Banca Sistema S.p.A. (incorporated with limited liability as a joint stock company (società per azioni) under the laws of the Republic of Italy)

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1 PROSPECTUS DATED 11 OCTOBER 2017 Banca Sistema S.p.A. (incorporated with limited liability as a joint stock company (società per azioni) under the laws of the Republic of Italy) EUR 175,000, per cent. Notes due 13 October 2020 The issue price of the EUR 175,000, per cent. Notes due 13 October 2020 (the "Notes") of Banca Sistema S.p.A. (the "Issuer") is per cent. of their principal amount. Unless previously redeemed or cancelled, the Notes will be redeemed at their principal amount on 13 October The Notes are subject to redemption in whole at their principal amount at the option of the Issuer at any time in the event of certain changes affecting taxation in the Republic of Italy. The Notes will bear interest from 13 October 2017 at the rate of per cent. per annum payable annually in arrear on 13 October each year commencing on 13 October Payments on the Notes will be made in euro without deduction for or on account of taxes imposed or levied by the Republic of Italy except that interest payments to certain Noteholders may be subject to Italian substitute tax (imposta sostitutiva) as more fully described in "Terms and Conditions of the Notes Taxation". This Prospectus has been approved by the Central Bank of Ireland (the "Central Bank"), as competent authority under Directive 2003/71/EC, as amended (the "Prospectus Directive"). The Central Bank only approves this Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive. Such approval relates only to the Notes which are to be admitted to trading on the regulated market (the "Main Securities Market") of the Irish Stock Exchange plc (the "Irish Stock Exchange") or other regulated markets for the purposes of Directive 2004/39/EC or which are to be offered to the public in any member state of the European Economic Area. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Main Securities Market. The Main Securities Market is a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and the Council on markets in financial instruments. The Prospectus comprises a Prospectus for the purposes of the Prospectus Directive. The Notes have not been, and will not be, registered under the United States Securities Act of 1933, as amended (the "Securities Act") and are subject to United States tax law requirements. The Notes are being offered only outside the United States by Intermonte (the "Lead Manager") in accordance with Regulation S under the Securities Act ("Regulation S"), and may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Notes will be in bearer form and in the denomination of EUR 100,000 and integral multiples of EUR 1,000 in excess thereof up to and including EUR 199,000. The Notes will initially be in the form of a temporary global note (the "Temporary Global Note"), without interest coupons, which will be deposited on or around 13 October 2017 (the "Closing Date") with a common safekeeper for Euroclear Bank S.A./N.V. ("Euroclear") and Clearstream Banking S.A. ("Clearstream"). Interests in the Temporary Global Note will be exchangeable, in whole or in part, for interests in a permanent global note (the "Permanent Global Note" and, together with the Temporary Global Notes, the "Global Notes"), without interest coupons, not earlier than 40 days after the Closing Date upon certification as to non-u.s. beneficial ownership. Interest payments in respect of the Notes cannot be collected without such certification of non-u.s. beneficial ownership. The Permanent Global Note will be exchangeable in certain limited circumstances in whole, but not in part, for Notes in definitive form in the denomination of EUR 100,000 and integral multiples of EUR 1,000 in excess thereof up to and including EUR 199,000 and with interest coupons attached. See "Summary of Provisions Relating to the Notes in Global Form". Investing in the Notes involves risks. For a discussion of these risks, see "Risk Factors" beginning on page 2. Lead Manager Intermonte

2 IMPORTANT NOTICES The Issuer accepts responsibility for the information contained in this Prospectus and declares that, having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus to the best of its knowledge is in accordance with the facts and contains no omission likely to affect its import. The language of the Prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law. Certain information regarding the Issuer's industry contained in this Prospectus under the headings "Description of the Issuer Key competitive strengths" and "Description of the Issuer Markets" relating to the Italian and European factoring market was derived from several sources, including Assifact, Factor Chain International, the Italian Ministry of the Economy and Finance and Intrum Iustitia. The Issuer does not accept any responsibility for the accuracy of such information, nor has the Issuer independently verified any such information. The Issuer confirms that this information has been accurately reproduced, and so far as the Issuer is aware and is able to ascertain from information available from such external sources, no facts have been omitted which would render the reproduced information inaccurate or misleading. The Issuer has confirmed to the Lead Manager that this Prospectus contains all information regarding the Issuer, its Group (as defined below) and the Notes which is (in the context of the issue of the Notes) material; such information is true and accurate in all material respects and is not misleading in any material respect; any opinions, predictions or intentions expressed in this Prospectus on the part of the Issuer are honestly held or made and are not misleading in any material respect; this Prospectus does not omit to state any material fact necessary to make such information, opinions, predictions or intentions (in such context) not misleading in any material respect; and all proper enquiries have been made to ascertain and to verify the foregoing. The Issuer has not authorised the making or provision of any representation or information regarding the Issuer, its Group or the Notes other than as contained in this Prospectus. Any such representation or information should not be relied upon as having been authorised by the Issuer or the Lead Manager. Neither the Lead Manager nor any of its affiliates have authorised the whole or any part of this Prospectus and none of them makes any representation or warranty or accepts any responsibility as to the accuracy or completeness of the information contained in this Prospectus. Neither the delivery of this Prospectus nor the offering, sale or delivery of any Note shall in any circumstances create any implication that there has been no adverse change, or any event reasonably likely to involve any adverse change, in the condition (financial or otherwise) or prospects of the Issuer or its Group since the date of this Prospectus. This Prospectus does not constitute an offer of, or an invitation to subscribe for or purchase, any Notes. The distribution of this Prospectus and the offering, sale and delivery of Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes - i-

