Credito Valtellinese Società Cooperativa Registered Offices in Piazza Quadrivio 8 - Sondrio, Italy Tax code and Sondrio Company Registration No.

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1 Credito Valtellinese Società Cooperativa Registered Offices in Piazza Quadrivio 8 - Sondrio, Italy Tax code and Sondrio Company Registration No Register of Banks No. 489 Parent of the Credito Valtellinese Banking Group - Register of Banking Groups No Website: creval@creval.it Share capital fully subscribed and paid-up EUR 1,846,816, Member of the Interbank Guarantee Fund CONDENSED INTERIM CONSOLIDATED REPORT AT 30 JUNE 2016

2 Company Officers of Credito Valtellinese in office at 5 August 2016 Board of Directors Chairman Miro Fiordi Deputy Chairman Michele Colombo Directors Elena Beccalli Mariarosa Borroni Isabella Bruno Tolomei Frigerio Gabriele Cogliati Giovanni De Censi Flavio Ferrari Maria Elena Galbiati Paolo Stefano Giudici Gionni Gritti Livia Martinelli Tiziana Mevio Paolo Scarallo Alberto Sciumè Board of Statutory Auditors Chairman Standing Auditors Substitute Auditors Angelo Garavaglia Giuliana Pedranzini Luca Francesco Franceschi Edoardo Della Cagnoletta Giorgio Sangiorgio General Management General Manager Mauro Selvetti Substitute Deputy General Manager Umberto Colli Deputy General Managers Saverio Continella Vittorio Pellegatta Enzo Rocca Manager in charge of financial reporting Simona Orietti Audit Company KPMG S.p.A. 2

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

4 CONSOLIDATED HIGHLIGHTS AND ALTERNATIVE PERFORMANCE INDICATORS AT 30 JUNE 2016 STATEMENT OF FINANCIAL POSITION DATA (in thousands of EUR) 30/06/ /12/2015 Change 30/06/2015 Change Loans and receivables with customers 18,614,840 19,049, % 18,590, % Financial assets and liabilities 5,514,936 5,101, % 5,367, % Total assets 27,149,323 26,901, % 27,062, % Direct funding from customers 21,870,299 21,694, % 21,898, % Indirect funding from customers 11,278,980 12,092, % 12,279, % of which: - Managed funds 6,876,910 6,792, % 6,602, % Total funding 33,149,279 33,787, % 34,178, % Equity 2,107,269 2,183, % 2,010, % SOLVENCY RATIOS 30/06/ /12/2015 Common Equity Tier 1 capital / Risk-weighted assets (CET1 capital ratio) 13% 13.1% Tier 1 capital/risk-weighted assets (Tier 1 capital ratio) 13% 13.1% Total own funds/risk-weighted assets (Total capital ratio) 14.5% 15.1% FINANCIAL STATEMENT RATIOS 30/06/ /12/2015 Indirect funding from customers / Total funding 34.0% 35.8% Managed funds / Indirect funding from customers 61.0% 56.2% Direct funding from customers / Total liabilities 80.6% 80.6% Customer loans / Direct funding from customers 85.1% 87.8% Customer loans / Total assets 68.6% 70.8% CREDIT RISK 30/06/ /12/2015 Change Net bad loans (in thousands of EUR) 1,228,602 1,207, % Other net doubtful loans (in thousands of EUR) 2,074,922 2,150, % Net non-performing loans (in thousands of EUR) 3,303,524 3,357, % Net bad loans / Loans and receivables with customers 6.6% 6.3% Other net doubtful loans / Loans and receivables with customers 11.1% 11.3% Net non-performing loans / Loans and receivables with customers 17.7% 17.6% Coverage ratio of bad loans 52.8% 57.1% Coverage ratio of other doubtful loans 23.4% 23.4% Coverage ratio of net non-performing loans 37.8% 40.3% Cost of credit (*) 1.61% 2.31% The above data do not include loans and receivables with customers classified among assets held for sale. (*) Calculated as the ratio between net impairment losses on loans and year-end loans. 4

5 ORGANISATIONAL DATA 30/06/ /12/2015 Change Number of employees 4,099 4, % Number of branches INCOME STATEMENT DATA (in thousands of EUR) 1st half of st half of 2015 Change Net interest income 211, , % Operating income 396, , % Operating costs (261,152) (250,142) 4.40% Net operating profit 135, , % Pre-tax profit from continuing operations 7,679 40, % Post-tax profit from continuing operations 21,291 32, % Profit for the period 19,136 50, % OTHER FINANCIAL INFORMATION 1st half of st half of 2015 Cost/Income ratio (*) 63.2% 59.0% 55.2% Personnel expenses (**)/Number of employees (*) Figure of the first half of 2016 calculated net of the SRF contribution and DTA fee of EUR 10,764 thousand, 2015 figure calculated net of ordinary and extraordinary contributions paid to SFR and DGS and of the impairment of the customer list of EUR 45,976 thousand. (**) Costs non chargeable to employees removed. 5

6 ASSIGNED RATINGS Fitch Ratings Long-term IDR Short-term IDR Outlook Last "rating action" on 24 June 2016 BB B Stable Moody s Ratings Long-term Ratings Short-term Ratings Outlook Last "rating action" on 25 January 2016 Ba1 Not-Prime Stable DBRS Ratings Senior Long-Term Debt & Deposit Short-term Debt & Deposits Trend Last "rating action" on 14 June 2016 BBB (low) R-2 (low) Negative INFORMATION ON SHARES 30/06/ /12/2015 Number of ordinary shares 1,108,872,369 1,108,872,369 Listed price at end of the period Average listed price for the period Average stock-market capitalisation (millions of EUR) 723 1,294 6

7 ORGANISATIONAL MODEL AND BREAKDOWN OF THE CREDITO VALTELLINESE BANKING GROUP The Credito Valtellinese Banking Group currently consists of territorial banks, specialised companies and special purpose companies for the provision of services - with a view to achieving synergies and economies of scale - to all the companies of the Group. The current group structure is graphically represented below. At 30 June 2016, the Credito Valtellinese Group is present in Italy with a network of 526 Branches, in eleven regions, through the territorial banks characterising the Market Segment : - Credito Valtellinese S.c., the Parent, present with its own network of 350 branches, most of which are in Lombardia, as well as in Valle d Aosta, Piemonte, Veneto, Trentino Alto Adige, Emilia Romagna, Toscana and Lazio. - Carifano S.p.A., with a branch network of 40 branches, mainly in the Marche region, as well as in Umbria, Perugia and Orvieto. - Credito Siciliano S.p.A. is present in all the provinces of Sicilia with 136 branches and in Roma, Torino and Milano with three branches dedicated to loans against pledges. The following companies characterise the "Specialised Companies Segment : - Global Assicurazioni S.p.A. 1, a multifirm insurance agency specialised in the brokerage and management of standard insurance policies in favour of individuals and household customers. - Global broker S.p.A. 2, insurance broker specialised in the brokerage and management of insurance policies in favour of companies. The companies providing services complementary to banking business characterising the "Corporate Centre Segment" complete the Group: - Creval Sistemi e Servizi S.c.p.A., is the Group's centre for ICT management and development, organisation, back office, real estate services and support processes. 1 Companies subject to management and coordination by Credito Valtellinese and therefore included in the consolidation scope, even if not included in the Group, pursuant to the supervisory provisions, in that they carry out insurance activities. 2 See previous note. 7

8 - Stelline Real Estate S.p.A., R.E.o.Co. (Real Estate Owned Company), Group company exclusively dedicated to asset repossessing. 8

9 REPORT ON OPERATIONS Macroeconomic reference context 3 The general economic framework The outcome of the consultative referendum of June 23 in the United Kingdom, in which the votes in favour of the exit of the country from the European Union prevailed, produced a situation never experienced in the European integration process, the repercussions of which are difficult to anticipate. The International Monetary Fund considered the uncertainty emerging from it as a risk for the world economy. The impact on the currency and financial markets was immediate; it was countered by the action of the monetary authorities, which favoured its partial re-absorption in the following days. The British pound depreciated; the Euro, albeit strengthening against the British currency, weakened against other major currencies, remaining virtually unchanged in real terms. The yields of Italian Government bonds of the Eurozone - which benefited from the Eurosystem purchase programme - were not affected by it. The fall in share prices was extensive. The ECB is ready to intervene, if necessary, and keeps up close contacts with other central banks, continuing to fulfil its responsibility by ensuring price stability and financial stability in the Eurozone. The cyclical expansion in the area continued in the second quarter, albeit at a slower pace than the first quarter, and consumer price inflation was once again positive in June; the increase and trend in prices should be stimulated by the already decided monetary policy measures. An additional contribution may derive from the impact on the supply of credit of new targeted refinancing operations launched last June, in which the Italian banks have so far taken part for approximately EUR 139 billion (29 net of repayments of the funds obtained in the first series of targeted operations). In our country, the recovery continues gradually, driven by domestic demand, although exports are affected by the weakness of non-eu markets. Household consumption benefits from the increase in disposable income and the improvement of working conditions; the growth of investments continued, also supported by the incentives introduced by the last Stability Law. However, the economic indicators suggest that in the second quarter, GDP, as in all the Eurozone, increased at a rate lower than that of the prior period. Despite a slowdown compared to last year - when the tax relief was applied in full on recruited persons - the upward trend in employment continued in the first quarter of the year. The overall unemployment rate remained stable due to the increase of the participation in the labour market; however, unemployment among young people further decreased. Consumer price inflation was negative since last February; its trend was affected by the decline in the energy component, as well as by a very low trend in underlying components, which were still affected by wide margins of idle capacity. Households and businesses expect a modest price growth in the coming months. According to the estimates of the analysts, consumer price inflation was once again positive on the average of this year. 3 Source: Bank of Italy Economic Bulletin no Updated with the figures available on 8 July 2016, unless otherwise indicated. 9

