Reports and Financial Statements. of Banca Popolare di Milano and the BPM Group

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1 2009 Reports and Financial Statements of Banca Popolare di Milano and the BPM Group

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3 Report and Financial Statements of Banca Popolare di Milano and the BPM Group Co operative Bank founded in 1865 Parent Bank of the BPM Banca Popolare di Milano Banking Group Share capital at : Euro 1,660,136,924 Milan Company Register no Enrolment in the National Register of Cooperative Companies No. A Head Office and General Management: Piazza F. Meda 4, Milan Italy Member of the Interbank Guarantee Fund Registered Bank and Parent Bank of the BPM Banca Popolare di Milano Registered Banking Group 2009

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5 Contents Directors and Officers General Management and Independent Auditors 9 Notice of Ordinary Shareholders Meeting 11 Financial statements of Banca Popolare di Milano Key figures and ratios of Banca Popolare di Milano 17 Introduction 19 Reclassified balance sheet 20 Reclassified income statement 21 Quarterly evolution of the reclassified income statement 22 Key figures 23 Ratios 24 Report on Operations of Banca Popolare di Milano 25 Macroeconomic scenario and banking industry 27 Significant events for Banca Popolare di Milano Strategic Plan 39 Distribution structure and human resources 42 Principal balance sheet aggregates 45 Results 53 Cash flow statement 58 Report on Corporate Governance and Ownership Structure as per art. 123-bis, CFA. Reference 59 BPM shareholders, stock price and ratings 59 Report on the principles used for pursuing the purpose of mutuality pursuant to article 2545 of the Italian Civil Code 64 Related-party transactions 69 Shares in companies held by the Directors, Statutory Auditors and General Manager of Banca Popolare di Milano 71 Subsequent events 73 Proposed allocation of the net profit for the year 75 Separate financial statements 77 Balance sheet 78 Income statement 80 Statement of comprehnsive income 81 Statement of changes in equity 82 Cash flow statement 84 5

6 Explanatory notes 85 Part A Accounting Policies 87 Part B Notes to the Balance sheet 125 Part C Notes to the Income statement 197 Part D Comprehensive income 225 Part E Information on risks and related hedging policies 229 Part F Information on capital 325 Part G Business combinations 335 Part H Transactions with related parties 339 Part I Share-based payments 347 Part L Segment reporting 351 Certification of the separate financial statements pursuant to art. 81 ter of Consob Regulation no dated 14 May 1999 and subsequent additions and amendments 355 Attachments 357 Disclosure of audit and other services fees in accordance to article 149 duodecies of the Consob Issuers Regulation 359 List of property owned by the bank with indication of revaluations 361 Report of the Board of Statutory Auditors 383 Report of the Independent Auditors 395 Consolidated financial statements of the BPM Group Key figures and ratios of the BPM Group 401 BPM Group structure 402 Introduction 403 Consolidated reclassified balance sheet 404 Consolidated reclassified income statement 405 Quarterly evolution of the consolidated reclassified income statement 406 Key figures 407 Ratios 408 Report on operations of the BPM Group 409 Main initiatives in Distribution structure and human resources 416 The BPM Group s scope of consolidation 419 Principal balance sheet aggregates 421 Income statement 432 Cash flow statement 437 Information on BPM Group companies 439 Companies consolidated line-by-line 439 Results of other companies of the BPM Group consolidated line-by-line 453 Results of BPM Group companies carried at equity 456 Related party transactions 459 Reconciliation of the parent bank s shareholders equity and net profit with consolidated shareholders equity and net profit 459 Subsequent events 460 Outlook for the current year C o n t e n t s

7 Consolidated financial statements 461 Consolidated Balance sheet 462 Consolidated Income Statement 464 Statement of comprehensive consolidated income 465 Statement of changes in consolidated equity 466 Consolidated cash flow statement 468 Consolidated explanatory notes 469 Part A Accounting Policies 471 Part B Notes to the consolidated balance sheet 517 Part C Notes to the consolidated income statement 583 Part D Comprehensive consolidated income 611 Part E Information on risks and related hedging policies 615 Part F Information on consolidated capital 719 Part G Business combinations 731 Part H Transactions with related parties 739 Part I Share-based payments 745 Part L Segment reporting 749 Certification of the consolidated financial statements pursuant to art. 81-ter of Consob Regulation no dated 14 May 1999 and subsequent additions and amendments 757 Attachments to the consolidated financial statements 759 Amounts paid for the audit and other services in accordance with art. 149 duodecies of Consob Regulation List of significant shareholdings in unlisted companies pursuant to article 126 of CONSOB Regulation of 14 May Report of the Board of Statutory Auditors on the consolidated financial statements 765 Report of the Independent Auditors on the consolidated financial statements 769 Item 2 on the Agenda of the Ordinary Shareholders Meeting 773 Item 3 on the Agenda of the Ordinary Shareholders Meeting 785 Item 1 on the Agenda of the Extraordinary Shareholders Meeting 791 Resolution 801 BPM Group network Banca Popolare di Milano 805 C o n t e n t s 7

