratio of total NPE was 41% compared to 41.5% at the end of December In detail, net bad loans amounted to EUR 0.6 billion, with a coverage ratio of 61%. The unlikely to pay were stable at EUR 1.6 billion, with a 29.8% coverage ratio, while little more than EUR 150 million loans were past due and/or overdue non-performing loans. 30/06/ /12/2016 (in thousands of EUR) Gross amount Impairment losses Carrying amount coverage % Gross amount Impairment losses Carrying amount coverage % Non-performing loans Bad loans 1,562, , , % 2,787,065-1,514,959 1,272, % Unlikely to pay 2,290, ,740 1,607, % 2,384, ,195 1,683, % Past due non-performing loans 166,917-14, , % 215,783-17, , % Total non-performing loans 4,019,134-1,649,697 2,369, % 5,386,904-2,232,876 3,154, % Performing loans 14,564,999-76,948 14,488, % 14,363,285-88,117 14,275, % Total loans and receivables with customers 18,584,133-1,726,645 16,857,488 19,750,189-2,320,993 17,429,196 The above figures do not include loans and receivables with customers classified among assets held for sale related to the Elrond operation described above. The coverage percentage is calculated as the ratio between impairment losses and the gross amount. 21

22 Funding from customers Direct funding was EUR 20 billion, down by 5.1% compared to EUR 21.1 billion at the end of December 2016, mainly as a result of the reduction of the deposits of central counterparties (Cassa di Compensazione e Garanzia). Commercial deposits slightly decreased over the previous quarter, affected by the negative trend of bond issues and by the reduction of more expensive technical forms in favour of managed funds. (in thousands of EUR) 30/06/ /12/2016 Change Current accounts and deposit accounts 13,896,680 13,521, % Reverse repurchase agreements 1,600,624 2,285, % Term deposits 1,022,153 1,628, % Other 575, , % Due to customers 17,094,884 18,034, % Securities issued 2,928,470 3,073, % Total direct funding from customers 20,023,354 21,108, % Indirect funding amounted to EUR 11.7 billion compared to EUR 11.6 billion at the end of December Assets under management showed a more pronounced trend (+2.9%), led by an increase in the sale of mutual funds and insurance products. (in thousands of EUR) 30/06/ /12/2016 Change Asset management 1,970,918 2,149, % Mutual funds 2,836,253 2,549, % Insurance funds 2,697,511 2,591, % Total Managed funds 7,504,682 7,290, % Assets under administration 4,211,164 4,312, % Total indirect funding 11,715,846 11,602, % 22

23 Financial assets and liabilities held for trading, available-for-sale financial assets and heldto-maturity investments Financial assets amounted to EUR 5.3 billion. Of these, EUR 4.6 billion were represented by Italian Government bonds, mainly classified in the AFS (Available for sale) portfolio, with a duration of approximately 3.18 years, considering the transactions for interest-rate risk hedging. The valuation reserve on AFS securities, recorded among equity items net of tax effects, was negative for EUR 38 million and almost entirely related to government bonds. (in thousands of EUR) 30/06/ /12/2016 Change Financial assets and liabilities held for trading Debt instruments 17,163 17, % Equity instruments and OEIC units 2, n.s. Derivative financial instruments with positive fair value 949 1, % Total assets 20,280 18, % Derivative financial instruments with negative fair value , % Total assets and liabilities 19,606 17, % Available-for-sale financial assets Debt instruments 4,292,023 5,199, % Equity instruments and OEIC units 203, , % Total 4,495,735 5,436, % Held-to-maturity investments Debt instruments 810, Hedging derivatives -263, , % Financial assets and liabilities 5,061,749 5,159, % The liquidity position The liquidity position was largely positive. The counterbalancing capacity up to 3 months amounted to EUR 4.1 billion. The exposure to the ECB for refinancing operations TLTRO2 (Targeted Longer-Term Refinancing Operations) stood at EUR 2.5 billion. 23

24 Equity investments The total value of equity investments at 30 June 2017, measured at equity, was EUR 23 million, up compared to the end of December 2016, due to the purchase of the equity investment in Generalfinance S.p.a.. The portfolio represents only investments in companies subject to joint control and to significant influence - companies in which Credito Valtellinese has a direct or indirect holding of at least 20% of voting rights, "potential" voting rights or, albeit with a lower percentage, has the power to influence financial and management policy through specific legal positions. The main equity investments are summarised below. (in thousands of EUR) equity investment % 30/06/2017 Generalfinance S.p.A. 46.8% 14,286 Global Assistance S.p.A. 40.0% 4,277 Creset - Crediti, Servizi e Tecnologie S.p.A. 40.0% 2,410 Other - 2,295 Total 23,268 24

25 Equity attributable to the owners of the parent The equity attributable to the owners of the parent at 30 June 2017 totalled EUR 1,549 million, compared to EUR 1,753 million at 31 December The statement of reconciliation between the Parent's equity and profit for the period and the corresponding amounts resulting from the consolidated financial statements at the same date, is illustrated below. 30/06/ /12/2016 (in thousands of EUR) Equity of which: profit (loss) for the period Equity of which: profit (loss) for the year Balances as per parent financial statements 1,580,488 (184,740) 1,774,910 (351,725) Investee results as per separate financial statements: - consolidated on a line-by-line basis (3,345) (3,345) (14,655) (14,655) - equity accounted Amortisation of positive differences: - past years (491) - (491) - Differences compared to carrying amounts for: - companies consolidated on a line-by-line basis (28,856) - (106,060) (67,710) - equity investment impairment reversal ,000 99,000 - equity accounted companies 1,672-1,421 (584) Adjustment to dividends collected during the period: - on retained earnings - (7,263) - (6,737) Other consolidation adjustments: - elimination of intra-group profit and loss (1,103) (2) (1,084) 9,361 - other adjustments (572) (1,015) Balances as per consolidated financial statements 1,548,538 (194,828) 1,753,430 (333,103) 25

26 Own funds and capital ratios The phased-in capital ratios amounted to: % for Common Equity Tier1 ratio, % for Tier1 ratio, % for Total capital ratio. Those requirements were well above the SREP minimum levels, respectively: % for CET1 ratio, % for Tier1 ratio, % for Total capital ratio. (in thousands of EUR) 30/06/ /12/2016 Common Equity Tier 1 capital (CET1) 1,511,216 1,712,552 Tier 1 Capital 1,511,216 1,712,552 Total Own Funds 1,795,451 1,892,971 Credit risk and counterparty risk 1,034,967 1,049,811 Credit valuation adjustment risk 2,082 2,144 Settlement risks - - Market risks Operational risk 110, ,960 Other calculation elements - - Total capital requirements 1,148,840 1,163,122 Risk-weighted assets 14,360,512 14,539,042 Common Equity Tier 1 capital / Risk-weighted assets (CET1 capital ratio) 10.52% 11.78% Tier 1 capital / Risk-weighted assets (Tier 1 capital ratio) 10.52% 11.78% Total own funds / Risk-weighted assets (Total capital ratio) 12.50% 13.02% 26

27 Income statement The reclassified consolidated income statement is shown below. ITEMS 1st half of 2017 (in thousands of EUR) 1st half of 2016 Change Net interest income 198, , % Net fee and commission income 142, , % Dividends and similar income 2,876 4, % Profit of equity-accounted investments (1) % Net trading and hedging income (expense) and profit (loss) on sales/repurchases 10,810 35, % Other operating net income (5) 10,700 8, % Operating income 365, , % Personnel expenses (134,315) (146,386) -8.25% Other administrative expenses (2) (107,711) (98,713) 9.12% Depreciation/amortisation and net impairment losses on property, equipment and investment property and intangible assets (3) (13,854) (16,053) % Operating costs (255,880) (261,152) -2.02% Operating profit 109, , % Net impairment losses on loans and receivables and other financial assets (369,013) (151,777) % Net accruals to provisions for risks and charges (42) (1,883) % Net gains on sales of investments and valuation differences on property and equipment at fair value (4) 68,780 26, % Pre-tax profit (loss) from continuing operations (190,523) 7,679 n.s. Income taxes (2,477) 13, % Post-tax profit (loss) from continuing operations (193,000) 21,291 n.s. Profit for the period attributable to non-controlling interests (1,828) (2,155) % Profit (loss) for the period (194,828) 19,136 n.s. 1) Net gains on equity-accounted investments include net gains (losses) on equity-accounted investments included in item "240. Net gains on investments". The residual amount of that item is included in gains on sales of investments, together with item "270. Net gains on sales of investments"; (2) Other administrative expenses include taxes and other recoveries recognised to item "220. Other operating net income" (EUR 25,718 thousand in the first half of 2017 and EUR 27,117 thousand in the first half of 2016); (3) Depreciation/amortisation and net impairment losses on property, equipment and investment property and intangible assets include items "200. Depreciation and net impairment losses on property, equipment and investment property", "210. Amortisation and net impairment losses on intangible assets" and the accumulated depreciation of costs incurred for leasehold improvements, under item "220. Other operating net income" (EUR 688 thousand in the first half of 2017, and EUR 1,073 thousand in the first half of 2016); (4) Net gains on sales of investments include the residual amount of item "240. Profit of investments" not included among profit of equity-accounted investments together with item "270, Net gains on sales of investments" and item 250. Valuation differences on property, equipment and intangible assets measured at fair value ; (5) Other income and costs correspond to item "220. Other operating net income" net of the above reclassifications. In the first half of 2017, net interest income stood at EUR 199 million, decreasing by 5.8%, compared to EUR 211 million of the first half of last year, but substantially in line with the first quarter of Net fee and commission income amounted to EUR 142 million, up by 4.4% year on year and by 10% over the first quarter of 2017, driven by the significant performance of management, trading and consulting fees (+ 18.2% year on year). Commissions related to current account management increased by 5.9%, whereas commissions related to the credit sector decreased. Net trading and hedging income and profit on sales/repurchases stood at EUR 11 million, compared to EUR 36 million of the corresponding prior period. The item includes losses of EUR 13 million for the sale of non-performing loans other than the Elrond portfolio concluded in the period. 27

28 Operating income totalled EUR 366 million, down by 7.7% compared to EUR 396 million of the same corresponding period. Operating costs totalled EUR 256 million, down by 2% compared to the same period last year. Personnel expenses amounted to EUR 134 million (compared to EUR 146 million in the first half of 2016) and also include a positive component of EUR 7.5 million, as a contribution of the expenses for the implementation of the Solidarity Fund, introduced by the 2017 Budget Law ( NASPI - Nuova Assicurazione Sociale per l Impiego contribution). Other administrative expenses reached EUR 108 million (compared to EUR 99 million in the first half of 2016), of which EUR 8 million for the ordinary contribution to the Single Resolution Fund. The operating profit reached EUR 110 million, compared to EUR 135 million in the first half of Net impairment losses on loans and receivables and other financial assets totalled EUR 369 million, EUR 229 million of which refer to the Elrond operation, whereas EUR 31 million form the write-down of Fondo Atlante. Net gains on sales of investments and intangible assets measured at fair value include gains of EUR 69 million of the sale of a portfolio of capital properties as part of the sale & lease back transaction concluded at the end of June. Thus, the period reported a negative pre-tax profit from continuing operations amounting to EUR 191 million. Considering income taxes for the period - amounting to approximately EUR 2 million - and profit attributable to non -controlling interests of EUR 2 million, the net loss for the period stood at EUR 195 million. ROA stood at -0.77%. 28

29 Related party transactions, risks and going concern prospects Related party and intra-group transactions The matter is mainly regulated: - by Article 2391-bis of the Italian Civil Code, whereby the governing bodies of companies resorting to the equity market adopt, according to general principles indicated by Consob, rules that assure "the transparency and substantial and procedural correctness of related party transactions" carried out directly or through subsidiaries, - by the "Related Party Transaction Regulation" adopted by Consob with resolution no of 12 March 2010, as amended, (hereinafter also the "Consob Regulation"), implementing the delegation contained in Article 2391-bis of the Italian Civil Code, as well as, in relation to the specific business, - by the supervisory provisions issued by the Bank of Italy on December 2011 on risk assets and conflicts of interest of banks and banking groups with respect to "Associated Parties" (9th update to Circular 263 of 27 December hereinafter also referred to as the "Bank of Italy Regulation"), provisions that complement what is provided by the Consob regulation. In compliance with the combined provision of the above-mentioned regulations, the Board of Directors approved the new "Procedures concerning Related Party Transactions and Associated parties" (hereinafter also the "RPT Creval Procedures"), in the last updated version, effective as from 31 October The RPT Creval Procedures establish the procedures and rules for ensuring transparency and substantive and procedural correctness in related party transactions carried out directly by Credito Valtellinese or by means of its subsidiaries. They also comply with the applicable regulations of the Bank of Italy on risk assets and conflicts of interest towards associated parties. In accordance with current regulations, the document is published on the website, Corporate Governance section Corporate documents. Still on the basis of the provisions of the Bank of Italy Regulation, the Board of Directors of the Parent approved the "Policy regarding controls on risk activities and on conflicts of interest towards associated parties" (hereinafter also the "Policy"), document that defines the internal policies regarding controls on risk activities and on conflicts of interest towards associated parties, and was made known to the Ordinary Shareholders' Meeting held on 27 April 2013, subsequently amended with Board resolution of 9 December The Policy describes, in relation to the operational features and the strategies of the Bank and of the Group, the business segments and the types of business relations, also other than those implying the assumption of risk assets, in relation to which conflicts of interest may arise, as well as the safeguards inserted in the organisational structures and in the internal control system to ensure constant compliance with prudential limits and the above decision-making procedures. The document also summarises the principles and rules applicable to transactions with associated parties that were used for the preparation of the relevant Procedures. With reference to intra-group transactions, relations with companies in the Credito Valtellinese Banking Group were established within an organisational model - as widely illustrated in this report based on which each legal entity focuses only on its own core business, in an industrial framework that offers effective and efficient management of overall Group resources. 29

30 The purpose of this approach is to achieve any form of synergy among the companies of the Group, assures to all members the access to specialised high-quality services and allows to achieve significant economies of scale to reduce operating costs relating to activities and common services. The common focus of activities and specialist services is regulated on the basis of appropriate intra-group contractual agreements, which concern in particular the provision of services by the parent to the subsidiary companies in the sector of finance, insurance, legal and corporate affairs, administrative, accounting and management, internal auditing, risk management and compliance, management and administration of the Personnel. The contracts between specialised and complementary companies and the other companies of the Group concern the management of the information system, the organisational and back office services, the payment systems in Italy and abroad, the management of real estate assets, the design and construction of real estate works, and the technical support to the disbursement of credit and leasing. The financial effects are regulated on the basis of specific contractual agreements that, with the main objective of optimising synergies and economies of scale and purpose at the Group level, refer to long-term objective and constant parameters, distinguished by material transparency and fairness. The quantification of the expected fees for services was defined and formalised according to tested parameters that take into account actual utilisation by each user company. The Board of Directors is exclusively responsible for the definition of intra-group contractual agreements and approval and possible amendment of the related economic conditions. No atypical or unusual transactions, with Group companies or related parties - as defined by Article 2427, second paragraph, of the Italian Civil Code, or according to the IFRS endorsed by the European Union - that impacted significantly on the financial position or results of operations of the company has taken place during the financial year. Detailed information on intra-group and related party transactions, including information on the effects of transactions or existing positions with such counterparties on the statement of financial position and on the income statement, accompanied by summary tables of such effects, are contained in the Notes to the condensed interim consolidated financial statements. 30