10 The Italian banking system Credit to the private non-financial sector increased at a moderate pace, but stronger in sectors where the recovery in the economic activity started more permanently: loans to the businesses were at a standstill, but there was a sharp increase in those to manufacturing companies. The gradual improvement of credit quality increased. The share prices of the Italian banks were affected, more than in other countries, by the concerns that the weakness of the markets may reduce their ability to transfer non-performing loans or raise capital; the preparation of different measures for protecting financial stability was started. In the three months ending in May, the growth in loans to the private non-financial sector increased at 1 per cent (net of seasonal effects and year on year) mainly supported by the expansion of loans to households (2.2 per cent). The growth of disposable income and the most favourable labour market conditions have helped to strengthen the consumer credit expansion, and in particular the one for the purchase of cars. Loans for purchasing homes increased by 1.5 per cent reflecting the sharp rise in properties bought/sold. The trend in loans to businesses stood at moderately positive values (0.1 per cent over three months ending in May). However, different trends depending on the business segment and the size of the company were recorded. Credit for manufacturing companies increased (2.2 per cent over twelve months ending in May); loans to companies operating in the service sector marginally increased; loans to property developers continued to decrease. There remains a gap between the performance of loans to companies with 20 or more employees and to smaller businesses (0.5 and -2.4 per cent, respectively). From February to May, total funding of Italian banks was basically stable; retail funding benefited from the expansion of deposits from residents, which more than offset the drop in bonds held by households. Bonds placed with banks and institutional investors continued to decrease, in line with what was observed in the first months of the year. In May, the average rate on new loans to businesses further decreased compared to February (of approximately 10 basis points, to 1.8 per cent). The cost of new mortgages decreased by approximately 20 basis points for those with a fixed rate (to 2.5 per cent) and by 10 for those with a floating rate (to 1.8). The differential of the cost of the credit with the Eurozone was almost cancelled for loans to businesses and remained low for households (20 basis points). The level of non-performing loans inherited from the recession remained high, but the quality of the credit continued to benefit from the gradual cyclical recovery. Net of seasonal effects and year on year, in the first quarter of 2016, the flow of new non-performing loans to total loans, which had reached a peak of 5.9 per cent in the fourth quarter of 2013, decreased to 2.9 per cent, the lowest value from the start of the global financial crisis. The drop concerned both businesses (to 4.4 per cent, from 4.9 in the previous quarter) and households (to 1.9, from 2.4). The amounts also started to decrease: for the banking groups, the portion of gross non-performing loans to total loans slightly decreased compared to the previous quarter (from 18 to 17.8 per cent), as well as their portion net of impairment losses (from 10.7 to 10.5 per cent). The financial market in Italy The result of the referendum in the United Kingdom caused a significant fall in share prices on the Italian market, partly reabsorbed in the following weeks. The sharp increase in risk aversion of investors and the reorganisation of portfolios towards less risky assets penalised especially the share prices of banks. The impact was limited on the market of Italian 10

11 government bonds, which benefited in all the Eurozone from the Eurosystem asset purchase programme. The result of the referendum caused a sharp decline in share prices and an increase in the expected volatility. The strengthening of the preference of the investors for financial assets considered safer (flight to safety), penalised to a greater extent the countries and sectors considered more vulnerable by the investors themselves. From the end of March, the general Borsa Italiana index decreased by 11 per cent against a 5 per cent decrease in the Eurozone as a whole. From the referendum, bank prices dropped by 29 per cent in Italy (by 17 in Spain, 20 in France, 26 in Germany and 23 in the Eurozone as a whole). The intensification of the fears on prospects for growth increased those on profitability and, as a result, on the financial conditions, of the Italian and European banking system. The spreading of the concerns that the continuing weakness of the markets may reduce their ability to transfer non-performing loans or raise capital affected also our banks. Overall, in the quarter, the index of the Italian banking sector lost around 31 per cent (53% from the beginning of the year). Italian Government bonds were not considerably affected by the tensions, benefiting from the Eurosystem purchase programme; from the end of March, the yields on government bonds with a maturity of three to ten years remained basically unchanged, whereas those with longer-term maturities decreased. In the same period, the differential between the yield of the Italian 10-year bond and that of the corresponding German bond increased by approximately 30 basis points, also as a result of the preference of investors for financial assets considered safer (flight to safety). 11

12 Events of bank operations during the first half of the year The most important events that characterised the management of the Creval Group during the first half of 2016 and that, if necessary, were the subject-matter of specific disclosures to markets are mentioned below. New organisational structure of the Parent After the renewal of the board by the Shareholders' Meeting and the appointment of Miro Fiordi as Chairman, the Board of Directors appointed Mauro Selvetti as the new General Manager and approved a new organisational structure for the Parent, in force as from 1 July The new organisational structure - natural continuation of the structure launched in March allows the top managers to further focus on specific areas of responsibility with a view of increasing the specialisation of the structures and optimising the control and the management processes of the Group activities. The new structure - graphically shown below - includes the identification of the following areas of responsibility: - Chief Commercial Officer, reporting directly to the General Manager, within which the Corporate, Retail, Private Managements, the Regional and Digital Bank Managements work, in addition to the pricing and product development functions. - Chief Financial Officer, reporting directly to the General Manager, which controls the Finance, Planning and Control, Administration and Accounting Departments. - Chief Operating Officer, who is responsible for the global operations of the Group: in addition to the activities referring to the operating machine allocated with Creval Sistemi e Servizi (IT, organisation, back office, real estate and support services), he is also directly responsible for the Human Resources Department and Legal Department, by finally coordinating the real estate repossession through the Group's REOCO (Stelline Real Estate). - Chief Lending Officer, who is in charge of the Loans Department and the newly established Non Performing Exposures (NPE) Department, which in turn controls the Dispute, Loan Trend Management and non core unit Divisions, dedicated to the proactive management and valuation of the non-performing loans in line with the objectives defined in the Business Plan. - Chief Risk Officer, who is responsible for the risk management function, with a strong focus in defining and implementing the Group's Risk Appetite Statement and related controlling policies. 12

13 Transfer of 2% of Anima Holding S.p.A. ordinary shares On 31 May 2016, the transfer of a share package of Anima Holding S.p.A., made up of 6,000,000 ordinary shares, equal to 2% of the Company's share capital, a total equivalent value of EUR 33 million, was finalised through an accelerated bookbuilding procedure reserved to Italian and foreign institutional investors. The operation following which there remains an equity investment of approximately 0.8% of the share capital of the Company allowed to recognise a capital gain of approximately EUR 21.4 million. Sale of the equity investment in Istifid S.p.A. On 2 May 2016, the sale of the entire investment in Istifid S.p.A. of 35.5% of the share capital - with the carrying amount in the consolidated financial statements of EUR 2.2 million - to Unione Fiduciaria S.p.A. was completed. Part of the fee for the sale of the shares of Istifid may be reinvested by purchasing shares of Unione Fiduciaria up to a maximum of 7.93% of the share capital. The transaction will allow Creval to further enhance the range of services to its customers benefiting from the experience and professionalism of Unione Fiduciaria. Fondo Atlante equity investment On 15 April 2016, Credito Valtellinese joined the closed-end alternative investment fund called Atlante, set up by SGR Quaestio Capital Management, by subscribing shares of approximately EUR 36 million and undertaking the commitment to subscribe further units of the Fondo of approximately EUR 24 million. Among other things, this transaction allows, in particular, to support the start of a new and qualified investor in the market of NPLs, helping to improve trading liquidity and to gradually align demand and supply. 13