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9 Directors and Officers General Management and Independent Auditors Board of Directors Chairman Massimo Ponzellini Deputy Chairmen Mario Artali Graziano Tarantini Directors Beniamino Anselmi Antoniogiorgio Benvenuto Francesco Bianchi Giovanni Bianchini Giuseppe Coppini Enrico Corali Franco Debenedetti Franco Del Favero Roberto Fusilli Piero Lonardi Roberto Mazzotta Marcello Priori Leone Spozio Jean-Jacques Tamburini Michele Zefferino Arbitrators Italo Ciancia Anna Maria Sanchirico Carlo Felice Varini General Management General Manager Fiorenzo Dalu Co-General Manager Enzo Chiesa Deputy General Manager Roberto Frigerio (*) Head Office Managers Maurizio Biliotti Paolo Franco Croci Giovanni Damiani Angelo Pellegatta Giovanni Antonio Pipi Board of Statutory Auditors Chairman Salvatore Rino Messina Independent Auditors Reconta Ernst & Young S.p.A. Statutory Auditors Carlo Bellavite Pellegrini Enrico Castoldi Stefano Salvatori Ezio Maria Simonelli (*) Financial Reporting Manager D i r e c t o r s a n d O f f i c e r s 9

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11 Notice of Ordinary and Extraordinary Shareholders Meeting The Members of Banca Popolare di Milano Scrl are called to the ordinary and extraordinary general meeting, which will be held at first calling on 23 April 2010, at 9.00 a.m., at the registered office in Milan, Piazza Filippo Meda 4, to discuss the following agenda: Ordinary part 1. Reports of the Board of Directors and the Board of Statutory Auditors on the 2009 financial statements. Review of the financial statements. Related resolutions; 2. Review of the Bank s remuneration policy and related resolutions; 3. Integration of the audit fees of Reconta Ernst & Young SpA, appointed independent auditors for the period , on the reasoned proposal of the Board of Statutory Auditors. Related resolutions; Extraordinary part 1. Approval of the plan under art of the Civil Code to merge Bipiemme Private Banking SIM SpA with Banca Popolare di Milano Scrl on the basis of their respective balance sheets at 31 December Related resolutions. Given the co-operative nature of the Bank, each Member has the right to one vote whatever the number of shares owned (so-called one-man-one-vote ); The Bank s share capital is variable and at 31 December 2009 amounts to Euro 1,660,136,924 represented by registered shares of par value Euro 4 each. Members eligible to attend are those: who have been included in the Register of Members for at least ninety days (i.e. by 23 January 2010). At this date, the voting rights amount to 49,947 (which, considering the one-man-one-vote, reflects the number of Members); who under article 13 of the Articles of Association have complied with the obligations laid down in article of the Italian Civil Code at least two working days before the General Meeting and who therefore have a certificate issued by an intermediary belonging to the centralised system of Monte Titoli SpA under article 85.4 of Decree 58 of 24 February 1998 and article 23 of the Bank of Italy - Consob joint resolution dated 22 February Members whose shares are already lodged with the Bank for safe custody and administration must nonetheless request the required certification in writing from the Bank s branches where the shares are deposited. Alternatively, they can go in person to the Bank s Shareholders Office in Piazza Filippo Meda 4, Milan, between 9.00 a.m. and 1.30 p.m., where they can ask for and collect their certification. These requests must be made between 24 March and 21 April For the purposes of issuing the necessary certification, members holding shares which are still in printed form must deliver the shares to an intermediary for their input into the centralised electronic administration system, in accordance with current regulations. N o t i c e o f O r d i n a r y a n d E x t r a o r d i n a r y S h a r e h o l d e r s M e e t i n g 11

12 If there are not enough members to form a quorum at the first meeting called for 23 April 2010 in accordance with article 30 of the Articles of Association, the meeting will be held at second calling on 24 April 2009, at 9.00 a.m., at Fieramilanocity Pavilion 3, Viale Scarampo Porta Teodorico 11, in Milan with the same agenda. ******** Members wishing to be represented at the meeting by a proxy are reminded of the current Regulations for Shareholders Meetings which state as follows. Every member entitled to attend meetings can be represented, in accordance with the Articles of Association, by another member who can act as proxy for just two other members; proxies cannot be given to persons who are not allowed to be proxyholders under the applicable regulations Each member can find the proxy form at the bottom of his copy of the Communication to attend the meeting as per art. 23 of the Bank of Italy - CONSOB joint resolution dated 22 February The Communication will be issued on the Member s request to attend the AGM. Proxies cannot be given with the name of the representative left blank and the signature of the person delegating has to be authenticated by an officer at the Bank s head office or one of its branches, or by the intermediary who issued the attendance certification, or by a public official. Legal entities, with the exception of Italian and foreign Undertakings for Collective Investment in Transferable Securities (UCITS), as well as foreign collective entities and legal entities, can only attend meetings in the person of their legal representative; alternatively, the legal representative can give a proxy to another member in accordance with the previous two paragraphs. For attendance purposes, only the certifications and proxies handed over by each participant when registering for the first time that they enter the meeting will be considered valid. We would like to inform you that: ******** with reference to item 1 on the Agenda of the Extraordinary Part of the General Meeting, the related documentation will be deposited at the registered office of the Bank, Piazza Meda 4, Milan, and at Borsa Italiana from 24 March 2010, as per art septies and 2505 of the Italian Civil Code and art of Consob Regulation 11971/99 (and subsequent amendments). the documentation relating to the other items on the Agenda - as well as the Report on Corporate Governance and Ownership Structure of the Bank in 2009, as per art. 123-bis, CFA - will be available at the registered office of the Bank in Milan, Piazza Filippo Meda 4, and at Borsa Italiana from 8 April 2010; as regards the bond loan with obligatory conversion entitled Convertendo BPM 2009/ %, in accordance with art of the related Regulation, we would like to inform you that the conversion period of these bonds into the Bank s shares has been suspended from today up to the date on which the shares go ex-dividend. 12 N o t i c e o f O r d i n a r y S h a r e h o l d e r s M e e t i n g