31 Risk management In accordance with the Supervisory provisions, the Credito Valtellinese Group adopted a detailed and strong internal control system (consisting of rules, functions, structures, resources, processes and procedures) the aims of which are reducing the risk within the limits indicated in the framework of reference for determining the risk appetite of the bank (Risk Appetite Framework, RAF), prevention of the risk that the bank is involved, even unintentionally, in illegal activities (such as money laundering, usury and terrorist financing) and compliance of the transactions with the law and supervisory regulations, as well as with policies, regulations and internal procedures. The internal control system is a fundamental element of the overall governance system of the Credito Valtellinese Group, and ensures that company operations comply with company strategies and policies. It takes on a substantial role in the prevention, identification, management and minimisation of risks, also contributing to the effective oversight of company risks, protection from losses and the safeguarding of asset value. A good internal control system contributes to preserving correct, effective company operations and ensures compliance with rules and regulations, as well as the faithfulness, accuracy and reliability of company disclosure. The internal control and risk management system, regulated by the prudential supervisory regulations and by the company policy defined in the "Control coordination document", is broken down in the company's control functions set up with the Parent and based in the following organisational units: - the Auditing Department of Credito Valtellinese, responsible for the activities related to the internal audit function; - organisational units forming the functional area assigned to the Chief Risk Officer (CRO) of Credito Valtellinese, responsible for the activities related to the risk control and validation functions; - the Compliance Department of Credito Valtellinese, responsible for the activities related to compliance and anti-money laundering functions. As part of the organisation on the control system, the Risk Management department of Credito Valtellinese has a prominent role, broken down in specialised Divisions and Services and also supported by the collaboration of contacts at the other companies of the Group. The Group has developed and standardised specific risk management processes broken down into several logical steps: definition of risk appetite, definition of management and control policies, definition of the limits, assumption of risk, risk measurement, monitoring and reporting, stress tests and management of critical issues. The risk appetite, which is an essential reference for defining the strategic plan and the logical premise for planning, is defined for relevant risks. In particular, the definition of the risk appetite of the Group, based on a sound and prudent management, pertains to the Board of Directors of the Parent, which sees to it when defining the Risk Appetite Framework by considering the existing prudential rules, the adopted business model, the deposit and loan methods typical of the Group and the ability of the control structures to monitor and measure the risks. Annually, the Board of Directors of the Parent also reviews the risk appetite framework and, if the conditions are met, updates them. The actual completeness, adequacy, functionality and reliability of the main risk management processes is assessed at regular intervals by the Risk Management Department; the results are submitted to internal audit by the Auditing Department of 31

32 Credito Valtellinese and reported to the Board of Directors, showing any anomaly and shortfall of the improvement actions. Overall, the coordinated action of governance, organisation, risk management and internal control system allow to obtain a full picture and an adequate management of the assumed risk and the awareness, looking ahead, of the expected risk. Detailed information on the general characteristics of the control systems, the risk management, measurement and control policies are contained in the Notes to the 2016 Consolidated Financial Statements (Part E Information on risks and hedging policies) and in the informative report on the third pillar at 31 December 2016 made available on the Group's website at Information on main risks and uncertainties to which the Group is exposed In line with its focus on retail banking, the Group is mainly exposed to credit risk. In terms of capital requirement, the exposure to operational risks is also significant: these risks are assumed in that they serve as a means for carrying out the banking business. The exposure to financial and market risks is limited, given that the objective of limiting the volatility of the forecast results would not be compatible with an intensive speculative financial activity, with a pronounced transformation of maturities and with treasury management as a profit centre rather than a service. The current composition of the assets also involves an exposure to the sovereign risk, whereas the other risks are of lesser significance. The risk profile at the end of the reporting period is consistent with the risk appetite defined by the Board of Directors, which, in line with the identity, values, business model and strategic input of the Group, resolved, also for the 2017 financial year, to: - allocate the main part of the capital to the credit risk, which represents the core business of a retail Banking Group; - confirm a low propensity to other risks with business purpose; - confirm the aim of limiting/minimising exposure for pure risks to which no return is associated. For detailed information on the exposure of the Group to the risks, please refer to the section "Information on risks and related hedging policies" of this report. 32

33 Information on disputes For detailed information on disputes, tax or otherwise, and on the main pending legal actions, please refer to the Notes to the condensed interim consolidated financial statements. Information on business outlook, with a particular reference to going concern assumptions With regard to the going concern assumption, the Board of Directors confirms its reasonable expectations that the company and the Group will remain a going concern in the foreseeable future and, consequently, confirms that the condensed interim consolidated report was prepared on a going concern basis. As regards the requirements relating to impairment testing and uncertainties in the use of estimates, please refer to the information provided in the special sections in the Notes to the condensed interim consolidated financial statements. 33

34 Events after the close of the half-year For the events after the close of the half-year, please refer to what is stated in the first part of this Report and in the Notes to the condensed interim consolidated financial statements with reference to the Elrond Project. Current-year outlook The Italian economy is headed towards a stronger recovery. Growth estimates were fully revised upwards, according to the last projections (Bank of Italy), Italy's GDP is expected to increase by 1.4% this year (1.3% in 2018 and 1.2% in 2019). Economic indicators confirm the acceleration of production and the latest quality surveys report high confidence consolidation and restart in investments. Prospects for exports and employment also remain favourable. All these conditions positively affect the trend in loans and receivables. The ECB confirmed the continuation of the expansionary policy and of the current rate levels for a prolonged period of time, well beyond the horizon of net purchases of assets at least until the end of this year. Looking ahead, the profitability of Italian banks remains exposed to risks: first of all, a stronger and lasting consolidation of recovery that can support increase in revenues and their diversification, but also encourage the disposal and proactive management of impaired loans and receivables, reducing their impact on total loans. The recovery of profitability also requires a further, decisive progress in cost reduction, company reorganisation, review of business models, to meet the challenges implied in the pervasive changes in progress, at the level of technologies, regulations, market structure and customer requirements. In compliance with the above premises, the activity of the bank in the remaining part of the year will be guided by the achievement of the objectives of the Action plan. From an operating point of view, the positive management trend of the first part of the year is expected to be confirmed, however, income prospects for the current year will suffer the effects of the transfers of assets carried out, with the aim of returning to a sustainable profitability in the medium period. Sondrio, 4 August 2017 The Board of Directors 34

35 CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 35

36 Condensed interim consolidated financial statements Consolidated statement of financial position (in thousands of EUR) ASSETS 30/06/ /12/ Cash and cash equivalents 156, , Financial assets held for trading 20,280 18, Available-for-sale financial assets 4,495,735 5,436, Held-to-maturity investments 810, Loans and receivables with banks 916, , Loans and receivables with customers 16,857,488 17,429, Equity investments 23,268 9, Property, equipment and investment property 403, , Intangible assets 46,525 45,590 of which: - goodwill 30,385 30, Tax assets 732, ,572 a) current 124,720 85,741 b) deferred 607, ,831 as per Italian Law 214/ , , Non-current assets held for sale and disposal groups 507,709 1, Other assets 423, ,171 Total assets 25,393,944 25,469,459 LIABILITIES AND EQUITY 30/06/ /12/ Due to banks 2,655,250 1,661, Due to customers 17,094,884 18,034, Securities issued 2,928,470 3,073, Financial liabilities held for trading 674 1, Hedging derivatives 263, , Tax liabilities: 1,503 8,716 a) current 1,352 7,992 b) deferred Other liabilities 727, , Post-employment benefits 48,477 56, Provisions for risks and charges: 121, ,750 a) pension and similar obligations 33,779 36,680 b) other provisions 87, , Valuation reserves -41,874-33,397 of which: associated with discontinued operations Reserves -61, , Share premium reserve - 39, Share capital 1,846,817 1,846, Treasury shares (-) Equity attributable to non-controlling interests (+/-) 3,378 4, Profit for the period (+/-) -194, ,103 Total liabilities and equity 25,393,944 25,469,459 36

37 Consolidated Income Statement (in thousands of EUR) ITEMS 1st half of st half of Interest and similar income 268, , Interest and similar expense (69,659) (92,850) 30. Net interest income 198, , Fee and commission income 156, , Fee and commission expense (14,182) (13,052) 60. Net fee and commission income 142, , Dividends and similar income 2,876 4, Profit (Losses) on trading 2, Net hedging expense (49) (410) 100. Profit (loss) on sale or repurchase of: 7,977 35,624 a) loans and receivables (13,411) (14,087) b) available-for-sale financial assets 21,879 50,302 d) financial liabilities (491) (591) 120. Total income 354, , Net impairment losses on: (369,013) (151,777) a) loans and receivables (293,396) (150,208) b) available-for-sale financial assets (35,166) (3,951) d) other financial transactions (40,451) 2, Net financial income (14,239) 235, Administrative expenses: (267,744) (272,216) a) personnel expenses (134,315) (146,386) b) other administrative expenses (133,429) (125,830) 190. Net accruals to provisions for risks and charges (42) (1,883) 200. Depreciation and net impairment losses on property, equipment and investment property (9,155) (10,690) 210. Amortisation and net impairment losses on intangible assets (4,011) (4,290) 220. Other operating net income 35,730 34, Operating costs (245,222) (254,289) 240. Net gains on investments , Net result of property, equipment and investment property and intangible assets at fair value (1,146) Net gains (losses) on sales of investments 69,926 (102) 280. Pre-tax profit (loss) from continuing operations (190,523) 7, Income taxes (2,477) 13, Post-tax profit (loss) from continuing operations (193,000) 21, Profit (loss) for the period (193,000) 21, Profit for the period attributable to non-controlling interests (1,828) (2,155) 340. Profit (loss) for the period attributable to the owners of the parent (194,828) 19,136 Basic earnings (loss) per share - in EUR (1.757) Diluted earnings (loss) per share - in EUR (1.757)

38 Consolidated Statement of Comprehensive Income (in thousands of EUR) Items 1st half of st half of Profit for the period (193,000) 21,291 Other comprehensive income net of income taxes without reclassification to profit or loss 20. Property, equipment and investment property 11, Defined-benefit plans 2,959 (5,927) 60. Portion of valuation reserves of equity-accounted investments 5 - Other comprehensive income net of income taxes with reclassification to profit or loss 100. Available-for-sale financial assets (23,047) (54,968) 110. Non-current assets held for sale Portion of valuation reserves of equity-accounted investments (70) Total other comprehensive income net of income taxes (8,447) (60,895) 140. Comprehensive income (Item ) (201,447) (39,604) 150. Consolidated comprehensive income attributable to non-controlling interests (1,858) (2,122) 160. Consolidated comprehensive income attributable to owners of the parent (203,305) (41,726) 38

39 Statement of changes in consolidated equity (in thousands of EUR) Changes during the year Allocation of prior year profit Equity transactions Equity Balance at 31/12/2016 Change in opening balances Balance at 1/1/2017 Reserves Dividends and other allocations Changes in reserves Issue of new shares Purchase of treasury shares Extraordinary dividend distribution Change in equity instruments Derivatives on treasury shares Stock options Changes in equity investments Comprehensive income 30/06/2017 Equity attributable to owners of the parent at 30/06/2017 Equity attributable to non-controlling interests at 30/06/2017 Share capital: a) ordinary shares 1,849,672 1,849, ,846,817 2,847 b) other shares Share premium reserve 39,343 39,343-39, Reserves: a) income related 230, , , ,042-1,301 b) other -59,890-1,587-61,477 Valuation reserves -33,474-33,474-8,447-41, Equity instruments Treasury shares Profit (loss) for the year -328, , ,290-4, , ,828 1,828 Equity attributable to owners of the parent 1,753,430 1,753,430-1, ,305 1,548,538 Equity attributable to non-controlling interests 4,040 4,040-4, , ,858 3,378 The item "Reserves - other" conventionally includes the losses carried forward. 39

40 Changes during the year Allocation of prior year profit Equity transactions Equity Balance at 31/12/2015 Change in opening balances Balance at 1/1/2016 Reserves Dividends and other allocations Changes in reserves Issue of new shares Purchase of treasury shares Extraordinary dividend distribution Change in equity instruments Derivatives on treasury shares Stock options Changes in equity investments Comprehensive income 30/06/2016 Equity attributable to owners of the parent at 30/06/2016 Equity attributable to non-controlling interests at 30/06/2016 Share capital: a) ordinary shares 1,849,700 1,849, ,846,817 2,855 b) other shares Share premium reserve 39,491 39, , Reserves: a) income related 120, ,829 83, , ,666-1,395 b) other Valuation reserves 55,552 55,552-60,895-5, Equity instruments Treasury shares Profit (loss) for the year 122, ,258-83,069-39,189 21,291 19,136 2,155 Equity attributable to owners of the parent 2,183,348 2,183,348-34, ,726 2,107,269 Equity attributable to noncontrolling interests 4,382 4,382-4,223 1, ,122 3,865 40

41 Consolidated Statement of cash flows Direct method (in thousands of EUR) 1st half of st half of 2016 A. OPERATING ACTIVITIES 1. Cash flow from operating activities 190, ,263 - interest income received (+) 235, ,644 - interest expense paid (-) -58,954-93,875 - dividends and similar income (+) 2,212 4,128 - net fee and commission income (+/-) 142, ,210 - personnel expenses (-) -147, ,789 - other costs (-) -97, ,521 - other revenue (+) 126,889 81,119 - taxes (-) -12,347-25, Cash flow generated/used by financial assets 473, ,696 - financial assets held for trading -1,762 8,657 - available-for-sale financial assets 830, ,585 - loans and receivables with customers -156, ,975 - loans and receivables with banks: on sight -39,810 11,221 - loans and receivables with banks: other -89, ,456 - other assets -69, , Cash flow generated/used by financial liabilities 122, ,605 - due to banks: on sight 16,742-53,823 - due to banks: other 976, ,119 - due to customers -792, ,970 - securities issued -83, ,220 - financial liabilities held for trading ,998 - other liabilities 5, ,795 Cash flow from (used in) operating activities 785,736 24,172 B. INVESTING ACTIVITIES 1. Cash flow generated by 36,843 3,174 - sales of equity investments - 2,057 - dividends from equity investments sales of property, equipment and investment property 36, Cash flow used for -832,371-12,042 - purchases of equity investments -11, purchases of held-to-maturity investments -805, purchases of property, equipment and investment property -11,238-7,289 - purchases of intangible assets -4,944-4,753 Cash flow from (used in) investing activities -795,528-8,868 C. FINANCING ACTIVITIES - dividend distribution and other -4,558-39,189 Cash flow from (used in) financing activities -4,558-39,189 NET CASH FLOW GENERATED/USED DURING THE PERIOD -14,350-23,885 Key: (+) generated (-) used 41

42 Reconciliation Financial statement items 1st half of st half of 2016 Cash and cash equivalents at the beginning of the period 170, ,462 Net liquidity generated/used during the period -14,350-23,885 Cash and cash equivalents at the end of the period 156, ,577 Key: (+) generated (-) used 42

43 Notes to the condensed interim consolidated financial statements Accounting Policies General part The condensed interim consolidated report of the Credito Valtellinese Group is prepared in consolidated format as prescribed by art. 154-ter, Italian Legislative Decree no. 58 of 24 February 1998 (the Consolidated Finance Act) and in compliance with IFRS issued by IASB (the International Accounting Standards Board) endorsed by the European Union, whose application was compulsory at the date of preparation of the condensed interim consolidated report. In preparing this condensed interim consolidated report, the financial reporting standards applied in accordance with IAS 34 - Interim Financial Reporting comply with those adopted in the annual consolidated report at 31 December 2016, except for those amended by IASB and endorsed through the issue of new EU Regulations and the following. The Group accounting policies used for preparing the condensed interim consolidated report, with reference to the recognition, measurement and derecognition criteria for each asset and liability item, as with the recognition methods for revenue and costs, remained substantially the same as those used for the financial statements at 31 December 2016, to which reference should be made. However, it should be noted that in view of the specific assessment in the first half on the individual art works owned by the Banks of the Group, the standard by which they are measured subsequent to initial recognition has changed. In particular, the restatement model was applied to replace the cost model used in preparing the financial statements at 31 December The restatement model envisages that a class of property, equipment and investment property may be recognised at a restated value, equal to its fair value on the date of the restatement, net of any subsequent accumulated depreciation and any subsequent accumulated impairment loss. If the carrying amount of an asset increased as a result of a restatement, the increase must be recognised in a special equity reserve, whereas if the carrying amount of an asset decreased, the reduction must be recognised in the income statement. The first application of this method led to the recognition of a positive net equity reserve of EUR 15.9 million and a write-down recognised in the income statement amounting to EUR 1.1 million (amounts gross of their tax effects). In drawing up the condensed interim consolidated financial statements, estimates and assumptions were used, which may affect the values recorded in the statement of financial position, income statement and the Notes to the condensed interim consolidated financial statements. The subjective assessments relevant in the application of the Group's accounting policies and the main sources of uncertainty in estimates were the same included in the consolidated financial statements for the year ended 31 December The most important valuation processes, such as the assessment of any impairment loss on assets, are only carried out completely for the preparation of the annual financial statements when all necessary information is available. Important impairment indicators requiring immediate assessment are an exception. 43