14 Initiatives for the management and valuation of non-performing loans The management and valuation of total non-performing loans, also through transfers on the market, is an important strategic objective of the Creval group. In this perspective, the establishment of the new NPE Department, which is responsible for the entire sector of problem loans, past-due loans, unlikely to pay and bad loans - and related assets, with a view to improving workout performances also through transfers on the market and the recovery levels of non-performing loans, is established. During the first half-year, the Group completed two transfers of NPE on the market for a gross book value ( GBV ) of approximately EUR 330 million, whereas an agreement was signed for the sale of an additional portfolio for a value approximately of EUR 100 million of GBV, which will be implemented within this financial year. Therefore, thanks also to the strategic partnerships with Cerved Credit Management and Yard Credit and Asset Management, the asset disposal plan continued, also shared with the Supervisory Authority, which should allow to achieve already within the current year a significant reduction of the stock of NPL and a consistent gradual improvement of credit quality indicators. The above operations are explained in greater detail below. Sale of a secured and unsecured bad loan portfolio to Credito Fondiario On 1 February 2016, the deed of transfer to Credito Fondiario S.p.A. of a portfolio - known as Cerere portfolio - consisting in secured (44%) and unsecured (56%) bad exposures for a gross carrying amount of approximately EUR 302 million, including default interests, was completed. The portfolio consists of a high number of exposures, mainly towards businesses, backed, for the secured portion, by mainly commercial-industrial guarantees. Sale of a secured non-performing loan portfolio to specialised investor In June 2016, the sale of a portfolio consisting of secured bad loans - known as Arizona portfolio was completed for a gross book value of approximately EUR 21 million, against a total valuation of the portfolio of approximately 35% of the GBV. The portfolio consists of 15 credit exposures mainly towards companies in the real estate sector, with mainly a residential underlying guarantee. This operation - albeit involving a relatively small amount - also certifies the gradual improvement of the conditions of the Italian secondary market of the secured NPLs, which starts to express valuations more consistent with the fundamental values of the underlying assets and the gradual recovery prospects of real estate in Italy. Agreement for the sale of a secured non-performing loan book to Credito Fondiario On 27 May 2016, an agreement for the sale of a portfolio mainly consisting in secured unlikely to pay - known as Gavia portfolio - claimed with regard to enterprises of the real estate sector, for a gross book value of approximately EUR 103 million, against a total valuation of the portfolio of approximately 41% of the GBV. The transferred mortgage loan agreements have underlying real estate assets for diversified purposes. The transaction will be completed within the current financial year, subject to the required authorisations, with respect to Credito Fondiario, from the Bank of Italy. 14

15 The operational structure, the customers and the commercial performance indicators The territorial network At 30 June 2016, the branches forming the territorial network of the Credito Valtellinese Group are 526 as represented below. Other distribution channels The following other distribution channels complete the operational structure: ORGANISATIONAL DATA 30/06/ /12/2015 Change Number of ATMs % Number of POS 26,886 25, % Bancaperta line users 294, , % Interbank Corporate Banking contracts 17,436 17, % At the end of June 2016, "active" Internet users in the Group - customers who have performed at least one transaction in the last six months - total 294,067, compared to 266,234 at the end of the prior year, with an increase of 10.45%. 15

16 Customers and commercial performance indicators At 30 June 2016, the Group s customers numbered 985,554. They numbered 978,697 at the end of 2015 and 979,656 at the end of the first quarter of The constant growth confirms the Group's capacity to attract new customers and maintain its customer base in its territories of origin, with a retention rate of approximately 98.9%. The cross selling indicator - equal to 4.2 products on average per customer (calculated on the basis of the "ABI method"), attests also a high degree of optimisation of commercial relations. The personnel At the end of June 2016, the registered workforce of the companies included in the consolidation scope of the Group consisted of 4,125 collaborators (compared to 4,152 resources at the end of 2015). These include 26 collaborators employed by companies or entities outside the Group, among them Fondazione Gruppo Credito Valtellinese, Global Assistance, the Pension Fund for the Employees of the Credito Valtellinese Group and Cerved Group. In terms of professional categories, the total workforce of 4,125 can be broken down as follows: - 51 executives; - 1,551 middle managers; - 2,523 workers in other professional categories. Workforce by contract category at 30 June

17 Performance of Credito Valtellinese shares During the first half of the year, the financial markets recorded a high volatility. Share prices underwent significant losses in January February, then partly recovered. The outcome of the referendum on the permanence of the United Kingdom in the European Union led to a new further fall in share prices. The decline was particularly severe for European banks, and even more pronounced for Italian banks, which were affected by specific factors of the sector, such as weak prospects for growth for the coming years, the problem of nonperforming loans, the uncertainties related to the development of the regulatory framework. The increase in risk aversion of investors and the reorganisation of portfolios towards less risky assets penalised especially the share prices of banks, which struggle to find a trend in line with fundamentals. In line with the prices, the implied volatility of the banking sector increased to an extent greater than that of the general index. The period of uncertainty continued until the publication of the EBA/ECB stress tests in late July. The charts below show the trend of Credito Valtellinese share prices in the first half of

18 The second chart shows the Credito Valtellinese share performance compared with FTSE - ALL SHARE and FTSE-IT Financial indices. (Base 30 December 2015 = 100) Source: Bloomberg, adjusted values 18

19 Information on the main statement of financial position items and on consolidated income statement figures The interim results are commented upon in summary format, drawn up on a consolidated basis, reclassified according to the presentation criteria considered most appropriate for presenting a fair view of the Group s operating performance. The aggregates and reclassifications regarding items of the financial statements as envisaged in Bank of Italy Circular no. 262/05 as amended are detailed below. The reclassified consolidated statement of financial position is shown below. (in thousands of EUR) ASSETS 30/06/ /12/2015 Change Cash and cash equivalents 151, ,462 Financial assets held for trading 42,746 51, % % Available-for-sale financial assets 5,812,543 5,321, % Loans and receivables with banks 776, , % Loans and receivables with customers 18,614,840 19,049, % Equity investments 9,164 9, % Property, equipment and investment property and intangible assets (1) 568, , % Non-current assets held for sale and disposal groups 50,633 2,478 n.s. Other assets (2) 1,122,532 1,005, % Total assets 27,149,323 26,901, % (1) Include the items "120. Property, equipment and investment property" and "130. Intangible assets"; (2) Include the items "140. Tax assets" and "160. Other assets". (in thousands of EUR) LIABILITIES AND EQUITY 30/06/ /12/2015 Change Due to banks 1,770,058 2,040, % Direct funding from customers (1) 21,870,299 21,694, % Financial liabilities held for trading 1,311 1, % Hedging derivatives 339, , % Other liabilities 874, , % Provisions for specific purpose (2) 182, , % Equity attributable to minority interests 3,865 4, % Equity (3) 2,107,269 2,183, % Total liabilities and equity 27,149,323 26,901, % (1) Includes the items "20. Due to customers" and "30. Securities issued"; (2) Include the items "80. Tax liabilities", "110. Post-employment benefits" and "120. Provisions for risks and charges"; (3) Includes items "140. Valuation reserves", "170. Reserves", "180. Share premium reserve", "190. Share Capital", "200. Treasury shares" and "220. Profit (loss) for the period". Loans and receivables with customers At 30 June 2016, loans and receivables with customers amounted to EUR 18.6 billion compared to EUR 19 billion at the end of December The loan trend continued to show a gradual improvement. New loans in the first half reached EUR 1.3 billion, with an increase of almost 35% compared to the same period last year. The new mortgages to private individuals exceeded EUR 430 million (+17% compared to the same period last year), with 19

20 a percentage of subrogations limited to 13%. The new loans to businesses of EUR 883 million increased by 48%. Albeit positive, the trend is conditioned by the weakness of economic recovery and in particular by the trend in investment demand, despite the easing of offer policies. (in thousands of EUR) 30/06/ /12/2015 Change Current accounts 3,236,439 3,363, % Reverse repurchase agreements 481, , % Mortgages 8,964,162 8,732, % Credit cards, personal loans and salary-backed loans 264, , % Finance leases 480, , % Other loans 1,845,921 2,021, % Debt instruments 38,760 28, % Total net performing loans and receivables 15,311,316 15,692, % Bad loans 1,228,602 1,207, % Unlikely to pay 1,810,845 1,835, % Past due non-performing loans 264, , % Total net non-performing loans and receivables 3,303,524 3,357, % Total net loans and receivables 18,614,840 19,049, % Positive signs are confirmed also with regards to credit quality, in line with the reduction year on year of the default rates of non-financial companies, certified by the most recent analysis. At the end of the period, Non-Performing Exposure (NPE), net of impairment losses and without considering the positions reclassified as Assets held for sale, totalled EUR 3.3 billion, (-1.6% compared to the end of December 2015), with a total coverage ratio of 37.8%, down compared to 40.3% at the end of December due to the sales of non-performing loans portfolio completed during the period. In detail, net bad loans amounted to EUR 1.2 billion, with a coverage ratio of 52.8%. The unlikely to pay amounted to EUR 1.8 billion, with a coverage ratio of 25.1%, whereas EUR 264 million were represented by past due and/or overdue non-performing loans. 20