13 ******** Members will be able to obtain a copy of the documentation made available at the Bank s head office at their own expense. This documentation will also be available before the meeting on the Bank s website at This notice will be published on Wednesday 24 March 2010 in two financial newspapers: Il Sole 24 Ore and Italia Oggi. ******** Information concerning the procedures for attending the meeting can be requested from the Bank s Shareholders Office in Piazza Filippo Meda 4, Milan by telephoning the free-phone number on weekdays between 9.00 a.m. and 5.00 p.m. Milan, 23 March 2010 for the Board of Directors The Chairman Massimo Ponzellini N o t i c e o f O r d i n a r y S h a r e h o l d e r s M e e t i n g 13

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15 Financial Statements of Banca Popolare di Milano

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17 Key figures and ratios of Banca Popolare di Milano 17

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19 Introduction The reclassified balance sheet and income statement, in which line items have been aggregated and reclassified in keeping with market practice in such a way as to provide a clearer picture of performance, are presented below. This has mainly involved aggregating or making reclassifications between accounts, as explained in detail in the footnotes to the reclassified tables and in the section in the notes on Accounting Policies. Afterwards, there are some key figures and a number of important economic, financial and productivity ratios relating to the BPM Group. These have been calculated on the basis of the figures contained in the above reclassified schedules. K e y f i g u r e s a n d r a t i o s o f B a n c a P o p o l a r e d i M i l a n o 19

20 Banca Popolare di Milano Reclassified balance sheet (euro/000) Compulsory format codes Assets Change A-B A B (+/ ) % 10. Cash and balances with central banks 597, , , Financial assets at fair value and hedging derivatives: 2,174,315 2,985, , Financial assets held for trading 372, , , Financial assets designated at fair value through profit and loss 433, ,375 56, Financial assets available for sale 1,357,969 1,780, , Hedging derivatives 9,883 76,350 66, Loans and advances to banks 2,509,679 3,306, , Loans and advances to customers 27,272,711 27,928, , Fixed assets 2,667,938 2,470, , Other assets 1,852,074 1,160, , Total assets 37,074,557 38,047, , Compulsory format codes Liabilities and shareholders equity Change A-B A B (+/ ) % 10. Due to banks 2,179,385 3,114, , Due to customers 18,494,644 17,022,280 1,472, Debt securities in issue 9,912,507 11,049,180 1,136, Financial liabilities and hedging derivatives: 1,508,046 2,239, , Financial liabilities held for trading 175, ,248 71, Financial liabilities designated at fair value through profit and loss 1,329,563 1,990, , Hedging derivatives 2,779 2, Other liabilities 931,081 1,232, , Provisions for specific use 381, ,495 45, Capital and reserves 3,565,484 2,973, , Net profit (loss) for the year (+/ ) 101,761 78,869 22, Liabilities and shareholders' equity 37,074,557 38,047, , K e y f i g u r e s a n d r a t i o s o f B a n c a P o p o l a r e d i M i l a n o

21 Banca Popolare di Milano Reclassified income statement (euro/000) Compulsory format codes Line items Change (+/ ) % Net interest income 680, ,972 (169,206) Net fees and commission 422, ,239 34, Dividend and similar income 85, ,316 (27,580) Net income from financial activities 171,863 (69,877) 241,740 n.s Other operating charges/income 48,394 38,591 9, Operating income 1,409,667 1,320,241 89, Administrative expenses: (876,447) (777,022) 99, a) payroll (*) (623,492) (522,289) 101, b) other administrative expenses (252,955) (254,733) (1,778) Net adjustments to property, plant and equipment and intangible assets (60,040) (55,970) 4, Operating costs (936,487) (832,992) 103, Operating profit 473, ,249 (14,069) Net impairment adjustments to loans and financial assets (307,842) (206,446) 101, Net charges to provisions for risks and charges (11,477) (33,461) (21,984) Profits (losses) from equity and other investments 17,100 (73,473) (90,573) n.s Profit (loss) from current operations before tax 170, ,869 (2,908) Income taxes on current operations (69,200) (95,000) (25,800) Net profit (loss) for the year 101,761 78,869 22, Earnings per share (euro) Diluted earnings per share (euro) (*) Payroll includes for non-recurring charges relating to the Solidarity Fund for Income Support for an amount of 104,945 thousand euro, which is the current value of the forecast expenditure of 108,488 thousand euro. Method of preparing the reclassified income statement To ease reconciliation between the reclassified income statement and the compulsory format, the code numbers from the compulsory format are shown beside each item in the reclassified statement. The following reclassifications have been made: 1. Other operating charges/income (line item 190) recorded as part of Operating costs in the official reporting format have been adjusted to exclude Recoverable indirect taxes (Euro 45,481 thousand at and Euro 45,811 thousand at ) and to include the depreciation of leasehold improvements (Euro 4,030 thousand at and Euro 3,462 thousand at ). After reclassification, this item has been included in Operating income in the reclassified income statement; 2. Other administrative expenses (line item 150 b) have been adjusted to exclude the recoverable indirect taxes mentioned in point 1) above; 3. Net adjustments to property, plant and equipment and intangible assets have been increased in the reclassified income statement by the depreciation of leasehold improvements mentioned in point 1) above; 4. Net impairment adjustments to loans and financial assets (Euro 307,842 thousand at and Euro 206,446 thousand at ) reported in line item 130 have been booked after Operating profit in the reclassified format. K e y f i g u r e s a n d r a t i o s o f B a n c a P o p o l a r e d i M i l a n o 21