44 New financial reporting standards As already shown in the 2016 financial statements, the new international financial reporting standards issued by IASB that will have a potential impact on the Group are IFRS 9 "Financial instruments", IFRS 15 "Revenue from contracts with customers" and IFRS 16 "Leases. For a disclosure on IFRS 15 Revenue from contracts with customers and IFRS 16 Leases, reference is made to the 2016 financial statements, whereas for what concerns IFRS 9 an update is provided below. IFRS 9 Financial instruments IFRS 9 "Financial Instruments", issued by the IASB in July 2014 and approved by the European Commission with Regulation (EU) 2016/2067, will replace IAS 39 "Financial Instruments: Recognition and Measurement", as from 1 January As already shown in the 2016 financial statements, this standard redefines the requirements for recognition and measurement, impairment, derecognition and general hedge accounting. During 2015, the Group started a project with the purpose of adapting the procedures and internal processes to the provisions introduced by the new accounting standard. The project is broken down into different guidelines defined on the basis of three stages of the review process of the standard. Each project branch envisages sites related to accounting framework, Impacts and Planning, Credit Operational Model Valuation Models and Portfolio Analysis, Securities portfolio and Derivative Impacts, Organisational Measures and IT and envisages the joint responsibility of the CFO and CRO areas and the involvement of the Organisation and IT Department and business divisions. With reference to the "Recognition and measurement" of the financial assets, the standard introduces a business model and contractual cash flow characteristics of the financial instrument to be tested by means of a specific process (known as SPPI Test). With reference to the business model, its definition is being finalised, both when the standard is first applied and under normal circumstances. On the basis of the analyses carried out, it is assumed that the redefinition of the first-time application (FTA) of the business model will involve the transfer of some securities currently classified as Available-for-sale financial assets to financial assets at amortised cost. In order to define the Hold to Collect portfolio, the analyses for defining the thresholds are underway to consider frequent sales as admitted but non-significant or non-infrequent even if significant, as well as in-depth analyses on equity investments required for defining whether or not to use the option for recognising the equity instruments at fair value recorded under equity (without reclassification to profit or loss even if the instrument is sold). With regard to the SPPI test, the Group has set out the method to be used for carrying out the test and the testing activities on the loans and receivables and securities portfolio are being completed in order to identify the correct recognition at the time of the first application of the new standard. In relation to the loans and receivables portfolio, the analyses carried out were differentiated by types of loans and receivables and product classes. The results may be considered in line with those deriving from the application of IAS 39. With regard to the securities sector, the failure of the SPPI test will involve the reclassification of some financial instruments in the category of financial assets at fair value through profit or loss for a small percentage compared to the overall portfolio. Based on the recent clarifications provided by IFRIC, it should be noted, however, that 44

45 investment funds currently classified as Available-for-sale financial assets must be measured at fair value through profit or loss. As for the financial liabilities sector, no impacts are expected from the application of IFRS 9. With reference to the impairment of financial assets, as already specified in the 2016 financial statements, the Standard requires that, for financial assets not measured at fair value through profit or loss, impairment losses will be calculated based on the expected loss in 12 months and, whereas, if there is a significant increase in credit risk compared to the initial recognition date, impairment losses must be calculated based on the expected loss calculated over the entire residual life of the financial instrument. Based on these elements, the financial instruments are classified into three separate stages: - stage 1 includes performing financial instruments for which a significant increase of the credit risk compared to the initial recognition date was not observed. The impairment is determined collectively on the basis of an expected loss in one year (12 months - expected credit loss); - stage 2 includes performing financial instruments for which a significant increase of the credit risk compared to the initial recognition date was observed. The impairment is determined collectively on the basis of an expected loss on the residual maturity of the instrument (lifetime expected credit loss); - stage 3 includes non-performing financial instruments. The impairment is determined analytically on the basis of a calculated loss on the residual maturity of the instrument (lifetime expected credit loss). Specific analyses for operations in loans and securities were carried out in this area. The application of the IFRS 9 framework required the need to define risk metrics on a lifetime horizon conditioned by expectations on expected macroeconomic scenarios. To this end, the Group completed the estimate of PD, LGD and EAD parameters and started their implementation. The main elements of the transition from the first to the second stage have been identified; in particular, reference will be made to the change in the default lifetime probabilities as compared to the initial recognition of the financial instrument determined by the credit quality of each individual relation on each measurement date; moreover, the possible presence of a past due of at least 30 days and/or of forbearance measures were considered, presumptively, to be indicative of a significant increase in credit risk and involve the transition to the second stage. No changes are expected in the classification of impaired positions in the third stage in consideration of the alignment of the already existing default accounting and regulatory definitions. The models, including forward-looking information are being finalised to calculate the expected 12-month and lifetime loss. There are still some areas of intervention - critical to the calculation of impairment - which are expected to be developed in the coming months. These areas mainly consist of 1) the development of the model for defining the stage to which it belongs with reference to the use of the change in lifetime PD as the main indicator of impairment (in particular, the estimate of the significance thresholds of the increase in credit risk - with the inclusion of the change in lifetime PD - and the method of inclusion of the scenarios) and 2) the development of the methods for including macroeconomic scenarios (for the purposes of staging and calculating the expected credit loss. With reference to this last aspect, alternative methods were analysed, and also in consideration of the proportionality criteria, the Group expects to use the approach of the so-called Most likely scenario+add on. This approach envisages determining the expected loss in the baseline scenario 45

46 considered the most probable and used for other purposes (for example, for budget and planning purposes) to which an add on or overlay was added to reflect the effects of the possible non-consistency of the expected credit loss compared to macro-economic scenarios. Finally, as mentioned above, no impact from IFRS 9 is expected with reference to the recognition and measurement approach of non-performing loans in the third stage. In the coming months, analyses will be carried out to consider possible measurement impacts deriving from the inclusion of forward-looking factors and future scenarios for these assets as well. The main economic and equity impacts of the new standard, recognised at equity during first-time application, will derive from the application of the new accounting model of impairment that will determine an increase in impairment losses and the application of the new rules for the transfer of the exposures from one recognition stage to the other. The impact of first-time application will be determined once the models are completed, defined as forward-looking factors at the date of first application and application interpretations still under discussion. With regard to hedge accounting, the Standard was examined by identifying the main changes and analysing the possibility of using the provisions of IAS 39 (opt-in/opt-out option envisaged by the Standard). Based on the analyses carried out to date and on the existing operations in the first application of IFRS 9, the opt-out option can be exercised. Therefore, hedging transactions will continue to be managed in compliance with IAS 39. The application of IFRS 9 also had organisational impacts on information systems. In an organisational context, it has become necessary to envisage the adaptation of existing operating processes and the design of new processes as well as the expansion of skills and competencies available within the various organisational structures. With regard to information systems, the impacts derive from the necessary adjustment of the systems for the implementation of the new rules on Recognition and Measurement and Impairment. The applications and procedures to be adjusted (or, possibly, to be purchased) were identified. The amendments to be made and the application implementations to be carried out were defined in specific functional analyses. Analyses are also being made to adjust accounting applications and to ensure adequate disclosures, in line, among other things, to Circular 262 (currently in consultation) and to the new version of FINREP that implement IFRS 9. With regard to the application of the new standard, the Group envisaged to start the socalled "parallel run" as from the fourth quarter of 2017 that envisages a more and more complete approach based on the availability of information and applications. Basis of preparation The condensed interim consolidated report comprises the Statement of financial position, Income Statement, Statement of Comprehensive Income, Statement of changes in equity, Statement of cash flows (Financial Statements) and Notes to the condensed interim consolidated financial statements. The financial statements were prepared in compliance with the "Instructions for the preparation of the separate financial statements and of the consolidated financial statements of banks and financial companies that are parents of banking groups" contained in Circular no, 262/2005 of Bank of Italy and following updates. The amounts reported in the Financial Statements and in the Notes to the condensed interim consolidated financial statements are in thousands of EUR, unless indicated 46

47 otherwise. Together with the amounts for the reporting period, the Financial statements and the Notes to the condensed interim consolidated financial statements also show the corresponding amounts at 31 December 2016 for statement of financial position data, and for the first half of 2016 for income statement and statement of comprehensive income data. In the Statement of financial position, Income Statement and Statement of Comprehensive Income, any item equal to zero in the reporting period of reference or in the previous period is not shown. In the Income Statement and Statement of Comprehensive Income, negative amounts are shown in brackets. The condensed interim consolidated financial statements at 30 June 2017 are accompanied by the certification of the Chairman of the Board of Directors and of the Manager in charge of financial reporting envisaged by Article 154 bis of the Consolidated Finance Act and are subject to a limited audit by KPMG S.p.A. Business performance and outlook With reference to the Bank of Italy, Consob and Isvap Document no. 2 of 6 February 2009, as well as to the subsequent Document no. 4 of 3 March 2010, relevant to the information to be provided in the financial statements on business outlook, with particular reference to going concern assumptions, financial risk, impairment testing and uncertainties in the use of estimates, the Credito Valtellinese Directors confirm their reasonable expectations that the bank and the Group companies will remain a going concern in the foreseeable future and, consequently, the condensed interim consolidated report at 30 June 2017 was prepared on a going concern basis. As shown in the interim Report on operations, in line with established times, activities aimed at achieving priority objectives set out in the Action Plan, approved in November last year, continued. As regards the requirements related to the disclosure on financial risks, impairment testing and uncertainties in the use of estimates, please refer to the information provided in this report as well as the information provided in the Report on operations, within the discussion of the related items. Information on risks is described in the chapter of the Notes to the condensed interim consolidated financial statements dedicated to risk management. Moreover, the Notes to the condensed interim consolidated financial statements provide the fair value of the financial instruments determined on the basis of the methods indicated in the financial statements at 31 December 2016, document to which reference is made for detailed information. Specific tests were carried out to ascertain any impairment of equity investments, available-for-sale securities, intangible values and goodwill, subject to the analysis of the presence of impairment indicators. The same methods and criteria shown in the 2016 financial statements were used in order to determine any impairment loss. Consolidation scope and methods The condensed interim consolidated financial statements include Credito Valtellinese and the companies directly or indirectly controlled by it. The financial statements used for preparing the condensed interim consolidated financial statements have the same reporting date. 47

48 Investments in companies subject to exclusive control are those in respect of which Credito Valtellinese has the power over the investee, is subject to exposure or rights to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect the amount of the investor's returns. Investments in companies subject to joint control are those in respect of which the Parent, together with other parties subject to the terms of an agreement, has the power of governing the decisions relating to the relevant activities of the agreement, with the unanimous consent of the parties sharing control. The financial statements of subsidiaries are consolidated on a line-by-line basis from when the Parent starts to exercise control until the date on which this control ends. The carrying amount of the equity investments in these companies is offset against the corresponding share in the equity. The differences arising from this transaction, after recording the subsidiary s assets and liabilities, are recorded, if positive under "Intangible assets - Goodwill"; if negative, they are directly recognised in the income statement. Noncontrolling interests are assigned the corresponding shares of equity and profit (loss). Assets, liabilities, income and expenses among consolidated companies are eliminated. The financial statements of subsidiaries are prepared at the same reference date and adopting financial reporting standards consistent with the Parent. In case of discrepancy between the evaluation criteria adopted by a subsidiary and those used in the consolidated financial statements, the subsidiary's financial statements are adjusted for consolidation purposes. Associates are those under significant influence, i.e. the Parent has the power of participating in the determination of financial and management policies, but has no control or joint control over those policies. Investments in associates and subsidiaries subject to joint control have been accounted at equity. The investment is initially recognised at cost, the amount later being increased or decreased due to the effect of investee profits or losses, recorded according to the equity ratios under "Net gains (losses) on equity investments", of dividends received and other changes in the equity of the investees. Other changes are booked to reserves. The differences between the carrying amount of the equity investment and the equity of the related investee are included in the carrying amount of the investee. Dividends booked to the Parent's financial statements and concerning equity investments in companies included in the consolidation scope or equity-accounted have been cancelled. Taxes associated with consolidation adjustments have been accounted for, where applicable. Commitments for the repurchase of own equity instruments, including commitments to purchase equity instruments of companies consolidated in full, give rise to a financial liability for the current amount payable. The initial recognition of the liability occurs by using the equity as an offsetting item. Compared to the financial statements at 31 December 2016, the consolidation scope at 30 June 2017 includes Creval PiùFactor S.p.A., company fully controlled by Credito Valtellinese set up during the half-year for the development of factoring, whereas it does not include Quadrivio SME 2014 S.r.l. since the related securitisation transaction ended in the half-year. 48

49 A list of equity investments in fully consolidated subsidiaries is provided in the table below. 1. Investments in companies subject to exclusive control Company name Operating office Registered office Type of relationship Type of equity investment Investor company % held 1. Credito Valtellinese S.p.A. Sondrio Sondrio 2. Credito Siciliano S.p.A. Acireale Acireale Creval Sistemi e Servizi Soc. Cons. P.A. Sondrio Sondrio Stelline Real Estate S.p.A. Sondrio Sondrio Global Assicurazioni S.p.A. Milan Milan Global Broker S.p.A. Milan Milan Creval PiùFactor S.p.A. Milan Milan Quadrivio Rmbs 2011 S.r.l. Conegliano Conegliano 4 9. Quadrivio Rmbs 2013 S.r.l. Conegliano Conegliano 4 Key: Type of relationship: 1 = majority of voting rights at ordinary shareholders'/quotaholders' meeting 2 = considerable influence in ordinary shareholders'/quotaholders' meeting 3 = agreements with other shareholders 4 = other forms of control 5 = sole management pursuant to article 26, paragraph 1 of "Italian Legislative Decree no. 87/92" 6 = sole management pursuant to article 26, paragraph 2 of "Italian Legislative Decree no. 87/92" Events after the reporting period The following is pointed out. The Elrond project On 8 November 2016, the Board of Directors approved the start of a transaction aimed at the deconsolidation of non-performing loans of the Group for a gross equivalent amount up to a maximum of EUR 1.5 billion (the Loans Portfolio ), through a securitisation transaction pursuant to the Law on Securitisation, concerning monetary credits deriving from mortgage or unsecured loan agreements claimed from debtors classified as bad loans. In July 2017, the securitisation transaction was completed through: - factoring without recourse and en bloc of a bad loans portfolio originated by Credito Valtellinese and Credito Siciliano ( Originators ) of approximately EUR 1.4 billion on the cut-off date, pursuant to the combined provisions of Articles 1 and 4 of Italian Law 130/99 and of Article 58 of Italian Legislative Decree 385/1993, to a special purpose entity called Elrond NPL 2017 S.r.l.; 49