21 30/06/ /12/2015 (in thousands of EUR) Gross amount Impairment losses Carrying amount coverage % Gross amount Impairment losses Carrying amount coverage % Non-performing loans Bad loans 2,601,364-1,372,762 1,228, % 2,811,298-1,604,141 1,207, % Unlikely to pay 2,418, ,654 1,810, % 2,462, ,195 1,835, % Past due non-performing loans 289,040-24, , % 346,130-31, , % Total non-performing loans 5,308,903-2,005,379 3,303, % 5,620,037-2,262,405 3,357, % Performing loans 15,416, ,293 15,311, % 15,806, ,610 15,692, % Total loans and receivables with customers 20,725,512-2,110,672 18,614,840 21,426,765-2,377,015 19,049,750 The above data do not include loans and receivables with customers classified among assets held for sale related to the Gavia agreement described above. Funding from customers Direct funding amounted to EUR 21.9 billion, up by 0.8% compared to EUR 21.7 billion at the end of December Net of the increase in institutional investors, the trend slightly decreased (-0.8%) driven by the reduction in funding through bonds (-11%) against an increase in time deposits (+12%) and more mitigated increase in current accounts. (in thousands of EUR) 30/06/ /12/2015 Change Current accounts and deposit accounts 13,585,902 13,469, % Reverse repurchase agreements 2,476,122 2,154, % Term deposits 1,646,009 1,535, % Other 498, , % Due to customers 18,206,550 17,612, % Securities issued 3,663,749 4,082, % Total direct funding from customers 21,870,299 21,694, % The change in repurchase agreements mainly refers to the increase in transactions with Cassa di Compensazione e Garanzia. Indirect funding amounted to EUR 11.3 billion, compared to EUR 12.1 billion at the end of December 2015 and EUR 11.5 billion at the end of March The reduction is focused on safe custody, marked by the negative market effect recorded as a whole from the beginning of the year on equity. Vice versa, assets under management, which totalled approximately EUR 6.9 billion, recorded a slight increase, driven by insurance funds. Net deposits in the area of managed funds were affected by the phase of marked volatility of the financial markets. 21

22 (in thousands of EUR) 30/06/ /12/2015 Change Asset management 2,139,371 2,266, % Mutual funds 2,380,931 2,407, % Insurance funds 2,356,608 2,118, % Total Managed funds 6,876,910 6,792, % Assets under administration 4,402,070 5,300, % Total indirect funding 11,278,980 12,092, % Financial assets and liabilities held for trading and available for sale Financial assets amounted to EUR 5.9 billion. Of these, EUR 5.5 billion were represented by Italian Government bonds, mainly classified in the AFS -Available for sale portfolio, with a duration of approximately 2.6 years, considering the transactions for interest-rate risk hedging. The valuation reserve on AFS securities, recorded among equity items net of tax effects, was positive by EUR 16 million (EUR 71 million at the end of December 2015). The positive reserve relating to Government bonds amounted to EUR 14 million (EUR 27 million at the end of December 2015). (in thousands of EUR) 30/06/ /12/2015 Change Financial assets and liabilities held for trading Debt instruments 40,581 49, % Equity instruments and OEIC units 1,302 1, % Derivative financial instruments with positive fair value % Total assets 42,746 51, % Derivative financial instruments with negative fair value -1,311-1, % Total assets and liabilities 41,435 49, % Available-for-sale financial assets Debt instruments 5,623,628 5,111, % Equity instruments and OEIC units 188, , % Total 5,812,543 5,321, % Hedging derivatives -339, , % Financial assets and liabilities 5,514,936 5,101, % The liquidity position The liquidity position was largely positive. The net balance of overall liquidity at three months is currently equal to EUR 4.1 billion. The exposure to the ECB for refinancing operations TLTRO2 (Targeted Longer-Term Refinancing Operations) stood at EUR 1.5 billion. 22

23 Equity investments The total value of equity investments at 30 June 2016, measured at equity, was EUR 9 million, up compared to the end of December 2015, mainly due to operating results (net of dividend distribution) and changes in valuation reserves. The portfolio represents only investments in companies subject to joint control and to significant influence - companies in which Credito Valtellinese has a direct or indirect holding of at least 20% of voting rights, "potential" voting rights or, albeit with a lower percentage, has the power to influence financial and management policy through specific legal positions. The main equity investments are summarised. (in thousands of EUR) equity investment % 30/06/2016 Global Assistance S.p.A. 40.0% 4,104 Creset - Crediti, Servizi e Tecnologie S.p.A. 40.0% 2,401 Other 2,659 Total 9,164 23

24 Equity attributable to the owners of the parent The equity attributable to the owners of the parent at 30 June 2016 amounted to EUR 2,107 million, compared to the value recognised at the end of 2015 (EUR 2,183 million), mainly due to the profit for the period, dividend distribution and the changes in valuation reserves. The statement of reconciliation between the Parent s equity and profit for the period and the corresponding amounts resulting from the consolidated financial statements at the same date, is illustrated below. (in thousands of EUR) 30/06/ /12/2015 Equity of which: profit (loss) for the period Equity of which: profit (loss) for the period Balances as per parent financial statements 2,182,137 24,765 2,251, ,092 Investee results as per separate financial statements: - consolidated on a line-by-line basis 1,876 1,876 (10,769) (10,769) - equity accounted Amortisation of positive differences: - past years (33,538) - (33,538) - Differences compared to carrying amounts for: - companies consolidated on a line-by-line basis (33,752) - (70,126) - - equity investment impairment reversal and goodwill impairment recognition ,016 55,016 - equity accounted companies 1,648-1,814 (137,244) Adjustment to dividends collected during the period: - on retained earnings - (6,737) - (18,219) Other consolidation adjustments: - elimination of intragroup profit and loss (10,939) (4) (11,140) (27) - other adjustments (504) (1,105) (83) 3,468 Balances as per consolidated financial statements 2,107,269 19,136 2,183, ,277 24

25 Regulatory capital and capital ratios In pursuance of the transitional regime in force since 2014, Common Equity Tier 1 (CET1), without including the profit being formed, amounted to EUR 1,999 million against riskweighted assets (RWAs) of EUR 15.3 billion. Total own funds amounted to EUR 2,227 million. The phased-in capital ratios amounted to: - 13% for Common Equity Tier1 ratio, - 13% for Tier1 ratio, % for Total capital ratio. (in thousands of EUR) 30/06/ /12/2015 Common Equity Tier 1 capital (CET1) 1,999,406 2,034,337 Tier 1 Capital 1,999,406 2,034,531 Total Own Funds 2,227,103 2,344,554 Credit risk and counterparty risk 1,110,771 1,121,714 Credit valuation adjustment risk 2,191 2,248 Settlement risks - - Market risks 633 1,126 Operational risk 113, ,193 Other calculation elements - - Total capital requirements 1,226,788 1,238,281 Risk-weighted assets 15,334,847 15,478,506 Common Equity Tier 1 capital / Risk-weighted assets (CET1 capital ratio) 13.04% 13.14% Tier 1 capital/risk-weighted assets (Tier 1 capital ratio) 13.04% 13.14% Total own funds/risk-weighted assets (Total capital ratio) 14.52% 15.15% 25

26 Income statement The reclassified consolidated income statement is shown below. (in thousands of EUR) ITEMS 1st half of st half of 2015 Change Net interest income 211, , % Net fee and commission income 136, , % Dividends and similar income 4,128 1, % Profit of equity-accounted investments (1) , % Net trading and hedging income (expense) and profit (loss) on sales/repurchases 35,729 50, % Other operating net income (4) 8,746 11, % Operating income 396, , % Personnel expenses (146,386) (144,766) 1.12% Other administrative expenses (2) (98,713) (87,847) 12.37% Depreciation/amortisation and net impairment losses on property, equipment and investment property and intangible assets (3) (16,053) (17,529) -8.42% Operating costs (261,152) (250,142) 4.40% Operating profit 135, , % Net impairment losses on loans and receivables and other financial assets (151,777) (158,315) -4.13% Net accruals to provisions for risks and charges (1,883) (3,855) % Net gains on sales of investments 26,252 6 n.s. Pre-tax profit from continuing operations 7,679 40, % Income taxes 13,612 (7,554) % Post-tax profit from continuing operations 21,291 32, % Profit from discontinued operations - 20, % Profit for the period attributable to minority interests (2,155) (2,202) -2.13% Profit for the period 19,136 50, % (1) Profit-(losses) of equity-accounted investments include profit-(losses) of equity-accounted investments included in item 240 "Net gains on investments"; the residual amount of that item is included in gains on sales of investments, together with item 270 "Net gains on sales of investments"; (2) Other administrative expenses include recoveries of taxes and other recoveries recognised in item 220 "Other operating net income" (EUR 27,117 thousand in the first half of 2016 and EUR 29,962 thousand in the first half of 2015); (3) Depreciation/amortisation and net impairment losses on property, equipment and investment property and intangible assets include items 200 "Depreciation and net impairment losses on property, equipment and investment property", 210 "Amortisation and net impairment losses on intangible assets" and the accumulated depreciation of costs incurred for leasehold improvements, included in item 220 "Other operating net income" (EUR 1,073 thousand in the first half of 2016 and EUR 1,442 thousand in the first half of 2015); (4) Other income and charges correspond to item 220 "Other operating expenses/income" net of the above reclassifications. In the first half of 2016, net interest income stood at EUR 211 million, decreasing by more than 11%, compared to EUR 238 million of the corresponding 2015 period. The decline was affected both by the fall in the market parameters (from June 2015 to June 2016, Euribor decreased by almost 30 bps, determining a parallel reduction of the commercial spread, currently 2.39%), and by the lower contribution of interests from carry trade, related to the reorganisation of the securities portfolio. The improvement of the cost of funding (75 bps vs 89 bps at the end of June 2015) was not enough to offset the more pronounced 26