22 Banca Popolare di Milano Quarterly evolution of the reclassified income statement (euro/000) Format codes compulsory Line items Fourth quarter Third quarter Second quarter First quarter Fourth quarter Third quarter Second quarter First quarter Net interest income 145, , , , , , , , Net fees and commission 109, , ,405 94,311 84,677 96, , , Dividend and similar income , ,394 2, ,163 1, Net income from financial activities 21,205 19,567 49,518 81,573 (29,602) (21,698) (2,527) (16,050) 190. Other operating charges/income 9,033 13,362 11,275 14,724 2,746 11,164 10,922 13,759 Operating income 285, , , , , , , , Administrative expenses: (295,576) (186,845) (203,534) (190,492) (190,475) (191,377) (209,130) (186,040) a) payroll (224,991) (130,452) (132,530) (135,519) (116,811) (129,230) (148,855) (127,393) b) other administrative expenses (70,585) (56,393) (71,004) (54,973) (73,664) (62,147) (60,275) (58,647) Net adjustments to property, plant and equipment and intangible assets (14,994) (14,967) (15,330) (14,749) (15,098) (13,002) (14,349) (13,521) Operating costs (310,570) (201,812) (218,864) (205,241) (205,573) (204,379) (223,479) (199,561) Operating profit (25,295) 99, , ,105 70,213 89, , , Net impairment adjustments to loans and financial assets (85,834) (48,163) (116,244) (57,601) (116,438) (46,179) (22,409) (21,420) 160. Net charges to provisions for risks and charges (6,617) (2,092) 11,346 (14,114) (15,160) (12,161) (3,068) (3,072) Profits (losses) from equity and other investments 15, ,996 (4,627) (21,134) (48) (35,085) (17,206) 250. Profit (loss) from current operations before tax (102,015) 48, ,390 92,763 (82,519) 31, ,293 75, Income taxes on current operations 27,000 (16,200) (46,000) (34,000) 1,000 (16,500) (53,700) (25,800) 290. Net profit (loss) for the year (75,015) 32,623 85,390 58,763 (81,519) 14,719 95,593 50, K e y f i g u r e s a n d r a t i o s o f B a n c a P o p o l a r e d i M i l a n o

23 Banca Popolare di Milano Key figures (euro/000) Key balance sheet figures Change A-B A B (+/ ) % Loans and advances to customers 27,272,711 27,928, , of which: net non-performing loans 262, , , Direct deposits (*) 29,736,714 30,062, , Indirect customer deposits 27,092,965 25,997,817 1,095, of which: assets under management 12,117,712 11,183, , Total assets 37,074,557 38,047, , Shareholders' equity (excluding net profit for the year) 3,565,484 2,973, , Regulatory capital 5,066,025 4,533, , of which: Tier 1 capital 3,484,094 2,961, , Key income statement figures Change A-B A B (+/ ) % Operating income 1,409,667 1,320,241 89, Operating costs (936,487) (832,992) 103, of which: payroll costs (**) (623,492) (522,289) 101, Operating profit 473, ,249 14, Net impairment adjustments to loans and financial assets (307,842) (206,446) 101, Profit from current operations before tax 170, ,869 2, Net profit for the year 101,761 78,869 22, Operating structure Change A-B A B (+/ ) % Headcount (employees and other personnel) 6,493 6, Number of branches (*) This line item includes: Due to customers, debt securities in issue and financial liabilities designated at fair value. (**) Payroll includes for non-recurring charges relating to the Solidarity Fund for Income Support for an amount of 104,945 thousand euro, which is the current value of the forecast expenditure of 108,488 thousand euro. Net of this charge, payroll costs would amount to 518,547 thousand euro, 0.7% lower than the previous year. K e y f i g u r e s a n d r a t i o s o f B a n c a P o p o l a r e d i M i l a n o 23

24 Banca Popolare di Milano Ratios Structure ratios (%) Loans and advances to customers/total assets Fixed assets/total assets Direct deposits/total assets Funds under management/indirect deposits Loans and advances to customers/direct deposits Profitability ratios (%) Net profit/shareholders' equity (excluding net profit) (ROE) (a) Net profit/total assets (ROA) Cost/Income ratio (*) Risk ratios (%) Net non-performing loans/loans and advances to customers coverage of gross non-performing loans to customers Index of coverage of gross performing loans to customers Productivity ratios (Euro/000) (b) Direct deposits per employee 4,580 4,485 Loans and advances to customers per employee 4,200 4,167 Assets under management per employee 1,866 1,669 Assets under administration per employee 2,306 2,210 Capital adequacy ratios (%) (c) Tier 1 capital net of preference shares/risk-weighted assets (Core Tier 1) Tier 1 capital/risk-weighted assets (Tier 1) Regulatory capital/risk-weighted assets (Total capital ratio) Information on the BPM stock Number of shares: 415,034, ,034,231 in circulation 412,619, ,646,506 treasury shares 2,415,180 2,387,765 Stock price at the end of the year - ordinary share (euro) a) Shareholders equity at end of year. b) Number of employees at end of year including personnel with other types of contract. c) The 2008 capital adequacy ratios were recalculated following the 18/11/2009 update of the Bank of Italy s Circular no. 262 of 22/12/2005 regarding the calculation of risk-weighted assets in the separate financial statements of Group banks. (*) Net of the non-recurring charges for personnel joining the Solidarity Fund for Income Support, the cost/income ratio would go down from 66.4% to 58.9%. 24 K e y f i g u r e s a n d r a t i o s o f B a n c a P o p o l a r e d i M i l a n o