50 - the purchase of Senior, Mezzanine and Junior components of asset backed securities ( ABS Securities ) issued by Elrond NPL 2017 S.r.l. to finance the purchase of the Bad loans portfolio (EUR million); - the transfer on the market of 95% of the Mezzanine and Junior components of the ABS Securities. For the Senior component of the ABS Securities, fully held by Creval, the State guarantee was requested pursuant to Italian Law Decree no. 18 of 14 February 2016, converted by Italian law no. 49 of 8 April 2016 ( GACS ). A limited-recourse loan agreement granted by Elrond NPL 2017 S.r.l. to finance the setting up of an initial cash reserve was also entered into. Depending on the characteristics and the structure of the overall transaction carried out operationally in July, the conditions required by IAS 39 for the derecognition of the receivables from the financial statements did not occur at 30 June In particular, since the rights to collect cash flows deriving from loans included in the Portfolio have not yet been transferred, they are still being recognised at 30 June 2017 in the asset items of the Group. According to IFRS 5, such credit exposures were classified in the item 150. Non-current assets held for sale and disposal groups, considering the intention to carry out the disposal of the portfolio. At 30 June 2017, the loans included in the Portfolio, whose gross nominal value amounts to EUR 1,275.6 million to date, were measured considering the sale price to the special purpose entity as initially defined. In this sense, the indications envisaged by the publication of the ECB Guidelines were considered (in particular, see Chap Estimating future cash flows), which points out how the Authority confirms the need to consider the methods by which the Non Performing Exposures are managed in forming the estimates of expected future cash flows for the purposes of accounting measurement of the assets themselves. In particular, in a strategy of management of non-performing loans oriented to their sale rather than to their recovery through contractual flows, the estimate of future cash flows should take into account the market price realisable from the sale itself. In line with these indications, the Group, in the valuation of the Portfolio, considered the sale price to the special purpose entity as initially defined recognising in June 2017 higher impairment losses on the loans included in the Portfolio of EUR 188 million, thereby raising the coverage level from 47% (at 31 December 2016) to 60.8% (at 30 June 2017). Moreover, considering the commitment undertaken to buy Mezzanine and Junior components of ABS Securities issued by Elrond NPL 2017 S.r.l. to finance the purchase of receivables, a commitment was recognised for an amount equal to the equivalent of such notes. The measurement of the commitment involved the recognition of a further write-down compared to that of the receivables amounting to EUR 41.4 million in the item 130. Net impairment losses on: d) other financial transactions. The receivables were derecognised in July when the conditions set out in IAS 39 for the cancellation of financial assets were fulfilled (transfer of the risk related to the sold portfolio). Therefore, the economic effects related to the transaction will be fully recognised in the third quarter, after recognising the loss on disposal, including also the costs for organising the transaction borne by Elrond NPL 2017 S.r.l. (premium for Interest rate cap, legal costs and other initial expenses) pertaining to the third quarter. The additional negative effect that will be recognised in the third quarter of 2017 amounts to approximately EUR 22 million. 50

51 Fair value information This section includes the information on financial instruments subject to reclassification from one portfolio to another according to the rules laid down by IAS 39, and the information on the fair value hierarchy as defined by IFRS 13, The fair value is the price at which an asset can be sold or a liability can be transferred in a regular transaction between market participants at a certain valuation date. The fair value represents a market measurement basis, not related to the individual company and must be measured by adopting assumptions that the market operators would use to determine the price of the asset or of the liability, assuming that they act to meet their economic interest in the best way possible. The fair value of a financial liability that is due (for example, a sight deposit) cannot be less than the amount payable on demand, discounted from the first date on which payment may be required. In particular, the criteria adopted are as follows: - Mark to Market: valuation method that coincides with the Level 1 classification of the fair value hierarchy; - Comparable Approach: valuation method based on the use of inputs observable on the market the use of which implies a Level 2 classification of the fair value hierarchy; - Mark to Model: valuation method related to the application of pricing models whose inputs determine the Level 3 classification (use of at least one significant input that cannot be observed) of the fair value hierarchy. With regard to the criteria for determining the fair value, please refer to what is contained in the financial statements at 31 December In the first half of 2017, the Group did not make any transfers between portfolios of financial assets. Assets and liabilities measured at fair value on a recurring basis: breakdown by level of fair value 30/06/ /12/2016 Financial assets/liabilities at fair value L1 L2 L3 L1 L2 L3 1. Financial assets held for trading 18,491 1, ,838 6, Financial assets at fair value through profit or loss Available-for-sale financial assets 4,295,179 27, ,667 5,200,916 32, , Hedging derivatives Property, equipment and investment property Intangible assets Total 4,313,670 29, ,668 5,213,754 38, , Financial liabilities held for trading , Financial liabilities at fair value Hedging derivatives - 263, ,137 - Total - 264, ,605 - Key: L1 = Level 1 L2 = Level 2 L3 = Level 3 The transfers among different levels of fair value involve a limited number of positions referring to debt instruments. In particular, in the first half of 2017, transfers were 51

52 recorded from level 2 to level 1 of financial assets of EUR 13 million and transfers from level 2 to level 3 of EUR 6 thousand. The overall data of the DVA for derivative transactions at 30 June 2017 amounts to EUR 2 thousand, whereas the overall data of the CVA for derivative transactions at 30 June 2017 amounts to EUR 16 thousand. The Group has carried out a sensitivity analysis of unobservable market parameters in the valuation of instruments classified in level 3 of the fair value hierarchy and measured at fair value on a recurring basis. The portfolio of instruments measured at fair value on a recurring basis and classified within level 3 of the fair value hierarchy mainly consists of OEIC units and equity instruments. Level 3 OEIC units classified in the portfolio of "Available-for-sale financial assets" mainly include shares of real estate funds and private equity. As a result of the elements reported at the end of the half year, the Group wrote down by EUR 31 million its share in the Atlante fund, managed by Quaestio SGR, holds almost the entire share capital of Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. Considering that the fund invests in risk capital, in a particularly adverse simulation scenario, the cancellation of the residual value of EUR 4.0 million cannot be excluded. The value of the real estate OEIC units is exposed to the trend of the domestic real estate market. The sensitivity is estimated on the basis of a historical simulation approach by using the parameter shown below together with an estimated value. Financial asset Non-observable parameter Parameter change Sensitivity Real estate OEIC Trend in prices of the real estate market -300 b.p. -1,727 Moreover, the "Available-for-sale financial assets" also include OEIC units of private equity that hold equity investments or debt instruments, mainly of small and medium enterprises, for an amount of EUR 27.1 million, whose value is affected by the economic situation of the domestic market and for which information is not sufficient to build a sensitivity analysis. With reference to the financial assets acquired following the intervention of the voluntary scheme of the Interbank Guarantee Fund in favour of Cassa di Risparmio di Cesena, it is specified that the value, determined with the assumptions made at 31 December 2016, could be liable to further impairment losses. Considering that the Fund invests in risk capital, in an extremely adverse simulation scenario, the cancellation of the value cannot be excluded. As part of the financial instruments classified in Level 3 of the fair value hierarchy measured at fair value on a non-recurring basis, the Group holds investments in Asset Backed Securities (ABS) classified as "Loans and receivables with customers" with underlying credits originated in the exercise of consumer credit and leases, in the automotive sector and in other sectors. With regard to ABS, assuming specific changes in credit spreads on the basis of a historical simulation approach, the sensitivity is estimated in EUR -625 thousand. 52

53 Financial assets Non-observable parameter Parameter change Sensitivity ABS - Leases Credit spread +250 b.p ABS Consumer credit Credit spread +100 b.p ABS Residential mortgages Credit spread +100 b.p ABS - Automotive Credit spread +25 b.p. -3 Total

54 Annual changes of assets at fair value on a recurring basis (level 3) Financial assets held for trading Financial assets at fair value through profit or loss Availablefor-sale financial assets Hedging derivatives Property, equipment and investment property Intangible assets 1. Opening balance 1-202, Increases , Purchases , Gains recognised in: - - 1, Profit or loss of which gains on sales Equity X X 1, Transfers to other levels Other increases Decreases , Sales , Redemptions Losses recognised in: , Profit or loss , of which losses on sales , Equity X X Transfers to other levels Other decreases , Closing balance 1-172, Annual changes of liabilities at fair value on a recurring basis (level 3) There are no financial liabilities at fair value on a recurring basis (level 3). 54

55 Breakdown of the main statement of financial position items SECTION 1 LOANS AND RECEIVABLES WITH BANKS AND CUSTOMERS AND DUE TO BANKS AND CUSTOMERS Breakdown by type of item 60 of assets "Loans and receivables with banks" Type of transaction/amounts 30/06/ /12/2016 A. Loans and Receivables with Central Banks 292, , Term deposits Obligatory reserve 292, , Reverse repurchase agreements Other - - B. Loans and receivables with banks 623, , Loans 616, , Current accounts and deposit accounts 57,654 17, Term deposits 105,810 42, Other loans: 452, ,675 - Reverse repurchase agreements Finance leases Other 452, , Debt instruments 7,740 10, Structured instruments Other debt instruments 7,740 10,850 Total 916, ,748 Total fair value 917, ,898 The item "1.3 Other loans" mainly includes the items related to the carried out securitisation transactions and margin trading on existing derivatives. 55

56 Breakdown by type of item 70 of assets "Loans and receivables with customers" 30/06/ /12/2016 Type of transaction/amounts Performing Non-performing Non-performing Purchased Other Performing Purchased Other Loans 14,439,210-2,369,437 14,218,087-3,153, Current accounts 2,346, ,483 2,654,858-1,211, Reverse repurchase agreements 649, , Mortgages 9,360,974-1,290,643 8,971,204-1,670, Credit cards, personal loans and salary-backed loans 278,446-18, ,719-18, Finance leases 418, , , , Factoring Other loans 1,384, ,160 1,746, ,213 Debt instruments 48, , Structured instruments Other debt instruments 48, , Total 14,488,051-2,369,437 14,275,168-3,154,028 Total fair value 17,639,131 18,291,384 Item 7. Other loans includes instalment and non-instalment sundry facilities of EUR 442,725 thousand, loans for advances on bills of EUR 352,588 thousand, loans and receivables to Cassa Compensazione other than repurchase agreements of EUR 155,896 thousand, import and export loans of EUR 251,350 thousand and loans against security of EUR 62,721 thousand. The decrease in non-performing loans also refers to the reclassification among assets held for sale of bad loans included in the Elrond Portfolio. The transaction is described in the interim Report On Operations and in the part of the Notes to the financial statements related to Accounting Policies. 56

57 Breakdown by debtor/issuer of item 70 of assets "Loans and receivables with customers" 30/06/ /12/2016 Type of transaction/amounts Performing Non-performing Non-performing Purchased Other Performing Purchased Other 1. Debt instruments 48, , a) Governments b) Other government agencies c) Other issuers 48, , non-financial companies 4, , financial companies 43, , insurance companies other Loans to: 14,439,210-2,369,437 14,218,087-3,153,608 a) Governments 31, ,297-3 b) Other government agencies 107,217-5,948 88,282-5,931 c) Other parties 14,300,754-2,363,486 14,124,508-3,147,674 - non-financial companies 8,392,769-2,012,302 8,595,796-2,691,499 - financial companies 1,671,261-55,067 1,284,710-89,793 - insurance companies 2, , other 4,234, ,116 4,241, ,354 Total 14,488,051-2,369,437 14,275,168-3,154,028 57

58 Breakdown by type of item 10 of liabilities "Due to banks" Type of transaction/amounts 30/06/ /12/ Due to central banks 2,500,584 1,500, Due to banks 154, , Current accounts and deposit accounts 66,858 50, Term deposits 1,500 13, Loans 81,246 92, repurchase agreements other 81,246 92, Payables for commitments to repurchase own equity instruments Other payables 5,062 5,028 Total 2,655,250 1,661,670 Total fair value 2,651,254 1,661,579 The item "2.3.2 Loans other" mainly includes loans received from the European Investment Bank. Breakdown by type of item 20 of liabilities "Due to customers" Type of transaction/amounts 30/06/ /12/ Current accounts and deposit accounts 13,896,680 13,521, Term deposits 1,022,153 1,628, Loans 2,064,764 2,762, repurchase agreements 1,600,624 2,285, other 464, , Payables for commitments to repurchase own equity instruments 34,000 34, Other payables 77,287 89,184 Total 17,094,884 18,034,898 Total fair value 17,096,233 18,041,144 Item "3.1 Repurchase agreements" mainly contains transactions with Cassa Compensazione e Garanzia. Item 3.2 "Loans - other" mainly refers to medium to longterm loans received by Cassa Depositi e Prestiti following the agreement between ABI and the Cassa Depositi e Prestiti in support of SMEs, whereas item "4. Payables for commitments to repurchase own equity instruments" refers to purchase options for noncontrolling interests in Global Assicurazioni S.p.A. 58

59 SECTION 2 OTHER FINANCIAL INSTRUMENTS Breakdown by type of item 20 of assets "Financial assets held for trading" Item/Amounts 30/06/ /12/2016 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 A. On-statement of financial position assets 1. Debt instruments 16, ,633 4, Equity instruments 2, OEIC units Loans Total A 18, ,838 4,903 1 B. Derivatives 1. Financial derivatives , Credit derivatives Total B ,257 - Total (A+B) 18,491 1, ,838 6,

60 Breakdown by debtor/issuer of item 20 of assets "Financial assets held for trading" 30/06/ /12/2016 A. On-statement of financial position assets 1. Debt instruments 17,163 17,536 a) Governments and Central Banks 12,544 12,605 b) Other government agencies c) Banks 4,192 4,400 d) Other issuers Equity instruments 2, a) Banks b) Other issuers: 1, insurance companies financial companies non-financial companies 1, other OEIC units Loans - - a) Governments and Central Banks - - b) Other government agencies - - c) Banks - - d) Other parties - - Total A 19,331 17,742 B. Derivatives a) Banks b) Customers Total B 949 1,257 Total (A+B) 20,280 18,999 Bonds issued by Central governments and Banks are mainly represented by exposures towards the Italian Government. Breakdown by type of item 40 of assets "Available-for-sale financial assets" 30/06/ /12/2016 Item/Amounts Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1. Debt instruments 4,284,229 7, ,185,942 12, Equity instruments 10,950 20,470 86,909 14,974 19,488 92, OEIC units , , Loans Total 4,295,179 27, ,667 5,200,916 32, ,839 The decrease compared to 31 December 2016 in item "3. OEIC units" mainly refers to the write-down of the shares of the Atlante fund of approximately EUR 31 million. Level 3 also contains equity instruments measured at cost. 60

61 Breakdown by debtor/issuer: Available-for-sale financial assets Item/Amounts 30/06/ /12/ Debt instruments 4,292,023 5,199,238 a) Governments and Central Banks 4,130,725 5,078,159 b) Other government agencies - - c) Banks 116,786 66,275 d) Other issuers 44,512 54, Equity instruments 118, ,426 a) Banks 66,767 69,974 b) Other issuers: 51,562 57,452 - insurance companies financial companies 37,090 53,139 - non-financial companies 14,472 4,313 - other OEIC units 85, , Loans - - a) Governments and Central Banks - - b) Other government agencies - - c) Banks - - d) Other parties - - Total 4,495,735 5,436,165 Bonds issued by Central governments and Banks are mainly represented by exposures towards the Italian Government. Breakdown by type of item 50 of assets "Held-to-maturity investments" 30/06/ /12/2016 Type of instrument/ Amounts CA FV CA FV Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1. Debt instruments 810, , structured other 810, , Loans Key: FV = fair value CA = carrying amount 61