27 decrease (237 bps vs 278 bps at the end of June 2015) of asset yields, against volumes basically unchanged. Net fee and commission income amounted to EUR 136 million and recorded a 3.5% decrease compared to EUR 141 million of the first half of 2015, but slightly increased compared to the first quarter of last year. Despite the reflective trend of the financial markets, fee and commission income of the finance sector (placement of securities and managed funds and bancassurance) show a moderate increase on an annual basis (+2%), against a more significant progress compared to Q1 (+3%). Vice versa, other commissions decreased, in particular, those related to the credit sector, which are affected by the weakness in volumes. Net trading and hedging income and profit on sales/repurchases stood at EUR 36 million, compared to EUR 51 million of the corresponding prior period. This item includes the positive contribution of the sale of 2% of Anima Holding S.p.A., recorded in the AFS securities portfolio, of EUR 21.4 million, as well as the negative effect for the sale of non-performing loans during the period of approximately EUR 14 million. Operating income thus totalled EUR 396 million, down by 12.5% compared to EUR 453 million of the prior period. Operating costs totalled EUR 261 million compared to EUR 250 million of the same corresponding period, and include costs for the contribution to Fondo SRF of EUR 7.6 million, as well as the fee on the DTAs that can be transformed in tax asset, pursuant to Article 11 of Italian Law Decree no. 59 of 3 May 2016 converted into Italian Law no. 119 of 30 June 2016, of EUR 3.2 million. Net of this component, costs remained substantially unchanged. Personnel expenses amounted to EUR million compared to EUR million, whereas other administrative expenses amounted to EUR 98.7 million including the contribution to SRF and the DTA fee - compared to EUR 87.8 million of the corresponding period of the prior year. The operating profit reached EUR 135 million, compared to EUR 203 million in the first half of Net impairment losses on loans and receivables and other financial assets totalled EUR 152 million, with a cost of credit risk of 161 basis points, down compared to EUR 158 million of the first half of Albeit decreasing and recording the consolidation of prospects for improvement in credit quality, the level of adjustments was still important with the clear objective of realigning the coverage levels, also in view of further transfers on the market, if possible within the current year, in line with what was planned and also shared with the Bank of Italy as part of the supervisory activity. Net gains on sales of investments of EUR 26 million include the additional sales price component of ICBPI, to be paid to the seller banks on the basis of the agreements signed in December 2015, by way of earn-out arising from the sale of the investment in VISA Europe held by Cartasì (controlled by ICBPI) to VISA Inc. 27

28 The pre-tax profit from continuing operations thus amounted to EUR 8 million. Income taxes for the period were positive and estimated in approximately EUR 14 million; they incorporate the tax benefit related to the ordinary ACE ( Aiuto alla Crescita Economica - Aid to economic growth) contribution as per Article 1 of Italian Legislative Decree 201/2011) accrued for EUR 6.7 million. Considering the profit attributable to minority interests of EUR 2 million, the consolidated profit for the period was EUR 19 million. 28

29 Related party transactions, risks and going concern prospects Related party and intragroup transactions The matter is mainly regulated: - by Article 2391-bis of the Italian Civil Code, whereby the governing bodies of companies resorting to the equity market adopt, according to general principles indicated by Consob, rules that assure "the transparency and substantial and procedural correctness of related party transactions" carried out directly or through subsidiaries, - by the "Related Party Transaction Regulation" adopted by Consob with resolution no of 12 March 2010, as amended, (hereinafter also the "Consob Regulation"), implementing the delegation contained in Article 2391-bis of the Italian Civil Code, as well as, in relation to the specific business, - by the supervisory provisions issued by the Bank of Italy on December 2011 on risk assets and conflicts of interest of banks and banking groups with respect to "Associated Parties" (9th update to Circular 263 of 27 December hereinafter also referred to as the "Bank of Italy Regulation"), provisions that complement what is provided by the Consob regulation. In compliance with the combined provision of the above-mentioned regulations, the Board of Directors approved the new Procedures concerning Related Party Transactions and Associated parties (hereinafter also the RPT Creval Procedures ), in the last updated version, effective as from 31 December The RPT Creval Procedures establish the procedures and rules for ensuring transparency and substantive and procedural correctness in related party transactions carried out directly by Credito Valtellinese or by means of its subsidiaries. They also comply with the applicable regulations of the Bank of Italy on risk assets and conflicts of interest towards associated parties. In accordance with current regulations, the document is published on the website, Corporate Governance section Corporate documents. Still on the basis of the provisions of the Bank of Italy Regulation, the Board of Directors of the Parent approved the "Policies regarding controls on risk activities and on conflicts of interest towards associated parties" (hereinafter also the "Policy"), document that defines the internal policies regarding controls on risk activities and on conflicts of interest towards associated parties, and was made known to the Ordinary Shareholders Meeting held on 27 April 2013, subsequently amended with Board resolution of 9 December 2015 and made known to the Ordinary Shareholders Meeting of 23 April The Policy describes, in relation to the operational features and the strategies of the Bank and of the Group, the business segments and the types of business relations, also other than those implying the assumption of risk assets, in relation to which conflicts of interest may arise, as well as the safeguards inserted in the organisational structures and in the internal control system to ensure constant compliance with prudential limits and the above decision-making procedures. The document also summarises the principles and rules applicable to transactions with associated parties that were used for the preparation of the relevant Procedures. With reference to intra-group transactions, relations with companies in the Credito Valtellinese Banking Group were established within an organisational model - as widely illustrated in this report based on which each legal entity focuses only on its own core 29

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

31 Risk management The clear identification of risks to which the Credito Valtellinese Banking Group is actually and potentially exposed constitutes the essential prerequisite for a knowledgeable assumption of said risks and their effective management, making use of the appropriate mitigation and transfer tools and techniques. In line with the regulatory provisions, with the operational and organisational characteristics that derive from its identity as a subject belonging to the co-operative credit system, from the features that characterised it in over a hundred years of its history and from its mission of service to the economic and social development of the territories where it is established, the different types of risk that the Group assumes and manages in the carrying on of its activities are: - credit and counterparty risk (including country and transfer risk); - credit valuation adjustment risk; - market risk for the trading book (including the basis risk); - operational risk; - IT risk; - interest rate risk for the banking book; - concentration risk of the loans and receivables from customers portfolio; - liquidity risk; - real estate risk; - compliance risk; - risk of money laundering and terrorist financing; - risk towards associated parties; - reputational risk; - risk deriving from securitisations; - residual risk; - strategic risk (including risk from investments); - risk of excessive leverage; - sovereign risk; - model risk; - risk related to the portion of encumbered assets (asset encumbrance). The Group adopted a detailed and strong internal control system (consisting of rules, functions, structures, resources, processes and procedures) the aims of which are reducing the risk within the limits indicated in the framework of reference for determining the risk appetite of the bank (Risk Appetite Framework, RAF), prevention of the risk that the bank is involved, even unintentionally, in illegal activities (such as money laundering, usury and terrorist financing) and compliance of the transactions with the law and supervisory regulations, as well as with policies, regulations and internal procedures. In order to maintain adequacy over time, the risk control units as a whole are assessed and checked in terms of completeness, adequacy, functionality and reliability by the risk management, compliance and internal audit departments. 31