25 Report on operations for

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27 Macroeconomic scenario and banking industry The international economy 2009 was a year of deep recession for the main world economies, while those of emerging nations generally slowed down but on average still continued to grow. After an extremely difficult first half, when business activity continued to fall very rapidly, the first timid signs of recovery in the more advanced countries began to emerge in the summer, thanks to massive injections of support by Governments and Central Banks; these signs gradually became stronger during the last quarter, but only for the United States. However, the world economy is still looking fragile and conditioned by the exit strategies that the main Governments will have to adopt, together with structural reforms to boost growth; too rapid a retreat from extraordinary expansive economic and monetary policies could in fact jeopardise the sustainability of the recovery. In the Euro-area, the whole year closed with a contraction in GDP of 4%, conditioned by a particularly negative performance by Italy (-5%) and by Germany, where a decline of 5% is the worst fall in the economy since World War 11. The fourth quarter figure, which marked an uptick of 0.1% on the previous quarter, brought back a minimum of optimism to operators, which was then confirmed by the trend in the indicators of confidence among companies and consumers, even if it is struggling to convert into rising production and hence turnover. During the same period, France turned in a good performance (+0.6% q/q), whereas there was no change in Germany and Italy s growth was disappointing. With unemployment still worryingly high at around 10%, with few signs of improvement in the near future, inflationary pressures continue to be absent or, at most, very low. Expectations still reflect generally weak in prices, costs and wages, in line with a slow recovery in demand. In the immediate future, inflation should stay at around 1% and afterwards only slightly higher than that. The Euro-area also seems destined to continue feeling the effects of the tensions caused by the critical state of certain countries public accounts, particularly those of Greece, Portugal and, to a lesser extent, Spain, the only large European country where the recession has been going on for seven quarters in a row, with GDP slipping by 0.1% even in the last quarter of These countries can no longer afford to put off a substantial - but above all credible - change in their economic policies to bring their deficits back within the Maastricht parameters. Given the ongoing unknowns about how the macroeconomic scenario will evolve, the ECB has kept interest rates at an all-time low, formally initiating only a gradual re-entry from the exceptional measures that made it possible during the year to inject liquidity into the interbank market, which is now more or less back to normal. In the United States, 2009 will be remembered as the worst year for the economy since 1946, with GDP dropping by 2.4%. The recession would have been even deeper if, after an extremely negative start to the year (GDP suffered a contraction of 6.4% in the first quarter), the Government s fiscal stimulus plan had not achieved its purpose. Thanks to it, the recovery gradually got stronger and stronger and in the last quarter of 2009 it was even better than expected, coming in at 5.9%, the best progress in the last six years. Signs of relative stability have also come from the property sector, where tax incentives for first home purchases, together with a favourable interest rate scenario, have helped bring about a greater balance between supply and demand. Inflation turned positive again at the end of the year and estimates for 2010 converge around 2%. If the worst can be considered over, there are still elements that suggest prudence when considering the extent and duration of the current growth phase. The labour market remains weak, with unemployment close to 10%, which makes it hard for recent trends in consumer spending to last, while the public deficit has reached record highs. So the attitude of the Fed comes as no surprise: having recently increased its discount rate by a quarter of a point (from 0.50% to 0.75%) as the first sign that monetary policy was returning to normal, it continued to maintain the rate on Fed Funds at all-time lows between zero and 0.25%, confirming that its effective orientation was still not restrictive. In Japan, 2009 closed with a record decline in GDP (-5%), mainly due to an extremely negative first quarter caused by the crisis, which was not offset by the timid growth that had already begun in the second quarter and then repeated subsequently (+1.1 q/q in the fourth quarter). The Government has said that the risk of a relapse had not been completely averted, in a scenario where deflationary trends were visible again. Indeed, in 2009 prices fell on average by 1.4%. R e p o r t o n o p e r a t i o n s f o r

28 As regards Emerging Nations, the figures coming from China still turned out to be very positive for the entire year, confirming the fundamental role that this country has as the engine of the world recovery. In fourth quarter 2009, GDP growth rates were already back at their pre-crisis levels, turning in progress of 10.7% and bringing total annual growth to 8.7% (+9.6% in 2008) against an official target of 8%. Rates of growth were also strong, but less so, in South-East Asia (+1.3%) and India (+5.6%), whereas the situation in Brazil was marginally negative (-0.4%). The latest estimates for 2010 from the International Monetary Fund put world growth at 3.9%, after a contraction of 0.8% the year just past. The Italian economy Italy closed 2009 with a drop in GDP of 5.1%, the worst result since After a positive third quarter (+0.6% q/q), which interrupted the negative series that began in second quarter 2008, the trend in the last quarter was again disappointing, with the weakest performance of all the European partners (-0.3% q/q). The trend in exports was particularly negative, with 2009 posting a decline of 20.7%, the worst figure for the last 40 years; it should be emphasized, however, that the closing months of the year did show encouraging signs. The average annual decline in industrial output during the year was 17.5% and even though there were signs of recovery in the last three months, the levels reached are still very low compared with what they were prior to the crisis. The average increase in consumer prices came to 0.8%, the lowest rate for the last 50 years and tensions are not considered likely in the near future. The effects of the crisis have continued to be seen on the labour market; the rate of unemployment in December came to 8.5%, the highest figure since January The most worrying element is youth unemployment, the band where the increase was the highest. The employment situation has had a significant impact on consumer spending and capital investment, where the trend has remained weak despite the uptick in the third quarter. The recession has also been a key factor in the deterioration of the state deficit at more than 5% of GDP, having been 2.7% in 2008; however, this increase is a good deal lower than that announced for the whole of the Euro-area. As regards 2010, the latest forecasts from the Bank of Italy indicate still limited growth in GDP (0.7%). 28 R e p o r t o n o p e r a t i o n s f o r