3 are required by the Issuer and the Lead Manager to inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers, sales and deliveries of Notes and on distribution of this Prospectus and other offering material relating to the Notes, see "Subscription and Sale". In particular, the Notes have not been and will not be registered under the Securities Act and are subject to United States tax law requirements. Subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to U.S. persons. In this Prospectus, unless otherwise specified, references to a "Member State" are references to a Member State of the European Economic Area, references to "EUR" or "euro" are to the currency introduced at the start of the third stage of European economic and monetary union, and as defined in Article 2 of Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro, as amended. References to "billions" are to thousands of millions. Certain figures included in this Prospectus have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them. In connection with the issue of the Notes, Intermonte (the "Stabilisation Manager") (or persons acting on behalf of any Stabilisation Manager) may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, stabilisation may not necessarily occur. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the Notes is made and, if begun, may cease at any time, but it must end no later than the earlier of 30 days after the issue date of the Notes and 60 days after the date of the allotment of the Notes. Any stabilisation action or over-allotment must be conducted by the relevant Stabilisation Manager (or person(s) acting on behalf of any Stabilisation Manager) in accordance with all applicable laws and rules. - ii-

4 PRESENTATION OF FINANCIAL INFORMATION Financial information incorporated by reference and included in the Prospectus This Prospectus incorporates by reference the audited consolidated financial statements of the Issuer as at 31 December 2016 and 2015 and for the years then ended and the unaudited condensed interim consolidated financial statements of the Issuer as at and for the six months ended 30 June The consolidated financial statements of the Issuer as at and for the years ended 31 December 2016 and 2015 have been prepared by the Issuer in accordance with the International Financial Reporting Standards as adopted by the European Commission ("IFRS"). See "Information Incorporated by Reference". The unaudited condensed interim consolidated financial statements of the Issuer as at and for the six months ended 30 June 2017 have been prepared by the Issuer in accordance with IFRS. Alternative Performance Measures The Prospectus contains certain measures ("non-gaap measures") that are not based on generally accepted accounting principles ("GAAP") and which constitute alternative performance measures (each an "APM"). The APMs differ from the financial measures obtained directly from the audited consolidated financial statements of the Issuer as at and for the years ended 31 December 2016 and 2015, and the unaudited condensed interim consolidated financial statements of the Issuer as at and for the six months ended 30 June In line with the European Securities and Markets Authority's Guidelines on Alternative Performance Measures (ESMA/2015/1415) concerning the presentation of APMs disclosed in regulated information and prospectuses, the criteria used to construct the APMs are as follows: "Loan to Deposit Ratio" is calculated as the ratio between (i) loans and receivables with customers and (ii) the sum of (a) due to customers, excluding repurchase agreements, and (b) securities issued, each item as derived from the Issuer s consolidated financial statements and interim reports. The following table sets forth a calculation of the Group s Loan to Deposit Ratio as of 31 December 2016 and 30 June 2017: As of (in thousands of Euro, except percentages) 30 June December 2016 (i) Loans and receivables with customers (A) 1,503,150 1,348,329 Due to customers 1,236,719 1,262,123 - repurchase agreements 230, ,581 (ii)(a)due to customers (excluding repurchase 1,006, ,542 agreements) (ii)(b) Securities issued 104,470 90,330 (ii) Due to customers (excluding repurchase 1,110,848 1,056,872 - iii-