62 Information on shareholding relationships of investments in companies subject to joint control (carried at equity) and in companies subject to significant influence Name A. Companies subject to joint control Registered office Operating office Type of relationship Type of equity investment Investor company % held 1. Rajna Immobiliare S.r.l. Sondrio Sondrio 1 Credito Valtellinese B. Companies subject to significant influence 1. Global Assistance S.p.A. Milano Milano 2 Credito Valtellinese Sondrio Città Futura S.r.l. Milano Milano 2 Stelline Real Estate Adamello S.p.A. Milano Milano 2 Stelline Real Estate Valtellina Golf Club S.p.A. Caiolo Caiolo 2 Credito Valtellinese Fidipersona Società Cooperativa Ancona Ancona 2 Credito Valtellinese Creset - Crediti, Servizi e Tecnologie S.p.A. Milano Lecco 2 Credito Valtellinese Finanziaria Laziale S.p.A. in liquidation Frosinone Frosinone 2 Credito Valtellinese Generalfinace S.p.A. Milano Milano 2 Credito Valtellinese Key Type of relationship: 1 = joint control 2 = significant influence Although the investments are less than 20% of the share capital, equity investments in Fidipersona Società Cooperativa and in Adamello S.p.A. are included among equity investments in companies subject to significant influence by virtue of the significant presence in their Board of Directors and Board of Statutory Auditors of parties related to the Creval Group. Breakdown by type of item 30 of liabilities "Securities issued" 30/06/ /12/2016 Type of instrument/ Amounts Carrying amount Fair Value Carrying amount Fair Value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 A. Securities 1. bonds 2,733,907-2,543, ,102 2,901,690-2,627, , structured other 2,733,907-2,543, ,102 2,901,690-2,627, , other securities 194, , , , structured other 194, , , ,177 - Total 2,928,470-2,737, ,102 3,073,867-2,799, ,112 Financial instruments indicated in Level 3 refer to the securities sold in connection with the Quadrivio RMBS 2011 securitisation. 62

63 Breakdown by type of item 40 of liabilities "Financial liabilities held for trading" 30/06/ /12/2016 Transaction type/group elements NV Fair Value NV Fair Value L1 L2 L3 L1 L2 L3 A. On-statement of financial position liabilities 1. Due to banks Due to customers Debt instruments Total A B. Derivatives 1. Financial derivatives X X - 1, Credit derivatives X X Total B X X - 1,468 - Total (A+B) ,468 - Key: NV = nominal or notional value L1= Level 1 L2= Level 2 L3 = Level 3 Hedging derivatives: breakdown by type of hedge and level 30/06/ /12/2016 Fair Value NV Fair Value L1 L2 L3 L1 L2 L3 A. Financial derivatives - 263, , , ,000 1) Fair value - 263, , , ,000 2) Cash flows ) Investments in foreign operations B. Credit derivatives ) Fair value ) Cash flows Total - 263, , , ,000 NV Key: NV = nominal value L1= Level 1 L2= Level 2 L3 = Level 3 63

64 SECTION 3 OTHER ASSET AND LIABILITY ITEMS Breakdown of item 120 of assets "Property, equipment and investment property" - operational property, equipment and investment property Asset/Amounts 30/06/ /12/ Owned 352, ,942 a) land 54,527 60,220 b) buildings 254, ,499 c) furniture 31,035 16,937 d) electronic systems 3,828 3,945 e) other 8,393 9, Assets acquired under finance lease - - a) land - - b) buildings - - c) furniture - - d) electronic systems - - e) other - - Total 352, ,942 The increase in the item "c) furniture" is mainly due to the change in the method used for assessing artworks compared to 31 December In particular, as from 30 June 2017, the restatement model was applied to replace the cost model. Breakdown of item 120 of assets "Property, equipment and investment property" - property, equipment and investment property held for investment measured at cost Asset/Amounts 30/06/ /12/ Owned 50,955 60,284 a) land 5,706 7,485 b) buildings 45,249 52, Assets acquired under finance lease - - a) land - - b) buildings - - Total 50,955 60,284 Fair value 71,217 81,012 64

65 Breakdown of item 130 of assets "Intangible assets" 30/06/ /12/2016 Asset/Amounts Definite life Indefinite life Definite life Indefinite life A.1 Goodwill X 30,385 X 30,385 A.1.1 attributable to owners of the parent X 30,385 X 30,385 A.1.2 attributable to non-controlling interests X - X - A.2 Other intangible assets 16,140-15,205 - A.2.1 Assets measured at cost: 16,140-15,205 - a) internally generated intangible assets 8,371-1,630 - b) other assets 7,769-13,575 - A.2.2 Assets measured at fair value: a) internally generated intangible assets b) other assets Total 16,140 30,385 15,205 30,385 With reference to the goodwill recorded at 30 June 2017, analyses were carried out in order to check the possible presence of impairment indicators and the subsequent need to calculate again the recoverable amount of the different CGUs. It is specified that, following the results of the impairment test carried out for the 2016 financial statements and of the consequent write-downs, the residual goodwill recognised at 30 June 2017 is fully attributable to the Global Assicurazioni Specialised Company CGU. It represents the lowest level at which group management estimates the return on investment and this level is not greater than the operating segments identified for the segment reporting of the group prepared according to IFRS 8 Operating segments. The analyses carried out, using the same methodological approach adopted during evaluation in the financial statements at 31 December 2016 to which reference is made, showed the following: with reference to the estimate of the cash flows, final data at 30 June 2017 was compared with the interim forecasts pointing out their deviations. The economic results of the CGU of the first half of 2017 were substantially in line compared to what was defined in the budget; with reference to forecast figures, with reference to the CGU to which the goodwill of the consolidated financial statements was allocated, the expected financial results determined during the impairment test for the 2016 financial statements were substantially confirmed; with reference to the long-term growth rate (g) of the cash flows used to estimate the so-called "terminal value", the figure is confirmed in line with the one used in the impairment test for the 2016 financial statements (2%); with reference to the discount rate of the cash flows, it was updated on the basis of the new information available at 30 June In particular, the cost of capital at 30 June 2017 accounted for 8.7%, higher than 0.2% compared to the value reported at 31 December This was due to the combined effect of changes recorded on the Risk free rate (from 1.46% to 1.82%) and on the average beta associated with a sample of major listed Italian banks (from 1.25 to 1.223). 65

66 Albeit the outlines of the scenario as well as the parameters used during evaluation may vary significantly as a result of the events that management cannot influence, the results of the aforesaid analyses do not show the presence of factors and circumstances of impairment presumption and, as a result, confirm the carrying amounts. It is highlighted that the persisting volatility of the share prices, also following the uncertainty in the macroeconomic situation, as already observed in the financial statements, does not allow the stock market quotations, or the multipliers that they derive from, to fully express the bank's listed value based on the future growth opportunities and the ability to create sustainable value in the medium term. Prepaid tax assets Article 2 of Italian Law Decree no. 225 of 29 December 2010, converted, with amendments, by Italian Law no. 10 of 26 February 2011, allows the conversion into tax assets of the deferred tax assets recorded in the financial statements relating to impairment losses on loans and receivables of banks and financial companies and to goodwill and other intangible assets. The provision was amended by Italian Law no. 147 of 27 December 2013, which extended the regulation also to deferred tax assets, always related to the same items, recognised with reference to the local business tax (IRAP). As a result of accounting losses arising from the financial statements of the consolidated companies, the amount of deferred tax assets that were converted in 2017 in tax asset amounted to EUR 83.7 million. 66

67 Breakdown of item 120 of liabilities "Provisions for risks and charges Item/Amounts 30/06/ /12/ Company pension funds 33,779 36, Other provisions for risks and charges 87, , Legal disputes 19,451 20, Personnel expenses 65,928 82, Other 2,584 2,587 Total 121, ,750 Breakdown of item 160 of assets "Other assets" 30/06/ /12/2016 Amounts due from the tax authorities 54,859 63,642 Cheques drawn on the bank to be settled 77,635 37,072 Counterparts for securities and coupon payments to be received 15,167 21,064 Sundry items to be charged to customers and banks 44,822 48,204 Value date differences on portfolio transactions 67,326 45,618 Real estate inventory 46,625 45,052 Costs and other advance payments 2,740 5,656 Receivables related to the supply of goods and services 17,406 4,140 Leasehold improvements 3,405 3,929 Other items 93,816 44,794 Total 423, ,171 Breakdown of item 100 of liabilities "Other liabilities" 30/06/ /12/2016 Amounts due to tax authorities for indirect taxes 3,420 1,261 Amounts due to social security and welfare institutions 8,162 12,132 Amounts due to government agencies on behalf of third parties 222,086 48,008 Sundry items to be credited to customers and banks 47,945 33,176 Amounts available to customers 27,959 36,418 Amounts payable to employees 17,762 11,507 Value date differences on portfolio transactions 78,880 75,906 Items in transit between branches 5,144 1,576 Guarantees given and commitments 8,564 9,567 Accruals other than those capitalised 3,434 3,033 Payables related to the supply of goods and services 50,271 29,171 Payables for additional contributions - 17,918 Sundry and residual items 253, ,165 Total 727, ,838 67

68 Non-current assets held for sale and disposal groups: breakdown by type of asset 30/06/ /12/2016 A. Individual assets: A.1 Financial assets 506,974 - A.2 Equity investments - - A.3 Property, equipment and investment property 735 1,498 A.4 Intangible assets - - A.5 Other non-current assets - - Total A 507,709 1,498 of which measured at cost - - of which measured at fair value level of which measured at fair value level of which measured at fair value level 3 507,709 1,498 B. Groups of discontinued operations - - C. Liabilities associated with discontinued operations - - D. Liabilities associated with disposal groups - - Item A.1 Financial assets mainly includes bad loans included in the Elrond Portfolio amounting to EUR million. The transaction is described in the Report On Operations and in the part of the Notes to the financial statements related to Accounting Policies. Shares and OEIC units previously included in the portfolio of Available-for-sale financial assets were also reclassified in that their value will be recovered mainly with a sale no later than 12 months rather than with their continuous use (amount totalling EUR 6.7 million). Item A.3 Property, equipment and investment property include investment properties for which preliminary sale agreements were signed. 68

69 Information on Group share capital and reserves At 30 June 2017, equity attributable to the owners of the parent amounted to EUR 1,549 million, compared to EUR 1,753 million recorded at the end of December The main changes in the half-year are mainly due to: negative change in the AFS reserve of EUR 22.8 million mainly due to Government bonds held in the portfolio and sale of shares in Anima Holding; positive reserve for revaluation of art works of EUR 11.5 million; positive change in actuarial reserves of approximately EUR 2.9 million; loss for the period of EUR million. The share capital of Credito Valtellinese amounted to EUR 1,846.8 million. On the occasion of the Extraordinary Shareholders' Meeting of 29 October 2016, the reverse split of Creval ordinary shares was resolved according to a ratio of 1 new ordinary share - without any indication of a nominal value for every 10 existing ordinary shares, eliminating 9 existing ordinary shares for the sole purpose of enabling the overall balancing of the transaction and without reducing the total amount of the share capital. Therefore, the number of shares is 110,887,236. At 30 June 2017, the portfolio contained 6,000 treasury shares of EUR 100 thousand, i.e % of total shares outstanding at the end of the period. No purchase or sale was put in place during the financial year. Equity per share at 30 June 2017 is equal to EUR

70 SECTION 4 OTHER INFORMATION Breakdown of guarantees given and commitments Transactions 30/06/ /12/2016 1) Financial guarantees a) Banks 41,053 - b) Customers 76,343 70,639 2) Commercial guarantees a) Banks 13,315 10,251 b) Customers 579, ,473 3) Irrevocable commitments to grant finance a) Banks i) certain to be called on 1, ii) not certain to be called on - - b) Customers i) certain to be called on 1,829 1,756 ii) not certain to be called on 418, ,364 4) Commitments underlying credit derivatives: protection sales - - 5) Assets pledged as guarantee for third-party commitments - - 6) Other commitments 21,053 - Total 1,153,102 1,321,981 Assets pledged as guarantee for the Group's liabilities and commitments Portfolios 30/06/ /12/ Financial assets held for trading 16,692 16, Financial assets at fair value through profit or loss Available-for-sale financial assets 1,806,545 2,464, Held-to-maturity investments 452, Loans and receivables with banks 281, , Loans and receivables with customers 5,580,755 4,310, Property, equipment and investment property - - The assets indicated above were used as a guarantee for funding repurchase agreements, issue of bank drafts, derivatives as well as loan received from the European Central Bank, of loans received from the European Investment Bank and from Cassa Depositi e Prestiti. 70

71 Breakdown of management and trading services on behalf of third parties Type of service 30/06/ /12/ Execution of orders on behalf of customers a) Purchases 1. settled unsettled - - b) Sales 1. settled unsettled Portfolio management a) individual - - b) collective Custody and administration of securities a) third-party securities held on deposit: when acting as custodian bank (excluding portfolio management) 1. securities issued by companies included in the consolidation scope other securities - - b) third-party securities held on deposit (excluding portfolio management): others 1. securities issued by companies included in the consolidation scope 2,433,621 2,828, other securities 4,273,193 4,697,617 c) third-party securities deposited with third parties 6,518,853 7,344,626 d) treasury securities deposited with third parties 5,815,587 4,246, Other transactions 2,697,511 2,591,262 Item "3. d) Treasury securities deposited with third parties" also includes portfolio securities not recognised under assets coming from self-securitisations. Item "4. Other transactions" refers to the market value of the insurance premiums collected. 71

72 Breakdown of the main income statement items Breakdown of item 10 of the income statement "Interest and similar income" Items 1st half of st half of 2016 Change 1. Financial assets held for trading % 2. Financial assets at fair value through profit or loss Available-for-sale financial assets 30,067 30, % 4. Held-to-maturity investments 1, Loans and receivables with banks % 6. Loans and receivables with customers 232, , % 7. Hedging derivatives Other assets 3,584 2, % Total 268, , % Item "8. Other assets" conventionally includes interest income on financial liabilities that are remunerated with a negative rate. Breakdown of item 20 of the income statement "Interest and similar expense" Items 1st half of st half of 2016 Change 1. Due to central banks - (882) % 2. Due to banks (557) (598) -6.86% 3. Due to customers (21,076) (34,009) % 4. Securities issued (33,358) (43,797) % 5. Financial liabilities held for trading (68) (426) % 6. Financial liabilities at fair value Other liabilities and provisions (1,584) (662) % 8. Hedging derivatives (13,016) (12,476) 4.33% Total (69,659) (92,850) % Item 7. Other liabilities and provisions conventionally includes interest on financial assets that are remunerated with a negative rate. 72

73 Breakdown of item 40 of the income statement "Fee and commission income" Type of service/sectors 1st half of st half of 2016 Change a) guarantees given 3,377 4, % b) credit derivatives c) management, trading and consulting services: 52,953 45, % 1. trading of financial instruments % 2. currency trading 2,090 2, % 3. portfolio management individual collective custody and administration of securities % 5. custodian bank placement of securities 20,636 13, % 7. order acceptance and transmission 3,179 3, % 8. consulting services % 8.1 on investments on financial structuring % 9. distribution of third party services 26,357 25, % 9.1. portfolio management 8,106 8, % individual 8,106 8, % collective insurance products 15,928 16, % 9.3 other products 2,323 1, % d) collection and payment services 39,941 39, % e) servicing for securitisation transactions f) factoring transaction services g) tax collection services h) management of multilateral trading facilities i) current account management 29,432 27, % j) other services 30,795 32, % Total 156, , % Fee and commission income included under "j) other services" mainly refers to commissions on loan transactions of EUR 27,173 thousand and commissions for rights and pledges of EUR 1,896 thousand. 73

74 Breakdown of item 50 "Fee and commission expense" Services/Sectors 1st half of st half of 2016 Change a) guarantees received (1,286) (1,028) 25.10% b) credit derivatives c) management and trading services: (667) (1,118) % 1. trading of financial instruments (4) (451) % 2. currency trading (1) (3) % 3. portfolio management: own account for third parties custody and administration of securities (662) (664) -0.30% 5. placement of financial instruments off-premises provision of financial instruments, products and services d) collection and payment services (11,484) (10,130) 13.37% e) other services (745) (776) -3.99% Total (14,182) (13,052) 8.66% Breakdown of item 70. "Dividends and similar income" Items/Income 1st half of st half of 2016 Change Dividends Income from OEIC units Dividends Income from OEIC units Dividends Income from OEIC units A. Financial assets held for trading % - B. Available-for-sale financial assets 2, , % - C. Financial assets at fair value through profit or loss D. Equity investments - X - X - X Total 2, , % - Dividends on available-for-sale financial assets refer in particular to the interest in Istituto Centrale delle Banche Popolari. 74