29 Italian banking industry Having hit a low in October 2009 (+0.12% y/y), in last few months of the year we saw a slight acceleration in the rate of growth in bank loans to the private sector, with a headline change in December 2009 of 1.69% (+4.90% at the end of 2008). With specific reference to households and non-financial companies, growth came to 0.51%. If loans are analysed by duration, the medium/long-term segment has grown by 4.0%, while the short-term segment has gone down by 7.5%. In December 2009, loans to non-financial companies, which are still conditioned by the drop in companies financial requirement, fell by 2.4% y/y. Loans to households are rising again, driven in particular by the growth in home-purchase loans (+6% y/y). The deterioration in the quality of bank assets continued in the third quarter of At the end of 2009, gross non-performing loans amounted to 59 billion Euro (17.7 billion more than in December 2008); the year-on-year change was therefore +42.8%. As for net non-performing loans, at the same date they came to 35.9 billion euro, while the ratio of net non-performing loans to total loans came to 2.02% (1.24% at December 2008). As regards the funding of Italian banks in Euro, represented by deposits and bonds of resident customers, growth rates appear to be settling, though they are still high. For example, funding was showing a headline rate of +9.3% in December 2009; total funding went up by around 168 billion Euro during the year. Considering the individual components of this item, the trend was more dynamic for bonds (+11.2%) than for deposits (+8%). In December 2009, the weighted average interest rate on loans to households and non-financial companies fell to an all-time low, coming in at 3.76%, in line with the intentions of monetary policy and with conditions on the interbank market. Interest rates for new operations hit new all-time lows during the same period: the rate on Euro loans to non-financial companies came to 2.17% (4.52% at December 2008), whereas the rate on Euro home purchase loans to households came to 2.88% (5.09% at December 2008). As regards funding, the average rate applied to total deposits (including repos) of households and non-financial companies was 0.68% in December 2009 (1.99% in December 2008); in the same month, the rate of remuneration on bond funding was 2.91% (4.49% the previous December). The average rate on bank deposits therefore came to 1.59% at the end of the year, 141 basis points lower than in December Overall, the spread between the average funding rate and the average lending rate in December 2009 came to 2.17%, 92 bps lower than the previous year. Financial and foreign exchange markets After a substantial recovery in share prices that began in March and continued through to the end of third quarter 2009, in the latter part of the year there was a period of consolidation of the price levels reached, partly because of uncertainties regarding the strength of current economic growth. Even though the main indices files away 2009 with gains of around 20%, prices are still a long way from where they were prior to the financial crash at the end of Analysing the change in the main stock indices in 2009, the Standard & Poor s 500 went up by 23.5%, the Dow Jones Euro Stoxx 50 by 21.1%, the FTSE Italy All Shares by 19.2%, the FTSE Mib Italy by 19.5% and the Nikkei 225 by 19%. Spreads on the primary and secondary markets for corporate bond issued continued to fall, in the same way as for fundamental instruments used by banks for cash management purposes, such as covered bonds. The premiums on credit default swaps of the main international credit institutions also contracted, returning to pre-crisis levels, even if on average they remained higher than the record highs of As regards the foreign exchange market, 2009 saw a long period of US dollar weakness against the euro, interrupted only in December after the exchange rate had gone over The euro/yen exchange rate fluctuated in the range , closing the year towards the high end (133). Fluctuations were even wider for the euro/sterling exchange rate which having hit a low of 0.85 in June, closed the year recovering to 0.90, after having tested highs of 0.94 on various occasions. R e p o r t o n o p e r a t i o n s f o r

30 Asset management After a couple of very difficult years, the asset management sector had net inflows of almost 21 billion Euro during the fourth quarter, closing 2009 positively overall with inflows of more than 35 billion euro. For collective funds, the net result for the year was marginally negative ( 25 million euro), but with subscription picking up considerably during the last three months, coming close to 6.5 billion euro. The situation for open ended funds was similar, with net outflows for the year of 683 million euro, but with a very positive last quarter when net inflows came close to 6.4 billion euro. A positive contribution, on the other hand, came from closed end funds (+657 million for the entire year), though their growth slowed down during the latter part of the year (balance +93 million euro) due to a switch in investors preferences to other categories. After a couple of bad years, managed portfolios brought in more than 35 billion Euro in 2009, of which 14.3 in the last quarter alone; the main contribution came from insurance products. At the end of the year, total assets under management by sector operators came close to 950 billion euro, of which 82% managed by Italian groups. Of the eight categories shown in the quarterly map prepared by Assogestioni, five closed the year positively. These were bond, equity, balanced, real estate and unclassified products; flexible, monetary and hedge funds, on the other hand, concluded 2009 with net outflows. 30 R e p o r t o n o p e r a t i o n s f o r