5 agreements) and securities issued (B) Loan to Deposit Ratio (being (A)/(B)) 135% 128% The Issuer believes this non-gaap measure is useful and a commonly used measure of financial position because it facilitate operating performance comparisons from period to period, time to time and company to company. For these reasons, the Issuer believes the Loan to Deposit Ratio is regularly used by the investment community as a means of comparison of companies in its industry. Loan to Deposit Ratio should not be regarded as an alternative to any performance measures recognised in accordance with GAAP, IFRS or any other generally accepted accounting principles. As a financial measure, it is used by management to monitor the underlying financial position of the Group but is not indicative of the historical financial position of the Group, nor is it meant to be predictive of future results. Since companies do not all calculate this measure in an identical manner, the Issuer s presentation may not be consistent with similar measures used by other companies. Therefore, undue reliance should not be placed on any such data. Forward-looking Statements This Prospectus may contain certain statements that are, or may be deemed to be, forwardlooking, including statements with respect to the Issuer's and its Group's business strategies, expansion of operations, trends in their business and their competitive advantage, information on technological and regulatory changes and information on exchange rate risk and generally includes all statements preceded by, followed by or that include the words "believe", "expect", "project", "anticipate", "seek", "estimate", "aim", "intend", "plan", "continue" or similar expressions. By their nature, forward-looking statements involve known and unknown risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Potential investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Any forward-looking statements are only made as of the date of this Prospectus, and the Issuer does not intend, and does not assume any obligation, to update forward-looking statements set forth in this Prospectus. Many factors may cause the Issuer's and its Group's results of operations, financial condition, liquidity and the development of the industries in which they compete to differ materially from those expressed or implied by the forwardlooking statements contained in this Prospectus. The risks described under "Risk Factors" in this Prospectus are not exhaustive. Other sections of this Prospectus describe additional factors that could adversely affect the Issuer's and its Group's results of operations, financial condition, liquidity and the development of the industries in which they operate. New risks can emerge from time to time, and it is not possible for the Issuer to predict all such risks, nor can the Issuer assess the impact of all such risks on its business or the extent to which any risks, or combination of risks and other factors, may cause actual results to differ materially from those contained in any forwardlooking statements. Given these risks and uncertainties, investors should not rely on forwardlooking statements as a prediction of actual results. - iv-

6 INFORMATION INCORPORATED BY REFERENCE The following information has been filed with the Central Bank and the Irish Stock Exchange and shall be deemed to be incorporated in, and to form part of, this Prospectus provided however that any statement contained in any document incorporated by reference in, and forming part of, this Prospectus shall be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement: (i) (ii) (iii) the audited consolidated financial statements of the Issuer as at and for the year ended 31 December 2016 together with the independent auditors' audit report, which can be found at sh= ; the audited consolidated financial statements of the Issuer as at and for the year ended 31 December 2015 together with the independent auditors' audit report, which can be found at sh= ; and the unaudited condensed interim consolidated financial statements of the Issuer as at and for the six months ended 30 June 2017 together with the independent auditors' review report, which can be found at pdf?refresh= , in each case prepared in accordance with IFRS and together with the accompanying notes. Such documents will be made available, free of charge, during usual business hours at the specified offices of the Fiscal Agent, unless such documents have been modified or superseded. The table below sets out where the information incorporated by reference in this Prospectus can be found in the consolidated financial statements, the notes to the consolidated financial statements and the auditors' reports for the years ended 31 December 2016 and 2015 for the Issuer, as set out in the respective annual reports. Banca Sistema S.p.A. Audited consolidated financial statements of the Issuer as at and for the years ended 31 December Statement of financial position... Page 50 Page 48 Income statement... Page 51 Page 49 Statement of comprehensive income... Page 52 Page 50 Statement of changes in equity... Pages Pages Statement of cash flows... Page 55 Page 53 Notes to Financial Statements... Pages Pages Independent Auditors' Report... Pages Pages v-

7 The table below sets out where the information incorporated by reference in this Prospectus can be found in the consolidated financial statements, the notes to the consolidated financial statements and the auditors' review report for the six months ended 30 June 2017 for the Issuer. Banca Sistema S.p.A. Unaudited condensed interim consolidated financial statements of the Issuer as at and for the six months ended 30 June 2017 Statement of financial position... Page 41 Income statement... Page 42 Statement of comprehensive income... Page 43 Statement of changes in equity... Pages Statement of cash flows... Page 46 Notes to the condensed interim consolidated financial statements. Page Independent Auditors' Report... Page The documents set out above are translated into English from the original Italian. The Issuer has accepted responsibility for the accuracy of such translations. The non-incorporated parts of each of the documents detailed above are either not relevant to investors or are covered elsewhere in this Prospectus. - vi-