32 The current risk management systems are consistent with the business model, strategy and risk profile of the Group. Risk management, based on criteria of prudence, is implemented within a precise organisational context, which includes the set of internal rules, operating procedures and control structures and is broken down according to a model that integrates control methods at various levels, all converging with the objectives of ensuring efficiency and effectiveness of operating processes, safeguarding integrity of corporate assets, protecting from losses, ensuring reliability and integrity of information and verifying proper execution of activities with respect to the internal and external regulations. The assessment of exposure to risks is carried out on a regular basis, with the appropriate frequency reported periodically to corporate bodies. The internal capital adequacy assessment (ICAAP) and internal liquidity adequacy assessment processes (ILAAP) are of particular note, also in terms of prudential regulations. All-in-all, the coordinated action of governance, organisation, risk management and internal control system allow to obtain a full picture and an adequate management of the assumed risk and the awareness, looking ahead, of the expected risk. Detailed information on the general characteristics of the control systems, the risk management, measurement and control policies are contained in the Notes to the 2015 Consolidated Financial Statements (Part E Information on risks and hedging policies) and in the informative report on the third pillar at 31 December 2015 made available on the Group's website at With a special reference to the Internal control system, effective as from 1 July 2016, the definition of the new structure of the General Management and the appointment of the Chief Risk Officer responsible for the risk management and validation function are of note. Information on main risks and uncertainties to which the Group is exposed In line with its focus on retail banking, the Group is mainly exposed to credit risk. In terms of capital requirement, the exposure to operational risks is also significant: these risks are assumed in that they serve as a means for carrying out the banking business. The exposure to financial and market risks is limited, given that the objective of limiting the volatility of the forecast results would not be compatible with an intensive speculative financial activity, with a pronounced transformation of maturities and with treasury management as a profit centre rather than a service. The current composition of the assets also involves an exposure to the sovereign risk, whereas the other risks are of lesser significance. The risk profile at the end of the reporting period is consistent with the risk appetite defined by the Board of Directors, which, in line with the identity, values, business model and strategic input of the Group, resolved, also for the current financial year, to: - allocate the main part of the capital to the credit risk, which represents the core business of a retail Banking Group; - confirm a low propensity to other risks with business purpose; - confirm the aim of limiting/minimising exposure for pure risks to which no return is associated. The actual risk exposure complies with the tolerance thresholds set taking into account the maximum technically assumable risk, it is consistent with the capital allocation objectives and complies with both the operational limits and prudential supervision requirements. 32

33 For detailed information on the exposure of the Group to the risks, please refer to the section "Information on risks and related hedging policies" of this report. Information on disputes For detailed information on disputes, tax or otherwise, and on the main pending legal actions, please refer to the Notes to the condensed interim consolidated financial statements. Information on business outlook, with a particular reference to going concern assumptions With regard to the going concern assumption, the Board of Directors confirms its reasonable expectations that the company and the Group will remain a going concern in the foreseeable future and, consequently, confirms that the condensed interim consolidated report was prepared on a going concern basis. The Board confirms that the financial position of the companies and of the Group and the result of operations have brought to light no symptoms that could imply the uncertainty of going concern assumptions. As regards the requirements relating to impairment testing and uncertainties in the use of estimates, please refer to the information provided in the special sections in the Notes to the condensed interim consolidated financial statements. 33

34 Events after the close of the half-year There were no events after the close of the half-year. Current-year outlook The most recent surveys on the economy confirm a situation of growth in the second quarter, but at a slower pace than in the first half of the year. Therefore, the short-term outlook continued to be characterised by a moderate recovery, affected by the result of the vote in Great Britain and by other geopolitical uncertainties, low growth prospects in emerging markets, required financial statement adjustments in several sectors of the economy and the slow implementation of structural reforms. In this context, the prospects for growth of the European economy were still characterised by risks. In Italy, the expected growth remained moderate, with a positive trend expected for fixed investments and prospects for employment remained positive. According to the most recent projections, the GDP growth rate for the year in progress is expected to approach +1%. In a weak economic recovery scenario, the profitability of banks was also affected by an operating context influenced by increasing pressures on margins - negative interests and volatility of financial markets had a significant impact on net interest income and net fee and commission income - and by management costs, also through sales on the market, of problem loans, in a strict regulatory framework still changing. Current-year outlook is affected by the operating context. The results for the year may be affected by important actions, in terms of adjustments to loans, consistent with the strategic objective to reduce significantly the stock of non-performing loans and improve the recovery performance. Sondrio, 5 August 2016 The Board of Directors 34

35 CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 35

36 Condensed interim consolidated financial statements Consolidated statement of financial position (in thousands of EUR) ASSETS 30/06/ /12/ Cash and cash equivalents 151, , Financial assets held for trading 42,746 51, Available-for-sale financial assets 5,812,543 5,321, Loans and receivables with banks 776, , Loans and receivables with customers 18,614,840 19,049, Equity investments 9,164 9, Property, equipment and investment property 449, , Intangible assets 119, ,640 of which: - goodwill 101, , Tax assets 712, ,444 a) current 75,330 74,823 b) deferred 637, ,621 as per Italian Law 214/ , , Non-current assets held for sale and disposal groups 50,633 2, Other assets 410, ,948 Total assets 27,149,323 26,901,681 LIABILITIES AND EQUITY 30/06/ /12/ Due to banks 1,770,058 2,040, Due to customers 18,206,550 17,612, Securities issued 3,663,749 4,082, Financial liabilities held for trading 1,311 1, Hedging derivatives 339, , Tax liabilities: 18,754 33,110 a) current 6,208 9,132 b) deferred 12,546 23, Other liabilities 874, , Post employment benefits 58,458 56, Provisions for risks and charges: 105, ,735 a) pension and similar obligations 39,761 36,618 b) other provisions 65,922 73, Valuation reserves -5,254 55, Reserves 207, , Share premium reserve 39,004 39, Share capital 1,846,817 1,846, Treasury shares (-) Equity attributable to minority interests (+/-) 3,865 4, Profit for the period (+/-) 19, ,277 Total liabilities and equity 27,149,323 26,901,681 36

37 Consolidated Income Statement (in thousands of EUR) ITEMS 1st half of st half of Interest and similar income 303, , Interest and similar expense (92,850) (129,274) 30. Net interest income 211, , Fee and commission income 149, , Fee and commission expense (13,052) (13,515) 60. Net fee and commission income 136, , Dividends and similar income 4,128 1, Profit (Losses) on trading 515 (16,165) 90. Fair value adjustments in hedge accounting (410) (260) 100. Profit (loss) on sale or repurchase of: 35,624 67,145 a) loans and receivables (14,087) 702 b) available-for-sale financial assets 50,302 67,038 d) financial liabilities (591) (595) 120. Total income 387, , Net impairment losses on: (151,777) (158,315) a) loans and receivables (150,208) (158,536) b) available-for-sale financial assets (3,951) (403) d) other financial transactions 2, Net financial income 235, , Administrative expenses: (272,216) (262,575) a) personnel expenses (146,386) (144,766) b) other administrative expenses (125,830) (117,809) 190. Net accruals to provisions for risks and charges (1,883) (3,855) 200. Depreciation and net impairment losses on property, equipment and investment property (10,690) (10,733) 210. Amortisation and net impairment losses on intangible assets (4,290) (5,354) 220. Other operating net income 34,790 39, Operating costs (254,289) (242,751) 240. Net gains on investments 26,610 10, Net gains (losses) on sales of investments (102) Pre-tax profit from continuing operations 7,679 40, Income taxes 13,612 (7,554) 300. Post-tax profit from continuing operations 21,291 32, Post-tax profit from discontinuing operations - 20, Profit for the period 21,291 53, Profit for the period attributable to minority interests (2,155) (2,202) 340. Profit for the period attributable to the owners of the parent 19,136 50,867 Basic earnings per share (basic EPS) in EUR Diluted earnings per share (diluited EPS) in EUR Basic earnings per share from continuing operations - in EUR Diluted earnings per share from continuing operations - in EUR

38 Consolidated Statement of Comprehensive Income (in thousands of EUR) Items 1st half of st half of Profit for the period 21,291 53,069 Other comprehensive income net of income taxes without reclassification to profit or loss 40. Defined-benefit plans (5,927) 2, Portion of valuation reserves of equity-accounted investments Other comprehensive income net of income taxes with reclassification to profit or loss 100. Available-for-sale financial assets (54,968) (62,939) 120. Portion of valuation reserves of equity-accounted investments - (934) 130. Total other comprehensive income net of income taxes (60,895) (61,269) 140. Comprehensive income (Item ) (39,604) (8,200) 150. Consolidated comprehensive income attributable to minority interests (2,122) (2,231) 160. Consolidated comprehensive income attributable to the owners of the parent (41,726) (10,431) 38