75 Breakdown of item 100. "Profit (loss) on sale/repurchase" Items/Income components Financial assets Profit 1st half of st half of 2016 Change Losses Net profit (losses) Profit Losses Net profit (losses) Profit Losses Net profit (losses) 1. Loans and receivables with banks Loans and receivables with customers 1,166 (14,576) (13,410) 2,044 (16,131) (14,087) % -9.64% -4.81% 3. Available-for-sale financial assets 3.1 Debt instruments 12,334 (313) 12,021 28,610-28, % % 3.2 Equity instruments 9,855-9,855 21,692-21, % % 3.3 OEIC units Loans Held-to-maturity investments Total assets 23,357 (14,889) 8,468 52,346 (16,131) 36, % -7.70% % Financial liabilities 1. Due to banks Due to customers Securities issued 250 (741) (491) 418 (1,009) (591) % % % Total liabilities 250 (741) (491) 418 (1,009) (591) % % % Profits and losses on loans and receivables from customers refer to the already mentioned sale transaction of non-performing loans occurred in the first half of 2017 (in particular Algebris 2) whereas profits on equity instruments mainly refer to the sale of shares of Anima Holding S.p.A.. 75

76 Breakdown of item 80. "Profits (Losses) on trading" Transactions/Income components Gains (A) Trading income (B) Losses (C) Trading losses (D) Profits (Losses) on trading [(A+B)- (C+D)] 1. Financial assets held for trading (306) (186) Debt instruments 3 9 (130) (11) (129) 1.2 Equity instruments (176) (175) OEIC units Loans Other Financial liabilities held for trading Debt instruments Payables Other Financial assets and liabilities: exchange rate differences X X X X Derivatives (37) (444) 2, Financial derivatives: - On debt instruments and interest rates (37) (444) On equity instruments and stock market share indices On currencies and gold X X X X 2,026 - Other Credit derivatives Total 95 1,493 (343) (630) 2,882 76

77 Breakdown of item 90 "Net hedging income (expense)" Income components/amounts A. Gains on: 1st half of st half of 2016 Change A.1 Fair value hedges 29, A.2 Financial assets with fair value hedges - 70, % A.3 Financial liabilities with fair value hedges Total hedging income (A) 29,204 70, % B. Losses on: B.1 Fair value hedges - (70,543) % B.2 Financial assets with fair value hedges (29,253) - - B.3 Financial liabilities with fair value hedges Total hedging expense (B) (29,253) (70,543) % C. Net hedging expense (A-B) (49) (410) % Net impairment losses on loans and receivables: breakdown Transactions/Income components Impairment losses Reversals of impairment losses 1st half of 2017 Individual Collective Individual Collective Derecognition Other A B A B 1st half of 2016 A. Loans and receivables with banks Loans Debt instruments B. Loans and receivables with customers (11,827) (471,221) - 65, ,125-10,932 (293,396) (150,208) Purchased non-performing loans and receivables - - X X Loans - - X - - X X Debt instruments - - X - - X X - - Other loans and receivables (11,827) (471,221) - 65, ,125-10,932 (293,396) (150,208) - Loans (11,827) (470,801) - 65, ,125-10,932 (292,976) (150,208) - Debt instruments - (420) (420) - C. Total (11,827) (471,221) - 65, ,125-10,932 (293,396) (150,208) Key: A = from interest B = other reversals Net impairment losses on loans and receivables from customers include increases due to provisions made on the Elrond Portfolio as shown in the part of the Notes to the financial statements related to Accounting Policies. 77

78 Net impairment losses on available-for-sale financial assets: breakdown Transactions/Income components Impairment losses Reversals of impairment losses 1st half of st half of 2016 Change Individual Individual Derecognition Other A B A. Debt instruments B. Equity instruments - (3,153) X X (3,153) (104) n.s. C. OEIC units - (32,013) X - (32,013) (3,847) n.s. D. Loans with banks E. Loans with customers F. Total - (35,166) - - (35,166) (3,951) n.s. Key: A = from interest B = other reversals Impairment losses on OEIC units mainly refer to the write-down of the Atlante fund (EUR 31 million). Net impairment losses on other financial transactions: breakdown Transactions/Income components Impairment losses Reversals of impairment losses 1st half of st half of 2016 Individual Collective Individual Collective Derecognition Other A B A B A. Guarantees given - (405) (204) ,026 B. Credit derivatives C. Commitments to grant finance - - (24) (644) D. Other transactions - (41,447) (41,447) - E. Total - (41,852) (228) (40,451) 2,382 Key: A = from interest B = other reversals Net impairment losses on other financial transactions include the commitment to sell and purchase at fair value securities coming from the Elrond operation that will give rise to the derecognition of bad loans in the third quarter of Net accruals to provisions for risks and charges: breakdown Items 1st half of st half of 2016 Change Provision for legal disputes and claims from liquidators (576) (3,916) % Provision for sundry risks and charges 534 2, % Total (42) (1,883) % 78

79 Breakdown of item 180 "Personnel expenses" Type of expense/amounts 1st half of st half of 2016 Change 1) Employees (130,060) (142,360) -8.64% a) wages and salaries (91,707) (93,447) -1.86% b) social security charges (28,899) (29,856) -3.21% c) post-employment benefits (5,867) (5,889) -0.37% d) pension expenses e) accrual for post-employment benefits (486) (565) % f) accruals for pension and similar provisions: - defined contribution defined benefit (240) (323) % g) payments to external supplementary pension funds: - defined contribution (4,541) (4,731) -4.02% - defined benefit (203) (70) % h) costs of share-based payment plans i) other employee benefits 1,883 (7,479) % 2) Other personnel in service (859) (633) 35.70% 3) Directors and statutory auditors (2,427) (2,439) -0.49% 4) Retired personnel (969) (954) 1.57% Total (134,315) (146,386) -8.25% The item i) other employee benefits includes an extraordinary income of approximately EUR 7.5 million related to the 2016 Solidarity fund, the cost of which was allocated in 2016 of approximately EUR 61 million. In particular, the 2017 the Budget Law (no. 232/2016), in Article 1, envisaged a three-year public intervention 2017/2019 as part of the restructuring and merger processes in which the access to the Extraordinary section of the Solidarity fund is used. This provision envisages, for accesses to extraordinary services of the Fund that occur in 2017, a reduction in the extraordinary contribution to the charge of the employer amounting to 85% of the so-called Naspi (Nuova Assicurazione Sociale per l Impiego, which replaces the old unemployment benefit) and the related notional contribution. Therefore, this regulatory provision reduces the total charge of the Group, taking into consideration that all the entries in the Solidarity Fund deriving from the Group trade-union agreement of 21 December 2016 are finalised as from 1 April and 1 December

80 Breakdown of item 180 "Other administrative expenses" 1st half of st half of 2016 Change Fees for professional and consulting services (32,635) (20,056) 62.72% Data processing services (14,072) (14,535) -3.19% Property management (6,445) (5,246) 22.86% Rent payable (11,229) (11,227) 0.02% Taxes (29,386) (30,523) -3.73% SRF (7,922) (7,594) 4.32% Other (31,740) (36,649) % Total (133,429) (125,830) 6.04% Average number of employees by category 1st half of st half of 2016 Employees: 3,775 3,917 a) executives b) total middle managers 1,502 1,528 c) other employees 2,219 2,335 Other personnel Total 3,823 3,955 "Other employees" includes atypical forms of contract other than subordinate employment contract, such as for example project and temporary work contracts. Breakdown of item other operating expenses 1st half of st half of 2016 Change Amortisation of leasehold improvements (688) (1,073) % Real estate costs (2,646) (2,616) 1.15% Other expenses (4,722) (1,300) % Total (8,056) (4,989) 61.48% Other operating expenses mainly include costs borne as a result of the Elrond operation of EUR 3,000 thousand. 80

81 Breakdown of item other operating income ITEMS 1st half of st half of 2016 Change Rent receivable 901 1, % Recovery of loan setup fees 1,057 1, % Income from real estate services (including income from review of prices on real estate agreements underway) % Income from data processing services 6,211 5, % Income from other services % Recovery of indirect taxes 20,116 21, % Recovery of insurance policy payments % Recovery of legal and notarial costs 5,159 5, % Changes in property works in progress 1, n.s. Revenues from property sales 25 1, % Other income 7,836 2, % Total 43,786 39, % The other operating income mainly includes recovery of expenses on services to thirdparty companies of EUR 1,104 thousand and recovery of costs incurred from 30 November 2016 to 30 June 2017 for the management of bad loans included in the Elrond portfolio of EUR 4,979 thousand. 81

82 Breakdown of net gains (losses) on equity investments: breakdown Income components/amounts 1) Companies subject to joint control 1st half of st half of 2016 Change A. Income % 1. Revaluations % 2. Gains on sale Reversals of impairment losses Other income B. Expense Impairment Impairment losses Losses on sale Other expenses Net gains (losses) % 2) Companies subject to significant influence A. Income , % 1. Revaluations % 2. Gains on sale - 26, % 3. Reversals of impairment losses Other income B. Expense (278) (339) % 1. Impairment (278) (173) 60.69% 2. Impairment losses - (20) % 3. Losses on sale - (146) % 4. Other expenses Net gains (losses) , % Total , % 82

83 Breakdown of item "Net gains (losses) on sales of investments" Income components/amounts A. Property 1st half of st half of 2016 Change - Gains on sale 69,935 1 n.s. - Losses on sale (21) (71) % B. Other assets - Gains on sale % - Losses on sale (4) (46) % Net gains (losses) 69,926 (102) n.s. Recognition of deferred tax assets The recognition of deferred tax assets, other than those that can be transformed into tax asset, is strictly related to the Group's ability to generate large future taxable income. In line with what was done at year-end in view of the outcome of the so-called probability test, no new deferred tax assets depending on tax losses were recognised in this interim report. Deferred tax assets depending on tax losses, and to a lesser extent those relating to the carry-over of ACE deduction not recognised in the first half of 2017 amounted to approximately EUR 63 million. In any case, the tax benefit may be recorded in subsequent financial years when the requirement of the probability of its recovery with future taxable income is verified following the passing of a new probability test. 83

84 Earnings (losses) per share The basic earnings (loss) per share and diluted earnings (loss) per share are calculated in accordance with the methods described in IAS 33 - Earnings per share. The basic earnings (loss) per share are defined as the profit or loss or the result from continuing operations attributable to the owners of the parent (therefore, excluding the post-tax result from discontinued operations) attributable to ordinary equity holders and the weighted average number of ordinary shares outstanding during the period. The following table displays the basic earnings (loss) per share with the calculation details. 1st half of st half of 2016 Profit (loss) attributable to holders of ordinary shares (194,828) 19,136 Weighted average number of ordinary shares 110,881, ,881,236 Basic earnings (loss) per share (1.757) During the first half of 2017, the reverse split of Creval ordinary shares was carried out according to a ratio of 1 new ordinary share for every 10 existing ordinary shares. As established by IAS 33, the weighted average number of ordinary shares outstanding during the year and with reference to the first half of 2016 was adjusted to take account of this reverse split that changed the number of outstanding ordinary shares without a corresponding change in resources. There are no outstanding instruments with potential dilutive effect; therefore, diluted earnings (loss) per share are equal to basic earnings (loss) per share. 84

85 Information on risks and related hedging policies The type and size of the risks that can be assumed and actually assumed derive from identity, values, business model and strategic objectives of the Group. The clear identification of risks to which the Credito Valtellinese Banking Group is actually and potentially exposed constitutes the essential prerequisite for a knowledgeable assumption of said risks and their effective management, making use of the appropriate mitigation and transfer tools and techniques. In line with the regulatory provisions, with the operational and organisational characteristics, the different types of risk that the Group assumes and manages in the carrying on of its activities are: - credit and counterparty risk (including country and transfer risk); - credit valuation adjustment risk; - market risk for the trading book (including the basis risk); - operational risk; - IT risk; - interest rate risk for the banking book; - concentration risk of the loans and receivables from customers portfolio; - liquidity risk; - real estate risk; - compliance risk; - risk of money laundering and terrorist financing; - risk towards associated parties; - reputational risk; - risk deriving from securitisations; - residual risk; - strategic risk (including risk from investments); - risk of excessive leverage; - sovereign risk; - model risk; - risk related to the portion of encumbered assets (asset encumbrance). The risk exposure is assessed primarily within the Internal capital adequacy assessment processes (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP). The results of the ICAAP and ILAAP processes are summarised in the relevant Reports that represent the point of convergence and synthesis of the equity, economic and financial plans, of the risk management, capital management and liquidity management and that, on the other hand, are an essential instrument supporting strategic planning and the implementation of the corporate decisions. The subjective importance of the risks to be measured is confirmed in regulatory terms by the supervisory provisions, which require a capital control in connection with certain types of risk (known as "First Pillar" risks) and require the banks to assess other types of risk (known as "Second Pillar" risks), included in a list that is not complete, and to have an adequate capital to face up to them. The assumption of importance based on objective and regulatory elements is accompanied 85

86 additionally by the consideration of company characteristics, which can lead both to the integration and to the increase/decrease of the assessment of importance. In line with its focus on retail banking, the Group is mainly exposed to credit risk. In terms of capital requirements, the exposure to operational risks is also significant: these risks are assumed in that they serve as a means for carrying out the banking business. The exposure to financial and market risks is limited, given that the objective of limiting the volatility of the forecast results would not be compatible with an intensive speculative financial activity, with a pronounced transformation of maturities and with treasury management as a profit centre rather than a service. The current composition of the assets also involves an exposure to the sovereign risk, whereas the other risks are of lesser significance. On the date of reference of this report, the exposure to each risk is consistent with the risk appetite defined by the Board of Directors and with the risk-taking and risk management policies. Detailed information on the general characteristics of the control systems, the risk management, measurement and control policies are contained in the Notes to the 2016 Consolidated Financial Statements (Part E Information on risks and hedging policies) and in the informative report on the third pillar at 31 December 2016 made available on the Group's website at 1. CREDIT RISK In line with its focus on retail banking, the Group is mainly exposed to credit risk taken on when carrying out the traditional lending activity, regardless of the specific technical form in which the loan is granted. In line with and as part of the guidelines of the Group Risk Appetite Framework and of the budget objectives for the year, the aim of the credit policies is to improve the risk-return profile of the loan portfolio, with a view to: - make concrete and operational the statutory principles that express the corporate identity - a Group oriented to financing the real economy of the areas in which the Group operates, SMEs and households in particular - and inspire its guidelines for carrying out its lending activity; - direct the loans portfolio composition towards the optimisation of the ratio between the expected return and credit risk, with a view to realigning the risk-adjusted profitability to the cost of capital and limiting the concentration of exposures on single counterparties/groups, on single business segments or geographical areas; - support the monitoring of the credit risk management by applying policies, processes, methods and standard IT procedures. The credit risk monitoring mainly involves the risk management department assigned to the Chief Risk Officer and the organisational area controlled by the Chief Lending Officer (CLO) of Credito Valtellinese whose task is to: - govern the credit process, including the medium to long-term loans segment and corporate finance; - monitor credit quality by controlling all the variables of risk management, guidance and monitoring; - manage anomalous credit; 86