8 CONTENTS Clause Page IMPORTANT NOTICES... i PRESENTATION OF FINANCIAL INFORMATION... iii INFORMATION INCORPORATED BY REFERENCE... v RISK FACTORS... 2 TERMS AND CONDITIONS OF THE NOTES SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM DESCRIPTION OF THE ISSUER SELECTED FINANCIAL INFORMATION USE OF PROCEEDS TAXATION SUBSCRIPTION AND SALE GENERAL INFORMATION... 96

9 RISK FACTORS Any investment in the Notes is subject to a number of risks. Prior to investing in the Notes, prospective investors should carefully consider risk factors associated with any investment in the Notes, the business of the Issuer and its Group and the industry in which it operates together with all other information contained in this Prospectus, including the information incorporated by reference and, in particular, the risk factors described below. Words and expressions defined in the "Terms and Conditions of the Notes" below or elsewhere in this Prospectus have the same meanings in this section, unless otherwise specified. The following is not an exhaustive list or explanation of all risks which investors may face when making an investment in the Notes and should be used as guidance only. Additional risks and uncertainties relating to the Issuer and its Group that are not currently known to the Issuer or that it currently deems immaterial based on information currently available to it, may individually or cumulatively also have a material adverse effect on the business, prospects, results of operations and/or financial position of the Issuer and its Group and, if any such risk should occur, the price of the Notes may decline and investors could lose all or part of their investment. In addition, the order in which the risk factors are presented below is not intended to be indicative either of the relative likelihood that each risk will materialise or of the magnitude of their potential impact on the business, prospects, results of operations and/or financial position of the Issuer and its Group. Investors should consider carefully whether an investment in the Notes is suitable for them in light of the information contained in this Prospectus and their personal circumstances, based upon their own judgement and upon the advice from such financial, accounting, legal, tax and other advisers as they may deem necessary. Risks Relating To the Issuer The Issuer's business and results are affected by economic conditions in Italy and, more generally, by a volatile macroeconomic environment The global economy, the condition of financial markets and adverse macroeconomic developments in Italy, the Issuer's market, could all influence the Issuer's performance. The Issuer's earning capacity and stability could be affected by the overall economic situation and by the dynamics of financial markets. The Issuer generates all of its total income in Italy and its results therefore depend in particular on economic conditions in Italy which, in turn, are affected by European and global economic trends. In particular, a marked and prolonged reduction in Italian public spending could negatively impact the Group s business. Following the crisis that hit global markets starting in August 2007, the global financial system and financial markets have found themselves operating under difficult and unstable conditions that have required action by governments, central banks and supranational organisations to support financial institutions, including the injection of liquidity and direct intervention in the recapitalisation of some of these entities. This situation has negatively affected the financial markets and has particularly penalised the Italian banking system. The scenarios described above have generated for European banks a slowdown in ordinary activity, a decline in the value of assets resulting from the decline in stock and bond prices, - 2-

10 deterioration of loan portfolios with an increase in non-performing loans, and situations of insolvency and additional costs caused by a write-down and reduction in the price of assets, with a consequent reduction in the ability to produce profits. In addition, the introduction of austerity programmes has dampened economic growth, which could exacerbate the difficulty of Eurozone sovereigns and non-sovereigns in refinancing their debt as it comes due, further increasing pressure on the macroeconomic environment in the Eurozone and the global economy, which could have a material adverse effect on the Issuer's business, results of operations and financial condition. If the European Central Bank (the "ECB") continues to implement an expansionary monetary policy, the Issuer's customers may expect the Issuer to reduce its gross interests in line with market interest rates and the ECB's interventions and, as a result, unless the Issuer is able to reduce its funding costs, it may achieve lower margins. Even though tensions on the markets have eased, and some weak signs of recovery can be seen, volatility on the markets remains. Turmoil in the banking system and financial markets and market failures could trigger a further crunch in credit access, low liquidity level and significant volatility in financial markets. Such factors could have a number of effects on the Issuer's operations, including bankruptcy, financial instability or a reduction in the spending capacity of its clients, suppliers or partners, its inability to provide its products and services and the inability of its clients to access credit to finance the purchase of these services and products. Therefore, should Italian or global economic conditions worsen, the Issuer's services and products may consequently decline due to a variety of factors, which could have a material adverse effect on its business, financial condition and results of operations. The Group is highly dependent on its customers' receivables management policies and on public administrations receivables payment policies and terms The Group's main business consists of factoring of receivables owed by Italian Public Entities ("PAs"). The Group's factoring business accounted for a substantial part of its revenues for the years ended 31 December 2016 and PAs receivables factoring is heavily dependent on customers' receivables management policies as well as on PAs receivables payment policies and terms. Legislative Decree No. 231 of 9 October 2002 was amended in 2012 (following the issuance of EU Directive 2011/7/EU), requiring that agreements governing commercial transactions between private sector companies and public administrations must provide payment terms no greater than 30 days or, in very limited circumstances such as healthcare entities, 60 days, otherwise, the agreement is considered void. In addition, while the provision of different (i.e. longer) terms of payment is considered void, a high interest rate for late payment (ECB interest rate plus 8 per cent.) has been set which accrues automatically and unfair rate-reduction agreements were declared void. If PAs implement these shorter payment periods (as required by law) or should PAs otherwise adopt and operate an efficient management of their commercial receivables and reduce their receivables payment times, the demand for factoring activities and services from private companies which supply goods and services to PAs would decrease and the Group may experience a decrease of revenues generated by late payment interests. Any of these circumstances could materially and adversely affect the Group's results of operations and prospects. In addition, if the Group is unable to receive payments from PAs on a timely basis due to, inter alia, insolvency of, and/or legal proceedings brought by the assigned PAs, the Group may be unable to collect the outstanding credits and conduct its business, which in turn could - 3-