31 Significant events for Banca Popolare di Milano Public Purchase Offer for Anima SGR and merger between Bipiemme Gestioni SGR and Anima SGR In the first few months of 2009 the voluntary Public Purchase Offer promoted by Banca Popolare di Milano for the ordinary shares of Anima SGRpA (hereafter Anima ), of which BPM purchased 29% in The acceptance period during which the shareholders of Anima were able to accept the Offer ran from 15 December 2008 to 23 January At the end of the acceptance period, the Offer had been accepted by 91.52% of the shares involved in the Offer, which together with the shares already owned by BPM, represented around 94.06% of the SGR s total shares. Given that on completion of the Offer BPM held an interest of more than 90%, but less than 95%, of the share capital of Anima, having already declared in the Offer Document that it did not want to restore an adequate float to ensure regular trading in the shares, the Bank did not go ahead with the Voluntary Reopening of the Acceptance Period, but carried out the Obligatory Purchase of the remaining 6,241,913 ordinary shares of Anima in accordance with art. 108, para. 2 of the CFA. Carrying out this Obligatory Purchase involved Reopening the Terms of the Offer during the period from 2 to 20 February In this period, acceptances had been received for 3,323,554 ordinary shares of Anima, equal to 3.16% of its share capital. Adding these shares to the ones already owned, BPM came to hold a total of 102,081,641 ordinary shares of Anima, equal to 97.22% of its share capital, which fulfilled the conditions for an Obligatory Purchase under art. 108, para. 1 of the CFA and the Right to Purchase the 2,918,359 shares of Anima still in circulation, equal to 2.78% of the SGR s share capital, in accordance with art. 111, para. 1 of the CFA. On 2 March 2009, after exercising its right to purchase the residual shares that had not accepted the original offer, pursuant to art of the Finance Consolidation Act, Banca Popolare di Milano held all of the shares of Anima. In total, the outlay for the acquisition of the shares of Anima bought under the Public Purchase Offer amounted to Euro million, for the purchase of 73,605,000 shares. With a view to reorganising the activities of the BPM Group in the field of asset management and to exploit the greater growth potential by taking advantage of economies of scale and scope, on 26 June 2009 the Boards of Directors of Bipiemme Gestioni and Anima, both subsidiaries, agreed to a plan for Bipiemme Gestioni to absorb Anima. Based on a valuation carried out by an independent expert, the merger plan provides for an exchange ratio between the shares of Bipiemme Gestioni and Anima of 1 share of the former (par value 1,000 Euro each) for 10,564.5 shares of the latter (par value 0.05 Euro each). On 28 September 2009, following authorisation by the Bank of Italy, the General Meetings of Bipiemme Gestioni and Anima approved the merger of Anima with Bipiemme Gestioni. The merger is effective for legal purposes by 31 December 2009, taking effect for accounting and tax purposes from 1 January At the end of 2009 the shareholder structure of Anima is made up of: Banca Popolare di Milano S.c.r.l % Banca di Legnano S.p.A % Banca Popolare dell Etruria e del Lazio S.c. 2.91% Banca Finnat Euramerica S.p.A. 0.81% Cassa di Risparmio di Alessandria S.p.A. 0.58% The new company Anima SGR S.p.A., which is currently shown in the financial statements of Banca Popolare di Milano at Euro million, has assets under management of Euro 24.3 billion, of which Euro 17.5 billion in open-ended funds and Euro 6.8 billion in individual managed portfolios, ranking 4th in the open-ended fund sector with a market share of 4.2%. This operation is a key element in the process of rationalising the BPM Group s asset management activities. It will help reinforce the strategic and competitive positioning and the new company, which continues with its mission as a specialist operator in the asset management market. The merger led to a simplification and integration of these activities from both an operational and a decision-making point of view, while at the same time improving the quality of customer service. Now that the initial stage of integration has been completed, consolidation of the organisational structures should generate significant cost synergies thanks to the standardisation of corporate procedures and the adoption of integrated IT systems. R e p o r t o n o p e r a t i o n s f o r