87 - endorse corporate and Group regulations concerning Loans. With regard to the credit rating process, approval and management of positions, each Bank carries out the lending activity on the basis of guidelines and standard processes defined by the Parent and on the basis of delegated powers to authorise loans. In the granting of loans, guarantees are an accessory element; the granting of loans is, in fact, based on the borrower s actual capacity to repayment of the loan. Where necessary, for the purposes of credit risk reduction, the Group acquires from its customers the typical banking guarantees, i.e. mainly, mortgages on real estate, collaterals on securities and marginally personal guarantees. The Credito Valtellinese Group makes use of a set of parameters and instruments for managing and measuring the credit risk, which includes an important element such as the internal ratings calculated through differentiated and estimated models specifically by customer segment (Corporate, SME Corporate, Small Retail, Micro Retail and Private). For the company portfolio (Corporate and Retail) and Private Retail, the distributions by official rating classes at 30 June 2017 and at 31 December 2016 are indicated below. Chart 1 - Distribution of loans to companies and private by rating class 20% 15% 16,5% 16,7% 13,7% 14,3% Enterprises and Private 16,9% 18,1% December 2016 June 2017 Portion of EAD 10% 5% 4,4% 5,1% 11,3% 10,9% 10,1% 10,0% 9,9% 9,0% 8,1% 7,5% 8,5% 7,9% 0,8% 0,6% 0% AAA AA A BBB BB B CCC CC C NA/Unrated Rating Class The master scale adopted by the Group consists of 9 rating classes to which the related PDs (Probability of Default) correspond, i.e., the probability that a counterparty belonging to a particular rating class passes to the default state within a time horizon of one year. Another parameter used by the Group for measuring and managing the credit risk is the Loss Given Default (LGD) that represents a loss rate in case of default, i.e. the expected value (possibly affected by adverse scenarios) of the ratio, expressed in percentage terms, between the loss due to default and the amount of exposure at the moment of default (Exposure At Default, EAD). In order to calculate the value of LGD, bad loans LGD and the Danger Rate are estimated and then two additional components are applied: the downturn effect and indirect costs. The third parameter used by the Group for measuring and managing the credit risk is the Exposure At Default (EAD) that derives from the estimate of the Credit Conversion Factor 87

88 (CCF). The CCF is the ratio between the current unused portion of a line of credit that could be used - and that in case of default would result in an exposure - and the portion currently unused of this line of credit, where the entity of the credit line is determined by the previously established limit. The risk parameters have a key role in loan granting, monitoring and management. In particular, they play a role in deciding the bodies competent to approve loans and contribute to guide the decisions of loan managers when classifying positions based on their performance. Moreover, the risk parameters indicated are used in the assessment of performing loans and receivables from customers portfolio. In fact, with reference to this area, the Group developed the method of "Incurred but not reported losses", which uses the values of expected loss duly adjusted through the Loss Confirmation Period (LCP) parameter to take account of the average delay between the deterioration of the financial conditions of the debtor and the actual classification under default status of each exposure. In order to take into account the current economic situation, the PDs used for estimating the rate of depreciation are calculated according to a mostly Point In Time (PIT) method compared to a more Through The Cycle (TTC) approach used for the calibration of the rating models. In particular, the PDs used for estimating the rate of depreciation are equal to the PDs estimated for the rating models, which represent a longterm floor, or the average of the default rates recognised over the last three years. The irregularly performing loans are classified in compliance with what is provided by supervisory regulations as: past due non-performing loans, unlikely to pay and bad loans. The management of non-performing loans is entrusted to dedicated structures within the Group that operate through previously set recovery procedures, differentiated according to the risk classification. With regard to the management of non-performing financial assets, the Group carried out the following operations in line with the Action Plan that identifies among its priority objectives discontinuity measures on the non-performing loan, with a view to significantly improving asset quality indicators and freeing resources used for the growth of the Group: - on 27 March 2017, an agreement for the sale of a portfolio consisting of secured non-performing loans - unlikely to pay and bad loans was signed with a specialised operator in the industry for a gross book value of approximately EUR 50 million, against a total valuation of the portfolio of approximately 44%; - as already described in the section on Accounting Policies, on 14 July, the Group completed a securitisation of bad loans, disbursed by Credito Valtellinese and Credito Siciliano. The transaction meeting a strategy for the transfer of credit risk, with the reversal of bad loans from the financial statement asset (derecognition), carries out a positive impact on the exposure on credit risk reducing nonperforming loans. Concentration risk The exposure to concentration risk, by single counterparty or group of related customers, by business segments and by geographical areas, is modest and consistent with the objectives. 88

89 Distribution of credit exposures by portfolio and credit quality (carrying amounts) Portfolio/Quality Bad loans Unlikely to pay Past due nonperforming loans Past due performing loans Other performing loans Total 1. Available-for-sale financial assets ,291,649 4,292, Held-to-maturity investments , , Loans and receivables with banks , , Loans and receivables with customers 609,244 1,607, , ,938 14,148,113 16,857, Financial assets at fair value through profit or loss Financial assets held for sale 500, ,333 Total at 30/06/2017 1,109,577 1,607, , ,938 20,166,929 23,377,011 Total at 31/12/2016 1,272,106 1,684, , ,176 19,876,604 23,450,182 Other performing loans include EUR 780,426 thousand (EUR 928,935 thousand at 31 December 2016) of loans past due from 1 working day. Distribution of credit exposures by portfolio and credit quality (gross amount and carrying amount) Non-performing assets Performing assets Total Portfolio/Quality Gross amount Individual impairment Carrying amount Gross amount Collective impairment Carrying amount (carrying amount) 1. Available-for-sale financial assets ,291,649-4,291,649 4,292, Held-to-maturity investments , , , Loans and receivables with banks , , , Loans and receivables with customers 4,019,134-1,649,697 2,369,437 14,564,999-76,948 14,488,051 16,857, Financial assets at fair value through profit or loss X X Financial assets held for sale 1,275, , , ,333 Total at 30/06/2017 5,295,129-2,424,985 2,870,144 20,583,815-76,948 20,506,867 23,377,011 Total at 31/12/2016 5,387,278-2,232,876 3,154,402 20,383,897-88,117 20,295,780 23,450,182 Assets with a clear poor credit quality Other assets Portfolio/Quality Accumulated losses Carrying amount Carrying amount 1. Financial assets held for trading 3,998-18, Hedging derivatives Total at 30/06/2017 3,998-18,112 Total at 31/12/2016 3, ,786 89

90 Banking Group - On and off-statement of financial position credit exposures with banks: gross amount, carrying amount and past due brackets Type of exposure/amounts Gross amount Individual impairment Collective impairment Carrying amount Non-performing assets Performing assets Up to 3 months From 3 months to 6 months From 6 months to 1 year Beyond 1 year A. ON-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Bad loans X - X - - of which: forbearance exposures X - X - b) Unlikely to pay X - X - - of which: forbearance exposures X - X - c) Past due non-performing loans X - X - - of which: forbearance exposures X - X - d) Past due performing loans X X X X - X of which: forbearance exposures X X X X - X - - e) Other performing loans X X X X 955,865 X - 955,865 - of which: forbearance exposures X X X X - X - - TOTAL A , ,865 B. OFF-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Non-performing X - X - b) Performing X X X X 55,953 X - 55,953 TOTAL B , ,953 TOTAL A+B ,011, ,011,818 90

91 Banking Group - On and off-statement of financial position credit exposures with customers: gross amount, carrying amount and past due brackets Type of exposure/amounts Gross amount Individual impairment Collective impairment Carrying amount Non-performing assets Performing assets Up to 3 months From 3 months to 6 months From 6 months to 1 year Beyond 1 year A. ON-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Bad loans ,837,699 X -1,728,122 X 1,109,577 - of which: forbearance exposures ,108 X -89,896 X 62,212 b) Unlikely to pay 527,510 54, ,689 1,542,224 X -682,740 X 1,607,773 - of which: forbearance exposures 384,791 24,650 61, ,452 X -266,933 X 666,426 c) Past due non-performing loans 8,015 26,845 61,359 70,698 X -14,123 X 152,794 - of which: forbearance exposures 781 1,274 8,589 7,193 X -1,533 X 16,304 d) Past due performing loans X X X X 347,834 X -7, ,938 - of which: forbearance exposures X X X X 25,842 X ,231 e) Other performing loans X X X X 19,303,633 X -69,018 19,234,615 - of which: forbearance exposures X X X X 217,452 X -3, ,488 TOTAL A 535,525 80, ,048 4,450,621 19,651,467-2,424,985-76,914 22,444,697 A. OFF-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Non-performing 20, X -4,721 X 15,683 b) Performing X X X X 1,153,272 X -3,843 1,149,429 TOTAL B 20, ,153,272-4,721-3,843 1,165,112 TOTAL A+B 555,929 80, ,048 4,450,621 20,804,739-2,429,706-80,757 23,609,809 Other performing loans include EUR 780,426 thousand of loans past due from 1 working day. 91

92 Banking Group - Distribution of on and off-statement of financial position credit exposures with customers by business segment (carrying amount) Exposures/Counterparts A. On-statement of financial position exposures Carrying amount Governments Individual impairment Collective impairment Other government agencies Carrying amount Individual impairment Collective impairment A.1 Bad loans - - X - - X - of which: forbearance exposures - - X - - X A.2 Unlikely to pay 3-1 X 5,948-1,127 X - of which: forbearance exposures - - X 5,873-1,110 X A.3 Past due non-performing loans 1 - X - - X - of which: forbearance exposures - - X - - X A.4 Performing loans 4,984,736 X - 107,644 X of which: forbearance exposures - X - - X - TOTAL A 4,984, ,592-1, B. Off-statement of financial position exposures B.1 Bad loans - - X - - X B.2 Unlikely to pay - - X 4-1 X B.3 Other non-performing assets - - X - - X B.4 Other performing loans 1,420 X - 243,230 X -23 TOTAL B 1, , TOTAL (A+B) 30/06/2017 4,986, ,826-1, TOTAL (A+B) 31/12/2016 5,097, ,567-1, Exposures/Counterparts A. On-statement of financial position exposures Carrying amount Financial companies Individual impairment Collective impairment Carrying amount Insurance companies Individual impairment Collective impairment A.1 Bad loans 16,946-46,836 X 1-44 X - of which: forbearance exposures - - X - - X A.2 Unlikely to pay 47,531-29,673 X - - X - of which: forbearance exposures 7,274-6,474 X - - X A.3 Past due non-performing loans 1, X - - X - of which: forbearance exposures X - - X A.4 Performing loans 1,850,384 X -4,620 2,429 X - - of which: forbearance exposures 1,120 X -6 - X - TOTAL A 1,915,917-76,609-4,620 2, B. Off-statement of financial position exposures B.1 Bad loans X - - X B.2 Unlikely to pay 3-1 X - - X B.3 Other non-performing assets 18-2 X - - X B.4 Other performing loans 115,094 X X - TOTAL B 115, TOTAL (A+B) 30/06/2017 2,031,131-76,662-4,657 2, TOTAL (A+B) 31/12/2016 1,703,915-66,020-3,951 2,

93 Exposures/Counterparts Non-financial companies Other parties A. On-statement of financial position exposures Carrying amount Individual impairment Collective impairment Carrying amount Individual impairment Collective impairment A.1 Bad loans 956,153-1,519,375 X 136, ,867 X - of which: forbearance exposures 59,912-88,208 X 2,300-1,688 X A.2 Unlikely to pay 1,376, ,051 X 178,039-56,888 X - of which: forbearance exposures 611, ,196 X 41,297-11,153 X A.3 Past due non-performing loans 105,177-9,727 X 46,560-4,296 X - of which: forbearance exposures 10, X 5, X A.4 Performing loans 8,398,212 X -64,508 4,231,148 X -7,252 - of which: forbearance exposures 199,167 X -4,361 38,432 X -208 TOTAL A 10,835,794-2,124,153-64,508 4,592, ,051-7,252 B. Off-statement of financial position exposures B.1 Bad loans 3,614-2,156 X X B.2 Unlikely to pay 10,260-2,314 X X B.3 Other non-performing assets X X B.4 Other performing loans 650,944 X -3, ,288 X -376 TOTAL B 665,542-4,537-3, , TOTAL (A+B) 30/06/ ,501,336-2,128,690-67,915 4,699, ,181-7,628 TOTAL (A+B) 31/12/ ,015,575-1,962,537-78,676 4,718, ,285-9,358 Large exposures 30/06/2017 a) Amount - carrying amount 9,451,910 b) Amount - weighted amount 826,108 c) Number 7 As per the provisions of the Bank of Italy distributed by letter dated 28 February 2011, the amount of "risk positions" that constitutes "large exposure" is provided referring both to the carrying amount and to the weighted amount. In particular, in accordance with EU Regulation 575/2013 and incorporated by the Bank of Italy in Circulars 154 and 286, the value of the exposure is set at the carrying amount, whereas the value of the exposure after applying the Credit Risk Mitigation and the exemptions pursuant to Article 400 of the CRR is considered for the weighted amount. The report prepared on the basis of the new provisions envisaged by the Basel 3 regulations, shows positions that exceed the 10% threshold of the eligible capital, attributable to exposures towards the Italian Government of EUR 5,395,938 thousand, exposures towards Cassa Compensazione e Garanzia of EUR 2,438,393 thousand and, for the remaining part, mainly to exposures towards banking, financial and government counterparties. 93

94 2. MARKET RISK INTEREST RATE RISK AND PRICE RISK - REGULATORY TRADING BOOK "Regulatory trading book" means the portfolio of financial instruments subject to the capital requirements for the market risks, as stated by the measures regarding supervisory reports. The trading book comprises bonds, shares and trading derivatives. The bond component of the book consists mainly of fixed-rate securities with a quite limited duration and hedged against interest rate risk. The bonds held are issued mainly by the Italian Republic and by banks. The direct equity investments, small in size, mainly involve shares listed on the Italian Stock Exchange and with high degree of liquidity. The financial instruments in the book are mostly in Euro. At the end of the half-year, there are no positions that entail exposure to commodity risks. The risk is allocated almost entirely to the Parent and the exposure remains well within established limits; the size and riskiness of the book of the territorial banks comply with the established limits. The main portion of the portfolio risk consists of the price risk. Risk hedging tools and techniques are used in the management of the portfolio. Risk is measured using both analytical techniques (establishing the duration of the bond portfolio with regard to interest rate risk exposure) and statistical estimate techniques of the Value at Risk (VaR) that allows to evaluate the maximum potential loss in the trading book within a given time horizon with an established level of confidence. The estimate is carried out by using the parametric approach, based on the volatility and the correlations of risk factors observed in a certain period, over a 10-day period and a 99% confidence interval. The data used is provided by Prometeia (RiskSize). During the half-year, the VaR recorded limited values with relation to the book's size and to the allocated VaR. At the end of the reporting period, the main factor to which the portfolio is exposed is the price risk. The importance of this risk is ascribable to the purchase of listed shares carried out during the half-year. The backtesting activities carried out with reference to the trading book confirm the reliability of the estimates carried out. Regulatory trading book VaR performance (in thousands of EUR) First half of Average Minimum Maximum 30/06/2017 Average Minimum Average

95 Regulatory trading book VaR performance Credito Valtellinese Group VaR First half of Jan 31-Jan 28-Feb 28-Mar 28-Apr 29-May 27-Jun VaR Regulatory trading book Contribution of risk factors to calculation of VaR Situation at 30/06/2017 Price and specific risk Interest rate risk Currency risk Issuer risk Benefit of diversification 68.5% 0.1% 7.0% 24.5% -46.0% Regulatory trading book Breakdown of bond exposures by issuer type Situation at 30/06/2017 Sovereign issuers Public issuers Banks Insurance companies and other financial companies Corporate 73.1% 2.5% 24.5% 0.0% 0.0% 95