11 have a material adverse effect on the Group s results of operations, business and financial condition. Moreover, when assigned PAs refuse to accept, or non-explicitly accept, the transfer of the receivables from the seller to the Group, the sale of the relevant receivables is unenforceable vis-à-vis the PAs. As a result, the Group will not receive any payment from PAs under such receivables but will have recourse only against the seller of the receivables. Consequently, the Group will be exposed to the seller s credit risk (in addition to the PAs credit risk) as the PAs will pay the seller, resulting in the commingling of such funds within the seller s assets, and the Group will need to collect the payment from such seller. This may result in a higher level of the Group s capital absorption and an increase in the risk that the Group may be unable to collect the outstanding credits and conduct its business, which in turn could have a material adverse effect on the Group s results of operations, business and financial condition. The Group may have difficulties in operating in the interbank market and may not be able to procure sufficient financial resources to carry out its operations One of the Group's key objectives is to further strengthen its existing funding base through diversification and stabilisation of its financing sources. As of 31 December 2016, retail banking activities were the source of approximately 51 per cent. of the Group's funding base (approximately 53 per cent. as of 30 June 2017), while wholesale funding represented approximately 49 per cent. (approximately 47 per cent. as of 30 June 2017) of the Group's funding needs and included mainly (i) funds offered by the ECB through ABACO, a funding system procedure created by the Bank of Italy to manage loans, securities and credit portfolios that are assigned to the ECB as collateral in financing transactions (the "ABACO Procedure"); (ii) reverse repo transactions (operazioni di pronti contro termine) on the Group's proprietary Italian government bonds portfolio; (iii) interbank funding; (iv) bond issuances; and (v) refinancing transactions with the ECB. The retail banking activities of the Group comprise mostly direct funding initiatives through deposit taking (i.e., current accounts and other types of term deposit accounts) which are offered to individual retail and corporate customers in Italy, Germany and Austria. The Group's ability to obtain funding in the future from these sources will therefore depend on the Group's performance and its economic and financial prospects, as well as factors over which the Group does not exercise control. Such factors may include, for example, a potential amendment of the ABACO Procedure which disregards portfolios of commercial PA receivables acquired in the course of the Group's business as collateral in exchange for funds offered by the ECB, or the ability and willingness of banks to lend to the Group in particular, or changes in lending rates, inter alia, which in turn could have a material adverse effect on the Group's results of operations, business and financial condition. The Group relies on a stable core deposit base as its primary source of funding and the potential withdrawal of deposits from its customers could adversely affect its funding position and earnings As of 30 June 2017, term deposit accounts opened by retail customers accounted for 36.7 per cent. of the Group's direct collection. Any withdrawal of deposits by customers of the Group prior to their natural termination and/or simultaneous withdrawals by many customers concentrated within short periods of time may have an unfavourable effect upon the Bank's ability to meet its financial obligations as they fall due. If the Bank is unable to attract new customers by offering the same cost of funding or is unable to access alternative funding instruments on a timely basis upon favourable terms, the Group might not be able to support - 4-