32 Acquisition of Etruria Fund Management by Bipiemme Gestioni SGR (now Anima SGR S.p.A.) On 17 November 2009, Bipiemme Gestioni SGR signed a preliminary agreement with the Banca Etruria Group to acquire 99.98% of the Luxembourg-based company Etruria Fund Management Co. SA, which sets up and runs mutual funds. At 31 October 2009 it had 326 million Euro under management. The price has been established at Euro 5.5 million adjusted according to the company s book net equity at 31 December In particular, Bipiemme Gestioni will take over the Etruria Fund, a multisegment mutual fund that is placed mainly by the banks of the Banca Etruria Group. The banks of the Banca Etruria Group will continue to sell this fund and maintain relations with customers holding units. With this agreement, the Banca Etruria Group consolidates the commercial partnership with Bipiemme Gestioni that was launched in 2007 with the sale of the individual portfolio management business. The purpose was to ensure that customers of the Banca Etruria Group would have access to high value-added investment services that benefited from Bipiemme Gestioni s greater weight in the field of asset management, offering customer services based on an open architecture model. Transformation of We@Service into an on-line bank and acquisition of IntesaTRADE SIM The transformation of We@Service S.p.A. into an online bank was concluded on 1 November 2009 with the start of operations and change of name to Webank S.p.A. The company is wholly owned by BPM. The new entity, which focuses on acquiring new online customers by offering a complete banking service and on the provision of internet banking services for the BPM Group s territorial banks, at 31 December 2009 had more than 430 thousand customers, including 45 thousand purely online. This operation was completed by Banca Popolare di Milano contributing the business made up of its internet and phone banking services from 1 November, the date from which WeBank was authorised to start operating as a bank. In exchange, the shareholders meeting of We@Service S.p.A. authorised an increase in share capital from Euro 10,000,000 to Euro 23,301,404, by issuing 13,301,404 new ordinary shares of par value of Euro 1 each, to be allocated to BPM as the sole shareholder. On 30 July 2009, Banca Popolare di Milano bought 100% of IntesaTRADE SIM S.p.A., from Intesa Sanpaolo S.p.A. (online trading) for Euro 45 million with a view to extending and completing the range of financial investment services and products offered by the BPM Group through its online channel. At 31 December 2009, the company had funds under administration of more than one billion euro, shareholders equity of Euro 32.3 million (with a net profit of more than Euro 1.3 million) and 31 thousand customers (mainly heavy traders ) and approximately 2.6 million orders executed during the year. This acquisition is an integral part of a wider strategic project of the BPM Group, which has already led to the transformation of We@ Service. The complementary nature of what is offered by Webank and Intesa@Trade SIM, renamed WeTrade SIM, makes it possible to create a leading operator on the Italian online finance market that can cover all of an online customer s needs by combining ten years of experience in their respective market segments. Lastly, on 9 March 2010, the Board of Directors of Banca Popolare di Milano decided to merge WeTrade with WeBank in order to carry out another phase of reinforcement and development of this activity, achieving among other things a size threshold that will permit important structural rationalisation and cost synergies. 32 R e p o r t o n o p e r a t i o n s f o r

33 Consumer credit Incorporation of ProFamily In March 2009 the Board of Directors of the Bank approved the plan to expand the consumer credit business by acquiring a company that will devote its time to developing consumer credit in accordance with art. 106 of the Banking Act. This company will be controlled by BPM and will be complementary to the various structures of the Group, focusing on the production and distribution of consumer credit products to households, taking on the related risk. To this end, on 13 November 2009 the Bank acquired the entire share capital of Lux Finance srl, after receiving authorisation from the Bank of Italy. On the following 26 November the extraordinary shareholders meeting of Lux Finance approved the transformation of the company s legal status from a private limited liability company (S.r.l.) to a joint-stock company (S.p.A.), also changing its name to Profamily; they then authorised a cash increase in capital from Euro 10,000 to Euro 50 million, to be subscribed, in one or more tranches, within 24 months of the resolution. A first tranche of this increase (Euro 9,990,000) was subscribed by the Bank at the time that the company was transformed into Profamily, raising the paid-in share capital to Euro 10 million. Subsequently, the company applied to the Bank of Italy for authorisation to carry on the activities foreseen in art. 107 of the CBA so that it could start operating. The Group s Strategic Plan provides for ProFamily to take on an important role in the consumer credit market in Italy, by means of direct management of products distributed through the Group s branches, a new network based on some direct branches and gradual activation of money shops manned by sole agents. The critical success factors of this initiative are a wide and complete range of products to satisfy all of the financing needs of households, a short distribution chain to hold down distribution costs while at the same time increasing the possibility of control, and a clear and transparent style of communication with customers in line with the genuine credit pay-off which will distinguish the launch of the Profamily brand on the market. To implement the activity programme in 2009 and the first part of 2010, highly qualified professional skills were acquired on the market and investments were made to build the new company s production and operating machine, which should start up during the first half of Securitisation of loans In March 2009, Banca Popolare di Milano completed a securitisation of mortgage loans, selling a portfolio of around 11 thousand positions with a residual debt of some Euro 1.3 billion to BPM Securitisation 2, a special purpose entity that existed already. The operation consists of a without-recourse assignment to BPM Securitisation 2 of a portfolio of performing loans deriving from first mortgages and unsecured loans originated by BPM. The purchase of this portfolio was financed by BPM Securitisation 2 with a corresponding payment to BPM of the countervalue, using the proceeds of issuing senior securities listed on the Dublin Stock Exchange with a rating from Fitch Ratings Ltd and unlisted, unrated junior securities. The purpose of this operation, which was carried out during a period of acute financial crisis, was to transform receivables of the Bank into securities and to create a liquidity reserve in case of need. The securities were completely subscribed by BPM and the senior securities are eligible for use by BPM in repo transactions with the European Central Bank. Reorganisation of the Banca Italease Group On 15 March 2009, an agreement was signed by Banca Popolare di Milano, Banco Popolare, Banca Popolare dell Emilia Romagna and Banca Popolare di Sondrio, as shareholders of Banca Italease, with a view to reorganising the leasing sector and operations of the Banca Italease Group. In particular, this agreement envisaged the following: the launch by Banco Popolare of a voluntary public purchase offer for all of the ordinary shares of Banca Italease in circulation listed on the MTA (electronic equities market), not already held by Banco Popolare, and of the companies that it controls, with a view to delisting the shares. Banca Popolare dell Emilia Romagna, Banca Popolare di Sondrio and BPM all undertook to accept the Offer for the shares that they owned; R e p o r t o n o p e r a t i o n s f o r