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

40 Changes during the year Allocation of prior year profit Equity transactions Equity Balance at 31/12/2014 Change in opening balances Balance at 1/1/2015 Reserves Dividends and other allocations Changes in reserves Issue of new shares Purchase of treasury shares Extraordinary dividend distribution Change in equity instruments Derivatives on treasury shares Stock options Changes in equity investments Comprehensive income 30/06/2015 Equity attributable to owners of the parent at 30/06/2015 Equity attributable to minority interests at 30/06/2015 Share capital: a) ordinary shares 1,849,683 1,849, ,846,817 2,855 b) other shares Share premium reserve 351, , ,244-10, , Reserves: a) income related 130, ,318-13,275 2, ,773-1,325 b) other ,786 10,653 Valuation reserves 16,017 16,017-1, ,269-46, Equity instruments Treasury shares Profit (loss) for the year -322, , ,596-3,279 53,069 50,867 2,202 Equity attributable to the owners of the parent 2,020,106 2,020,106 1,253-10,431 2,010,927 Equity attributable to minority interests 4,454 4,454-3, ,231 4,269 40

41 Consolidated Statement of cash flows Direct method (in thousands of EUR) A. OPERATING ACTIVITIES 1st half of st half of Cash flow from operating activities 136, ,900 - interest income received (+) 289, ,905 - interest expense paid (-) -93,875-98,963 - dividends and similar income (+) 4,128 1,989 - net fee and commission income (+/-) 129, ,613 - personnel expenses (-) -146, ,171 - other costs (-) -101, ,207 - other revenue (+) 81, ,137 - taxes (-) -25,653 9,913 - costs/revenues related to disposal groups net of tax (+/-) Cash flow generated/used by financial assets -311,696 1,323,238 - financial assets held for trading 8,657-54,673 - available-for-sale financial assets -484,585 1,099,795 - loans and receivables with customers 421, ,740 - loans and receivables with banks: on sight 11,221 10,803 - loans and receivables with banks: other -161, ,593 - other assets -107, , Cash flow generated/used by financial liabilities 199,605-1,674,144 - due to banks: on sight -53,823 8,579 - due to banks: other -214,119-3,124,359 - due to customers 467,970 1,495,824 - securities issued -325, ,310 - financial liabilities held for trading -3, other liabilities 328, ,269 Cash flow from (used in) operating activities 24,172-55,006 B. INVESTING ACTIVITIES 1. Cash flow generated by 3,174 26,198 - sales of equity investments 2, dividends from equity investments 644 3,982 - sales of property, equipment and investment property sales of subsidiaries and business units - 21, Cash flow used for -12,042-10,444 - purchase of property, equipment and investment property -7,289-7,387 - purchase of intangible assets -4,753-3,057 Cash flow from (used in) investing activities -8,868 15,754 C. FINANCING ACTIVITIES - dividend distribution and other -39,189-3,277 Cash flow from (used in) financing activities -39,189-3,277 NET CASH FLOW GENERATED/USED DURING THE PERIOD -23,885-42,529 Key: (+) generated (-) used 41

42 Reconciliation Financial statement items 1st half of st half of 2015 Cash and cash equivalents at the beginning of the period 175, ,289 Net liquidity generated/used during the period -23,885-42,529 Cash and cash equivalents at the end of the period 151, ,760 Key: (+) generated (-) used 42

43 Notes to the condensed interim consolidated financial statements Accounting Policies General part The condensed interim consolidated report of the Credito Valtellinese Group is prepared in consolidated format as prescribed by Article 154-ter, Italian Legislative Decree no. 58 of 24 February 1998 (the Consolidated Finance Act) and in compliance with IFRS issued by IASB (the International Accounting Standards Board) endorsed by the European Union, whose application was compulsory at the date of preparation of the condensed interim consolidated report. In preparing this condensed interim consolidated report, the financial reporting standards applied in accordance with IAS 34 - Interim Financial Reporting comply with those adopted in the annual consolidated report at 31 December 2015, except for those amended by IASB and endorsed through the issue of new EU Regulations. With regard to the standards included in the annual financial statements at 31 December 2015, it should be noted that the following came into force as from 1 January 2016: Regulation 2015/28 of 17 December 2014 amending regulation no. 1126/2008 that adopts some international financial reporting standards in compliance with regulation no. 1606/2002 of the European Parliament and Council with respect to International Financial Reporting Standards IFRS 2, 3 and 8 and International Accounting Standards IAS 16, 24 and 38; Regulation 2015/29 of 17 December 2014 amending regulation no. 1126/2008 that adopts some international financial reporting standards in compliance with regulation no. 1606/2002 of the European Parliament and Council with respect to International Accounting Standard IAS 19; Regulation 2015/2113 of 23 November 2015 amending regulation no. 1126/2008 that adopts some international financial reporting standards in compliance with regulation no. 1606/2002 of the European Parliament and Council with respect to International Accounting Standards IAS 16 and 41; Regulation 2015/2173 of 24 November 2015 amending regulation no. 1126/2008 of the Commission that adopts some international financial reporting standards in compliance with regulation no. 1606/2002 of the European Parliament and Council with respect to International Financial Reporting Standard 11; Regulation 2015/2231 of 2 December 2015 amending regulation no. 1126/2008 that adopts some international financial reporting standards in compliance with regulation no. 1606/2002 of the European Parliament and Council with respect to International Accounting Standards IAS 16 and 38; Regulation 2015/2343 of 15 December 2015 amending regulation no. 1126/2008 that adopts some international financial reporting standards in compliance with regulation no. 1606/2002 of the European Parliament and Council with respect to International Financial Reporting Standards IFRS 5 and 7 and International Accounting Standards IAS 19 and 34; Regulation 2015/2406 of 18 December 2015 amending regulation no. 1126/2008 that adopts some international financial reporting standards in compliance with regulation no. 1606/2002 of the European Parliament and Council with respect to International Accounting Standard IAS 1; Regulation 2015/2441 of 18 December 2015 amending regulation no. 1126/2008 of the Commission that adopts some international financial reporting standards in compliance 43

44 with regulation no. 1606/2002 of the European Parliament and Council with respect to International Accounting Standard IAS 27. The Group did not report significant impacts due to their application. The Group accounting policies used for preparing the condensed interim consolidated report, with reference to the recognition, measurement and derecognition criteria for each asset and liability item, as with the recognition methods for revenue and costs, remained substantially the same as those used for the financial statements at 31 December 2015, to which reference should be made. With reference to the parameters used for the valuation of the collective impairment losses, in view of the conclusion of the internal estimation process, at 30 June 2016 the credit conversion factor estimated internally was used instead of the prescribed one used on 31 December There were no significant economic impacts. In drawing up the condensed interim consolidated financial statements, estimates and assumptions were used, which may affect the values recorded in the statement of financial position, income statement and the Notes to the condensed interim consolidated financial statements. The subjective assessments relevant in the application of the Group s accounting policies and the main sources of uncertainty in estimates were the same included in the consolidated financial statements for the year ended 31 December The most important valuation processes, such as the assessment of any impairment loss on assets, are only carried out completely for the preparation of the annual financial statements when all necessary information is available. Important impairment indicators requiring immediate assessment are an exception. New financial reporting standards The new international financial reporting standards issued by IASB that will have a potential impact on the Group - but that have not yet been approved by the European Union at the date of preparation of this Report - are IFRS 9 "Financial instruments", IFRS 15 "Revenue from contracts with customers" and IFRS 16 "Leases. In particular, IFRS 9 Financial instruments, issued in July of 2014 by IASB, will replace IAS 39 Financial instruments: Recognition and Measurement. The review process of IAS 39 was divided in three phases : classification and measurement, impairment and hedge accounting. For a brief description of the main changes introduced by the standard, reference is made to what was indicated in the Consolidated financial statements at 31 December IFRS 9 requires the mandatory application as from 1 January 2018, with earlier application of all the principle or only the changes related to the accounting treatment of own credit for financial liabilities designated at fair value. During 2015, the Group started a project with the purpose of adapting the procedures and internal processes to the provisions introduced by the new accounting standard. The Project is broken down into different guidelines defined on the basis of three phases of the review process of the standard (Classification and Measurement, Impairment and Hedge Accounting). Each project branch envisages sites related to accounting framework, Impacts and Planning, Credit Operational Model Valuation Models and Portfolio Analysis, Securities portfolio and Derivative Impacts, Organisational Measures and IT. With regard to Classification and measurement, the activities that are taking place concern the analysis of the product portfolio for the purposes of redefining the new classification, defining the process for the implementation of the new rules (SPPI Test and Business Model) and drafting the first guidelines. The analysis on the characteristics of the contractual cash flows of the instruments 44

45 (SPPI test) was carried out on the securities and loan portfolios of the Group at 31 December With regard to the Impairment, specific analyses for operations in loans and securities were carried out. The analyses carried out mainly concerned the definition of the elements that determine the transition from stage 1, on which an adjustments equal to the expected loss at 12 months is envisaged, to stage 2, on which an impairment loss equal to the lifetime expected credit loss is envisaged and parameters and models to be used for calculating the expected loss, in particular, for the lifetime component. With regard to hedge accounting, the standard was examined initially by identifying the main changes and analysing the possibility of using the opt-in/opt-out option envisaged by the standard. 45