12 its business activities, which in turn may have a material adverse effect on the Group's results of operations, business and financial condition. The Group is exposed to credit risk with respect to its customers and other contractual counterparties The Group is exposed to credit risk and counterparty risk, or the risk that its contractual counterparties will not fulfil their obligations in accordance with their contractual terms and conditions, or that their creditworthiness will decline. The Group's counterparty risk towards the Republic of Italy is related to its factoring and credit management services for receivables owed by the PAs and which the Group purchases through non-recourse factoring transactions (pro-soluto) as well as to the fact that the Group invests a substantial portion of its liquidity in Italian government bonds. In addition, the Group is exposed also to a certain counterparty risk in case of unsuccessful transfer of the receivable from its customer/seller due to the nonexplicit acceptance of the transfers by the PAs or, as the case may be, refusal of the transfer. As of 30 June 2017, 83 per cent. of the Group's non-performing exposures is related to PAs receivables. As of 30 June 2017, the loans and receivables with customers were equal to 1,503 million, as compared to 1,348 million as of 31 December Of that total, as of 30 June 2017 performing loans amounted to 1,363 million ( 1,243 million as of 31 December 2016), while non-performing loans totalled 146 million ( 124 million as of 31 December 2016). The quality of the Bank's book has deteriorated recently, with the ratio of gross impaired loans to the total in the portfolio up from 9 per cent. at 31 December 2016 to 9.6 per cent. at 30 June 2017, mainly due to increases in past due and doubtful accounts, tied to new loans in the factoring portfolio. Although the Issuer considers the Republic of Italy to be a creditworthy counterparty, the Group's credit and counterparty risk is inherently connected to the insolvency risk of the Italian government, local entities or municipalities and changes in their creditworthiness could have a material adverse effect on its results of operations, business and financial condition. Further, the Group's exposure to non-performing or doubtful receivables is mainly connected to distressed local municipalities pursuant to Legislative Decree No. 267 of 18 August 2000 and SMEs guaranteed loans. The level of the Group's doubtful loans coverage ratio is due to the Bank's exposure mainly to PAs, which have longer payment times than private counterparties but potentially lower credit risk, and SME guaranteed loans, in consideration of the 80 per cent. of such loans benefiting from state guarantee (which in limited cases may not be immediately enforceable due to disputes with the guarantor which may relate, inter alia, to the qualification of debtors as SMEs). Notwithstanding the Group has risk management policies in place that employ internal procedures and qualified personnel for the purpose of monitoring, identifying and managing risks, including credit and counterparty risk and these risk management policies and procedures provide for corrective measures to be applied when these risks may cause the Group to exceed certain thresholds that are defined by regulatory and banking authorities or the Board of Directors of the Issuer, the Group is exposed to the risk that some of these policies and methods may be inadequate. - 5-

13 The continuing crisis in the credit markets, deterioration of the conditions in capital markets, the downturn of the global economy, and measures adopted by regulators in individual countries have reduced, and could further reduce, disposable household incomes and the profitability of businesses, and/or have an adverse effect upon the ability of the Group's customers to honour the commitments they assumed, resulting in a significant deterioration in the credit quality of the Group's loans. These factors may result in a further significant increase in non-performing loans and related provisions, due to a decline in the Group's customers' ability to honour their commitments, which may have a material adverse effect upon the Bank's and/or the Group's business, financial condition, results of operations and cash flows. The Group's success depends on the continued service of certain key members of its management team The Group relies on the experience and qualifications of its senior management team members and key employees. The Group's success depends on its ability to attract, retain and mentor qualified and skilled individuals and on the retention of some persons who played a key role in the Bank's development and who have significant experience in its sector. The loss of services of one or more of the key employees of the Group, including the Chief Executive Officer, could disrupt the Group's operations. Although the Group focuses on the professional training and mentoring activities of its personnel and it adopts adequate remuneration and benefit policies in favour of its senior management team members and key employees and has adopted a succession plan in compliance with the regulatory framework applicable to it, no assurance can be given that these persons will remain with the Group or, if it loses key personnel, that timely and appropriate replacements would be found. Any failure to successfully locate adequate replacements for existing members of senior management team or key personnel in an efficient and timely manner could have adverse effects on the Group's results of operations, business and financial condition. The Group is exposed to risks relating to the importance of the assets granted as collateral for funding purpose The Group also finances its activity by accessing funds granted by the ECB through the ABACO Procedure, assigning to the ECB as collateral in exchange for funding Italian Government bonds and receivables towards PAs deriving from factoring transactions. Therefore, if the instruments granted by the Group as collateral lose their eligibility for the ABACO Procedure, due to the inability, or the delay, of relevant debtors to fulfil their payment obligations, the Group may not be able to refinance or repay loans granted to it by the ECB. Should (i) the Italian Republic fail to timely pay the Italian government bonds granted by us as collateral, and/or to repay the credits owned towards PAs granted by us as collateral, or (ii) PAs or other entities fail to pay the Group credits granted by us as collateral, or (iii) PAs or other entities fail to fulfil their payment obligations, in full or in part, on a timely basis, due to any financial crisis and instability, the Group is exposed to the risk of being unable to repay the loans granted by the ECB if it is unable to access alternative funding instruments. Such inability to repay ECB loans could have a material adverse effect on the Group's results of operations, business and financial condition. The Group is exposed to risks related to the purchase of non-recourse (pro-soluto) factoring receivables - 6-