96 2.2 - INTEREST RATE RISK AND PRICE RISK - BANKING BOOK The banking book consists of all financial instruments payable and receivable not included in the trading book. It mainly comprises loans and receivables with banks and customers and amounts due to banks and customers and Government bonds. The interest-rate risk mainly derives from the existence in the financial statements of the bank of interest-bearing assets and onerous liabilities. Interest rate risk management aims to minimise the impact of unfavourable changes in the rates curve on the economic value of equity and on cash flows generated by statement of financial position items. Limiting exposure to interest rate risk is achieved primarily by index-linking asset and liability items to money market benchmarks (usually the Euribor rate) and by balancing the duration of the asset or liability at low levels. The objectives with respect to interest rate risk exposure are considered when carrying out strategic and operational planning, both when identifying and developing new products. The Risk Management Department monitors on a monthly basis the exposure of the Banks and of the Group to the interest rate risk, and verifies the consistency with the risk appetite defined by corporate bodies within the Risk Appetite Framework and the compliance with the system of limits. Adequate information flows are provided on a regular basis and timely to corporate bodies and functions of management and control. Measurement of interest rate risk is firstly based on the economic value approach, defined as the current value of expected net financial flows generated by assets, liabilities and offstatement of financial positions. The behavioural profile of sight items, analysed on a statistical basis with a special model, is also considered in the assessment of the exposure to risk, based on the revaluation of positions in different scenarios. In the measurement of the risk, the current profit approach is used additionally and leads to the estimate of the impact of change in interest rates on net interest income, which represents a significant portion of bank revenues. The exposure to interest rate risk was subject to limits, both at individual and consolidated level, defined in terms of fair value change at the end of the reporting period (static ALM) resulting from instantaneous movements of the rate curve. To this end, both parallel shifts of fixed size (typically 200 basis points) and specific changes for each node of the interestrate structure are considered, determined on the basis of major decreases and increases actually recorded in an observation period of 6 years (considering the 1st and 99th percentile of the distribution, respectively). Moreover, non-parallel shifts of the yield curve that are able to change its inclination (flattening, steepening and reversal of the interest rate structure) are also taken into consideration. At half-year end, the changed duration calculated for all financial statements assets and liabilities as well as the duration gap were moderate. In the event of downward parallel shifts in the structure of the interest by 100 basis points, under the non-negativity restriction in nominal interest rates, the capital value would decrease by EUR 27.6 million. In the event of an equal shift upwards, an increase of EUR 2.3 million would be recorded. As regards income profiles, in the hypothesis of instantaneous and parallel shifts of the interest rate curve by -100 basis points, the variation of the net interest income generated by the banking book, over a time horizon of 12 months, would equal EUR 0.5 million, whereas it would equal EUR 34.0 million in the case of shifts of +100 basis points. These amounts express the effect of changes in the interest rates on the banking book, excluding modifications to the composition and size of the financial statement items. As a result, these cannot be considered as an indicator in forecasting the expected level of the 96

97 net interest income. However, under the assumptions indicated, changes in the net interest income would result in equal changes in total income and minor changes in profit, if we consider the related tax effects. The banking book consists also of the shares that are held as part of more in-depth relations with specific companies or represent the instrument supporting significant initiatives undertaken in the Group's reference territory. The price risk management methods for such financial instruments, therefore, tend more towards the management approach for investments in associates and companies subject to joint control, rather than the risk measurement techniques and instruments used for the trading book; as a result of the elements reported at the end of the half year, the Group wrote down its share in the Atlante fund, which holds almost the entire share capital of Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A.. The held fund units, mainly real-estate type, mostly pertain to the Italian market; the fragile economic situation could have a negative influence on the latter's value. Fair value hedges The hedging of interest rate risk aims to protect the banking book from fair value changes of loans caused by the movements of the interest rate curve (Fair value hedge); types of derivatives used by the Group are represented by interest rate swaps (IRS) carried out with third parties. At the end of the half-year, Italian Government bonds (BTP) are recognised in the banking book of Available-for-sale financial assets with the objective of hedging the variability of the relevant fair value component linked to changes in interest rates, excluding the residual component of the credit risk, whose effects remain in the relevant Equity reserve. To this end, hedging derivatives (IRS) were used. They were entered into together with the purchase of underlying securities. The effectiveness tests carried out on a monthly basis confirmed a very high effectiveness and, anyway, within the range required by the IFRS. 3. LIQUIDITY RISK The liquidity risk to which the banks are normally exposed due to the phenomenon of transformation of maturities is the risk that the banks will not be able to meet their payment commitments due to inability to procure the funds (funding liquidity risk) and to divest their assets (market liquidity risk). Liquidity management is aimed primarily at ensuring the solvency of each individual Group Bank also in stressful or crisis conditions, not at achieving profits (an objective that may involve a trade-off with the ability of the banks to meet their commitments when they fall due and reduce the effectiveness of the risk management system). The liquidity risk management process mainly involves some specific structures that produce, in relation to their operational and monitoring activities, special reports for corporate bodies. In particular, the Finance Department is in charge of treasury management and of the supply on the inter-bank market and manages the intraday and short-term liquidity risk; the Planning and Control Department participates in defining the structural liquidity balance of the Banks and of the Group as a whole; the Risk Management Department - independently from the "operational management" of the liquidity risk - contributes to the definition of the policies and processes of risk management, develops the evaluation process of liquidity risk, supports the governing bodies in defining and carrying out activities related to the observance of the prudential regulations, and ensures accurate, complete and timely information. 97

98 The liquidity risk occurs according to different exposure profiles compared to the considered timescale, to which specific arrangements for the management, measurement, mitigation and control correspond. The approach adopted for risk management envisages integration of the cash flow matching approach (which tends to make expected cash inflows coincide with expected cash outflows for each time horizon) with the liquid assets approach (which requires the financial statements to include a set number of financial instruments that can be readily converted into cash). In order to face up to the possible occurrence of unexpected liquidity requirements and thus to mitigate the relevant risk exposure, the Group provides itself with adequate short-term cash reserves (liquidity buffer). At 30 June 2017, the Group had a negative net interbank position of EUR 1.7 billion and a carrying amount towards central counterparties of EUR 1.3 billion. The Group held liquidity reserves mostly consisting of Italian Government bonds and deemed appropriate to the contingent and perspective requirements. In particular, EUR 7.5 billion (amount already reduced by the haircuts) of assets eligible for refinancing with the European Central Bank, including those coming from securitisations and loans that meet the eligibility requirements. At the end of the period, almost one third of these assets secured the transactions with the ECB, whereas approximately one fifth was used with market counterparties; assets amounting to EUR 3.4 billion are free. With reference to a threemonth time horizon, not tied up liquidity reserves amounted to EUR 4.2 billion. As part of the centralised treasury model that concentrates with the Parent the management of cash flows and the holding of liquid assets, the assets readily convertible into cash are mainly allocated in the portfolios of the Parent Credito Valtellinese. A portion of the securities resulting from securitisations and appropriate loans pertain, however, to Credito Siciliano. At 30 June 2017, the main source of funding consisted of retail customers (EUR 17.3 billion, accounting for 76.4% of total funding defined considering both the bank and customer components), stable and diversified. Funding from ECB (EUR 2.5 billion for longterm refinancing transactions) accounts for 11.0% of the total. In consideration of the current composition of deposits carried out by the Group, in order to assess the concentration, the degree of dependence on a limited number of counterparties is analysed, in particular, whereas transactions in currencies other than the euro and the concentration on special technical forms such as securitisations are not important. The Group monitors the stock of liabilities on sight or with a short-term to the major wholesale counterparts (institutional investors, large companies or groups, noneconomic institutions) considered more sensitive to the market situation and to the real or perceived situation of the Group Banks. The degree of concentration at the end of June 2017 slightly increased compared to that at the end of the prior year and still remains at low levels. From the structural perspective, the Group carried out a modest transformation of maturities. The loan and deposit ratio was 84.2%, up from 82.6% at the end of the previous year. 98

99 4. SECURITISATION TRANSACTIONS The specific risk deriving from securitisations is defined as the "risk that the economic substance of the securitisation transaction may not be fully reflected in the decisions of risk assessment and management. The carrying out of securitisations also involves an exposure to other types of risks, different by type and entity in relation to the structure of the transactions. With regard to assessment of exposure to risk, the different profiles are taken in consideration as part of the ordinary course of business related to the different types of risk. At the reporting date, the following securitisation transactions are in place: - Quadrivio RMBS 2011; - Quadrivio RMBS All the multi-originator transactions were carried out pursuant to Italian Law 130/1999. None of the securitisation transactions meet the criteria for the derecognition of the transferred loans and receivables that are fully represented in the asset items. For the securitisation transactions called Quadrivio RMBS 2013, the originator Banks subscribed all the ABS securities issued in connection with the factored portfolio, whereas in the Quadrivio RMBS 2011 transaction, the originator Banks fully hold the junior tranches, without transferring any credit risk. With respect to the Elrond bad loan securitisation, reference is made to what is indicated in the Report on operations. Credito Valtellinese holds also the senior tranches of ABS securities issued as part of the securitisations carried out pursuant to Italian Law 130/1999. As a result of the paid redemptions, the current equivalent carrying amount is EUR 37,064 thousand. 5. OPERATIONAL RISK The operational risk is defined as the risk of incurring losses due to the inadequacy or inefficiency of procedures, human resources and internal systems or due to external events, including the legal risk. It includes, inter alia, losses deriving from fraud, human error, interruption of operations, system break-down, contractual non-performance and natural disasters. Risk containment is achieved through the use of regulatory, organisational and procedural measures and training. Any critical area, identified through joint analysis of various sources of data, is examined in further depth by department managers who, together with the Risk Management Department, establish the appropriate corrective actions. Under the regulatory profile, the Group calculated the capital requirement to meet the operational risk in the consolidated financial statements by using the Traditional Standardised Approach (TSA). From the management viewpoint, risk exposure is assessed both in quantitative terms, by analysing the operating losses incurred, and in qualitative terms, through risk self-assessment. Legal risks A provision was made in the financial statements, appropriate and consistent with the policy for calculating the provisions adopted by the Group, in order to mitigate the potential economic losses resulting from the pending legal proceedings with regard to the Bank and the other banks belonging to the Group. 99

100 At 30 June 2017, there are 530 actions brought against the companies belonging to the Group for an overall amount of EUR 174 million against which a total loss of EUR 15.8 million is expected. The cases mainly refer to requests for restitution for compound interests and bankruptcy claw-backs, claims for compensation for losses accrued in investments in financial instruments and other cases of damages broken down as follows. Type of cases No. of cases Relief sought (in millions of EUR) Provision made (in millions of EUR) Compound interests Bankruptcy clawbacks Investment services Other Total The Group pursues careful settlement procedures, based on an in-depth analysis of the concrete grounds on which the actions are based, meaning the existence of both the subjective and objective elements. Some information concerning important actions against the Bank is summarised below. Gianfranco Ferrè in A.S. In 2012, the Procedure started a bankruptcy clawback proceedings against Credito Artigiano, now Credito Valtellinese, pursuant to Article 67 of the Bankruptcy Law with reference to the settlement remittances paid into the current account of the bankrupt company quantified by the counterparty in EUR 10.4 million. The case, which is pending before the Court of Isernia, is in the preliminary stage. The risks related to the cause are monitored by adequate provisions. Ministry of Economy and Finance On 3 February 2014, a claim form was notified to Credito Valtellinese by the MEF, in relation to the alleged non-payment by the Bank of interest due as a result of the exercise of the right of redemption of the financial instruments issued pursuant to Article 12 of Italian Law Decree no. 185 of 29 November 2008, amended and converted by Italian Law no. 2 of 28 January 2009 (Tremonti-bond). The MEF asked the Court of Rome to order the Bank to pay a total amount of EUR million. In this regard, on 18 June 2013 the Bank had informed the Ministry of its intention not to pay the amount of EUR million (corresponding to the interests accrued on a pro rata basis up to the date of redemption and calculated in proportion to the interest paid on the date of payment of the immediately previous interests) in that such interest is considered not due on the basis of an interpretation of the applicable regulations and of the formalised issue prospectus. The Bank appeared before the court maintaining that, at the time of redemption of the Financial Instruments, there was no payment obligation of interests, in that the last consolidated financial statements available on the redemption date, or the 2012 financial statements, approved by the Board of Directors of Credito Valtellinese on 19 March 2013, showed a loss for the year. These financial instruments were included among the equity instruments and the related interests were paid through equity. Any further payments of interests must be made in the same way, i.e. with the use of a free reserve of equity. 100

101 Saba Srl The plaintiff company started the case with regard to Credito Siciliano charging it with alleged irregularities in the management by the bank of the loans disbursed to the company itself (with a special reference to a building loan). The counterparty claims that, as a result of these irregularities, it would have undergone economic damages quantified in the summons in EUR 11.8 million. Based on acquired elements of pre-trial investigation, the claim appears unfounded. Lorental srl (former Tecnofil Group Spa) The lawsuit brought against Credito Siciliano concerns a property leasing agreement taken out in 1991 and rescind by mutual consent in The company complains about the unlawfulness of the termination of the agreement and asks for the refund of the fees paid with relevant expenses and related interests as well as the compensation for damages related to the non-acquisition of the financed property as a result of the termination of the contract. The counterparty requests the cancellation of the agreed termination because of the abuse of dominant position. Positive outcome for the Bank at the end of the first instance. Currently, the appeal is pending. Tax dispute During the first half of 2017, there are no notices of assessment of significant amount. With regard to the subsidiary Credito Siciliano S.p.A., a general tax audit is started and is still in progress on 30 June At present, no especially significant objections were raised. The rights of the Group companies are protected by external professionals with special skills and experience, with the intention to enforce the rights of the companies in the competent administrative and legal venues. Labour related lawsuits In terms of numbers, in the first half of the current financial year, there was a decrease in the number of labour-related lawsuits compared to those recognised at group level at 31 December In particular, labour related lawsuits at Group level, decrease from no. 20 active events at 31 December 2016 to no. 18 active events at 30 June 2017, decreasing by no. 2 units. In terms of risk quality, labour disputes in which the companies of the Group are involved at 30 June 2017 are divided equally between actions undertaken for alleged de-skilling or for disputes concerning the application of contractual regulations and/or laws governing salary aspects of the employment relationship and actions concerning the contestation of dismissals with regard to the employee. In terms of risk quantification, against the overall relief sought resulting from the set of judgements registered at 30 June 2017, the capital requirement of the globally considered labour dispute - adequately covered by the provisions made by the Group Companies concerned - can be prudentially estimated at just over a million and five hundred thousand euros; this risk is slightly decreasing compared to the value recognised at 31 December 2016, in view of the decreased number of total events, focusing in particular on Credito Valtellinese and, proportionally lower, on Credito Siciliano. IT (or ICT) risk IT risk is the risk of incurring economic, reputation and market share losses in relation to the use of the Information and Communication Technology - ICT. In the integrated representation of business risks for prudential purposes (ICAAP), this type of risk is 101

102 considered, in accordance with the specific aspects, among operational, reputational and strategic risks. The IT risk analysis is a tool guaranteeing the efficiency and effectiveness of the protection measures of the ICT resources. In the light of the supervisory provisions on this matter, the Group defined the overall framework for managing the IT risk as well as the methods of risk analysis and assessment. The percentage distribution of operational losses recognised in the internal database during the period is shown in terms of frequency and impact. 102

103 Operational losses - Distribution by type of event Event size 0,8% 15,0% 7,1% 67,7% 9,5% Recorded losses 4,9% 6,3% 3,2% 2,0% Other* External fraud Customers, products and business practices 83,6% Stoppage of operations and malfunctions of the systems Execution, delivery and management of processes * Internal fraud, contractual relationship and safety in the workplace, damage caused by external The events reported during the half-year are mainly attributable in terms of frequency to the following event types: "Execution, delivery and management of processes" (67.7%), "External fraud" (15%) and "Stoppage of operations and malfunctions of the systems " (9.5%). In terms of impact, losses are attributable to "Execution, delivery and management of processes" by 83.6%, to "External fraud" by 6.3%; losses attributable to other event types are of lesser importance. 103