14 The Group mainly purchases non-recourse (pro-soluto) factoring receivables, assuming the full risk of the assigned debtor's insolvency and bearing risks of any payment delays of the receivables acquired by the Group. In the event the assigned debtor is subject to bankruptcy or similar proceedings, the Group bears the risk of its full or partial non recoverability. The factoring activity of the Group requires it to assume credit risk mainly related to commercial healthcare receivables towards PAs and tax receivables. As of 30 June 2017 and 31 December 2016, the amount of non-recourse (pro-soluto) factoring receivables (excluding tax receivables) purchased by the Group totalled 533 million and 1,008 million, respectively, which represented 60 per cent. and 69 per cent., respectively, of the total turnover. As of 30 June 2017, the amount of non-performing loans increased to million from million and 91.4 million as of 31 December 2016 and 2015, respectively. An increase of the insolvency of debtors could have a material adverse impact on the Group's activity and, as a consequence, adversely affect the Group's results of operations, business and financial condition. The Group is exposed to risks related to receivables that are of poor quality and may be uncollectable, due to, inter alia, defects in customer documentation that may make the credit agreements unenforceable In the normal course of the Bank's credits portfolio purchases, and in the management of any assignment agreements that the Bank may enter into from time to time, some receivables may be included in the portfolios that do not conform to the Bank's standard terms and conditions for purchase contracts. The Bank's customers may also fail to meet their obligations or the Bank may not identify non-conforming accounts on a timely basis, or at all, to qualify for recourse to the assignor. Contracts entered into with the Bank's customers may restrict its ability to return non-conforming receivables (for example, those that have been subject to fraud or those that have been factored to the Bank pursuant to an agreement which has been declared void). The Bank is also unable to enforce on receivables where any underlying debt documentation is legally defective. A minor technical breach of some of these requirements that may not be discovered during the due diligence process undertaken in relation to a typical portfolio acquisition may render the credit agreement unenforceable and result in the total loss of the receivable value and potential additional expenditures on part of the Bank. While the Bank carries out due diligence on its proposed purchases, the quality of historical customer documentation may not allow, in each case, the discovery of past breaches relating to form and content requirements which would impair the Bank's ability to correctly assess the value of the portfolio, resulting in the risk of loss or reduction in the particular purchased portfolio's value. As the Group's business relies on its ability to enforce the contracts underlying its owned customer accounts, a contract found to be invalid or unenforceable could hinder the Group's ability to recover from purchased receivables. If the Group purchases debt portfolios containing too many accounts that do not conform to the terms of the purchase contracts or contain receivables that are otherwise uncollectable or unenforceable, the Group may be unable to recover a sufficient amount, or anything at all, and such a portfolio purchase could be unprofitable. The Group would not be able to collect on a portfolio for which someone else held legal ownership, or would need to spend time and resources establishing its legal ownership of the portfolio if such ownership was unclear. Moreover, in instances where underlying documentation does not prove the existence, ownership or enforceability of - 7-

15 receivables, or where a receivable balance is incorrect, the Group may not always have the right to transfer such accounts back to the customer. Furthermore, in the event that the legal proceedings related to the public tender adopted by the PAs to select their suppliers, rule against the supplier, the Group can encounter the (a) cancellation of such public tender, or (a) declaration of the relevant contract to be null and void, and, as a consequence, the write-off of the factored receivables. In addition, pursuant to applicable laws and regulations, PAs are entitled to autonomously resolve upon cancellation of the public tender, including with retroactive effects, involving the termination of the public contract deriving therefrom. The Group may be also unable to enforce, or may enforce at increased costs, receivables when the relevant seller does not provide the documentation governing and evidencing the receivables sold. Even though the Group's contractual relationships with sellers generally provide for an undertaking to deliver to the Bank any documentation underlying the receivables sold, there is no assurance that sellers will not breach such undertakings or will provide the relevant documentation in due course when needed by the Group. Any of the foregoing could materially and adversely affect the Group's results of operations, financial condition and financial returns. The Group is subject to liquidity risk The Group is exposed to liquidity risk, namely the risk of being unable to meet its payment obligations as they come due or of properly managing cash inflows and outflows (so called "contractual maturity risk"), which may consist of funding liquidity risk (arising from the inability to obtain funds without negatively affecting the business or the financial condition of the Group) and market liquidity risk (arising from the inability to sell financial assets in the market without incurring losses caused by the illiquidity of the markets). At 30 June 2017, the Group's Loan to Deposit Ratio (representing the ratio between loans to clients (except repurchase agreements (pronti contro termine)) and amounts deposited with the Group together with the securities in issue) was 135 per cent. (compared to 128 per cent. at 31 December 2016). At 30 June 2017, (i) the Group's liquidity coverage ratio, on an individual basis, ("LCR"), which represents the short-term liquidity ratio and corresponds to the ratio between the amount of high quality liquid assets and the total net cash outflows in the following 30 calendar days, was per cent.; (ii) the Group net stable funding ratio, on an individual basis ("NSFR"), which represents the 12-months liquidity ratio and corresponds to the ratio between the amount of stable capital provisions available and the statutory amount of stable capital provisions, was 95.0 per cent. The LCR became mandatory starting from 2015 and must be at least equal to 60 per cent. in 2015, 70 per cent. in 2016, 80 per cent. in 2017, 90 per cent. in 2018 and 100 per cent. in 2019; the NSFR will, instead, become mandatory starting from 2018 (or, on such different date as may be set forth when the technical parameters are defined at the European level) and, on the basis of the agreements taken in the context of the Basel III Committee, will have to be higher than 100 per cent.. As of the date of this Prospectus, the Group exceeds such minimum requirements but its failure to comply with such requirements (which become mandatory beginning from 2018) could have a material adverse effect on the Group's results of operations, business and financial condition. Through the registration within the ABACO Procedure, the Group has access to the funds offered by the ECB by assigning as collateral portfolios of commercial receivables acquired - 8-

16 by the Group in the course of its business by means of non-recourse (pro-soluto) PAs factoring arrangements as well as, to a lesser extent, SMEs loans arrangements. The Group's available liquidity consists of amounts deposited by its customers in current and demand accounts or term deposits as well as of the Group's proprietary Italian government bonds portfolio. Although the Group's available liquidity has historically been stable, future extraordinary events may result in a reduced or insufficient liquidity, and this could have a material adverse effect on the Group's results of operations, business and financial condition. The Group is exposed to interest rate risk Risks connected with changes in interest rates depend on a number of factors beyond the Group's control, such as monetary policies, macroeconomic performance and the political situation in Italy. In particular, the Group's interest margin and financial condition from banking and lending transactions depend upon the Group's exposure to interest rates and the sensitivity of its exposure. Any lack of alignment between the interest income that accrues to the Group and the interest expense borne by the Group (in the absence of suitable instruments guarding against such discrepancies) may have a material adverse effect upon the Group's results of operations, business, financial condition and cash flows. Extensive regulation in the banking and other sectors may adversely affect the Issuer's business The Issuer operates in a highly-regulated environment for banks and the laws and government regulations related to its industry may change from time to time. In particular, the Issuer is subject to extensive regulation and supervision by the Bank of Italy, the European Central Bank, the European Banking Authority and the European System of Central Banks. The Issuer is subject to law and regulations that govern the activities carried out by banks and are aimed at maintaining banks' safety and soundness and limiting their exposure to risk. In addition, the Issuer must comply with any financial services law which may apply to its marketing and selling activities. The Issuer has established specific procedures and internal policies in order to comply with applicable regulations. However, the Issuer cannot rule out any breach of such regulations in the future, particularly with respect to anti money laundering and fairness in dealing with clients, or any failure by the competent authorities to interpret such regulations correctly or any inspections by the Bank of Italy having a negative outcome. This could have a material adverse effect on the Issuer's business, results of operations and financial condition. The Basel III Proposals were implemented by the Capital Requirements Directive 2013/36/EU ("CRD IV") and Capital Requirements Regulation (Regulation (EU) No 575/2013) ("CRR"), which came into force following their adoption in June Full implementation began on 1 January 2014, with some elements to be phased in over a period of time. The requirements must become fully effective and applicable from 2019, though some minor transitional provisions will be introduced by Nevertheless, implementation in each country may require more time and additional costs. See " The Issuer may be unable to meet the minimum capital adequacy requirements" below. In addition, in June 2012 the European Commission published the Bank Recovery and Resolution Directive (Directive 2014/59/EU) ("BRRD"), a legislative proposal for a directive providing for the establishment of an EU wide framework for the recovery and resolution of - 9-