46 Basis of preparation The condensed interim consolidated report comprises the Statement of financial position, Income Statement, Statement of Comprehensive Income, Statement of changes in equity, Statement of cash flows (Financial Statements) and Notes to the condensed interim consolidated financial statements. The financial statements were prepared in compliance with the "Instructions for the preparation of the separate financial statements and of the consolidated financial statements of banks and financial companies that are parents of banking groups" contained in Circular no. 262/2005 of Bank of Italy and following updates. The amounts reported in the Financial Statements and in the Notes to the condensed interim consolidated financial statements are in thousands of EUR, unless indicated otherwise. Together with the amounts for the reporting period, the Financial statements and the Notes to the condensed interim consolidated financial statements also show the corresponding amounts at 31 December 2015 for statement of financial position data, and for the first half of 2015 for income statement and statement of comprehensive income data. In the Statement of financial position, Income Statement and Statement of Comprehensive Income, any item equal to zero in the reporting period of reference or in the previous period is not shown. In the Income Statement and Statement of Comprehensive Income, negative amounts are shown in brackets. The condensed interim consolidated financial statements at 30 June 2016 are accompanied by the certification of the Chairman of the Board of Directors and of the Manager in charge of financial reporting envisaged by Article 154 bis of the Consolidated Finance Act and are subject to a limited audit by KPMG S.p.A. Business performance and outlook With reference to the Bank of Italy, Consob and Isvap Document no. 2 of 6 February 2009, as well as to the subsequent Document no. 4 of 3 March 2010, relevant to the information to be provided in the financial statements on business outlook, with particular reference to going concern assumptions, financial risk, impairment testing and uncertainties in the use of estimates, the Credito Valtellinese Directors confirm their reasonable expectations that the bank and the Group companies will remain a going concern in the foreseeable future and, consequently, the condensed interim consolidated report at 30 June 2016 was prepared on a going concern basis. The Directors also confirm that the financial position and the result of operations have brought to light no symptoms that could imply the uncertainty of going concern assumptions. As regards the requirements related to the disclosure on financial risks, impairment testing and uncertainties in the use of estimates, please refer to the information provided in this report as well as the information provided in the Report on operations, within the discussion of the related items. Information on risks is described in the chapter of the Notes to the condensed interim consolidated financial statements dedicated to risk management. Moreover, the Notes to the condensed interim consolidated financial statements provide the fair value of the financial instruments determined on the basis of the methods indicated in the financial statements at 31 December 2015, document to which reference is made for detailed information. Specific tests were carried out to ascertain any impairment of equity investments, securities available-for-sale, intangible values and goodwill, subject to the analysis of the presence of 46

47 impairment indicators. The same methods and criteria shown in the 2015 Annual financial statements were used in order to determine any impairment loss. Consolidation scope and methods The condensed interim consolidated financial statements include Credito Valtellinese and the companies directly or indirectly controlled by it. The financial statements used for preparing the condensed interim consolidated financial statements have the same reporting date. Investments in companies subject to exclusive control are those in respect of which Credito Valtellinese has the power over the investee, is subject to exposure or rights to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect the amount of the investor s returns. Investments in companies subject to joint control are those in respect of which the Parent, together with other parties subject to the terms of an agreement, has the power of governing the decisions relating to the relevant activities of the Agreement, with the unanimous consent of the parties sharing control. The financial statements of subsidiaries are consolidated on a line-by-line basis from when the Parent starts to exercise control until the date on which this control ends. The carrying amount of the equity investments in these companies is offset against the corresponding share in the equity. The differences arising from this transaction, after recording the subsidiary s assets and liabilities, are recorded, if positive under "Intangible assets - Goodwill"; if negative, they are directly recognised in the income statement. Minority interests are assigned the corresponding shares of equity and profit (loss). Assets, liabilities, income and expenses among consolidated companies are eliminated. The financial statements of subsidiaries are prepared at the same reference date and adopting financial reporting standards consistent with the Parent. In case of discrepancy between the evaluation criteria adopted by a subsidiary and those used in the consolidated financial statements, the subsidiary s financial statements are adjusted for consolidation purposes. Associates are those under significant influence, i.e. the Parent has the power of participating in the determination of financial and management policies, but has no control or joint control over those policies. Investments in associates and subsidiaries subject to joint control have been accounted at equity. The investment is initially recognised at cost, the amount later being increased or decreased due to the effect of investee profits or losses, recorded according to the equity ratios under "Net gains (losses) on equity investments", of dividends received and other changes in the equity of the investees. Other changes are booked to reserves. The differences between the carrying amount of the equity investment and the equity of the related investee are included in the carrying amount of the investee. Dividends booked to the Parent s financial statements and concerning equity investments in companies included in the consolidation scope or equity-accounted have been cancelled. Taxes associated with consolidation adjustments have been accounted for, where applicable. Commitments for the repurchase of own equity instruments, including commitments to purchase equity instruments of companies consolidated in full, give rise to a financial liability for the current amount payable. The initial recognition of the liability occurs by using the equity as an offsetting item. Compared to the financial statements at 31 December 2015, the consolidation scope at 30 June 2016 does not include Quadrivio SME 2012 S.r.l. since the related securitisation transaction ended in the half-year. 47

48 A list of equity investments in fully consolidated subsidiaries is provided in the table below. 1. Investments in companies subject to exclusive control Company name Operating office Registered office Type of relationship Investor company Type of equity investment % held 1. Credito Valtellinese Soc. Coop. Sondrio Sondrio 2. Credito Siciliano S.p.A. Acireale Acireale Creval Sistemi e Servizi Soc. Cons. p.a. Sondrio Sondrio Stelline Real Estate S.p.A. Sondrio Sondrio Global Assicurazioni S.p.A. Milano Milano Global Broker S.p.A. Milano Milano Cassa di Risparmio di Fano S.p.A. Fano Fano Quadrivio Rmbs 2011 S.r.l. Conegliano Conegliano 4 9. Quadrivio Rmbs 2013 S.r.l. Conegliano Conegliano Quadrivio Sme 2014 S.r.l. Conegliano Conegliano 4 Key: Type of relationship: 1 = majority of voting rights in the ordinary shareholders /quotaholders meeting; 2 = dominant influence in the ordinary shareholders /quotaholders meeting; 3 = agreements with other shareholders/quotaholders ; 4 = other forms of control; 5 = sole management pursuant to Article 26, paragraph 1, of "Italian legislative decree 87/92"; 6 = sole management pursuant to Article 26, paragraph 2, of "Italian legislative decree 87/92" Events after the reporting period There were no events after the close of the half-year that have had a significant impact on the financial and economic situation of the company. 48

49 Fair value information This section includes the information on financial instruments subject to reclassification from one portfolio to another according to the rules laid down by IAS 39, and the information on the fair value hierarchy as defined by IFRS 13. The fair value is the price at which an asset can be sold or a liability can be transferred in a regular transaction between market participants at a certain valuation date. The fair value represents a market measurement basis, not related to the individual company and must be measured by adopting assumptions that the market operators would use to determine the price of the asset or of the liability, assuming that they act to meet their economic interest in the best way possible. The fair value of a financial liability that is due (for example, a sight deposit) cannot be less than the amount payable on demand, discounted from the first date on which payment may be required. In particular, the criteria adopted are as follows: - Mark to Market: valuation method that coincides with the Level 1 classification of the fair value hierarchy; - Comparable Approach: valuation method based on the use of inputs observable on the market, the use of which implies a Level 2 classification of the fair value hierarchy; - Mark to Model: valuation method related to the application of pricing models whose inputs determine the Level 3 classification (use of at least one significant input that cannot be observed) of the fair value hierarchy. With regard to the criteria for determining the fair value, please refer to what is contained in the financial statements at 31 December In the first half of 2016, the Group did not make any transfers between portfolios of financial assets. Transfers were recorded from level 2 to level 1 of financial assets of EUR 3 million, transfers from level 1 to level 2 of financial assets of EUR 12.6 million and transfers from level 3 to level 2 of EUR 19.6 million. 49

50 Assets and liabilities measured at fair value on a recurring basis: breakdown by level of fair value 30/06/ /12/2015 Financial assets/liabilities at fair value L1 L2 L3 L1 L2 L3 1. Financial assets held for trading 28,778 13, ,116 1, Financial assets at fair value through profit or loss Available-for-sale financial assets 5,603,167 29, ,444 5,148,568 10, , Hedging derivatives Property, equipment and investment property Intangible assets Total 5,631,945 43, ,445 5,198,684 11, , Financial liabilities held for trading - 1, , Financial liabilities at fair value through profit or loss Hedging derivatives - 339, ,496 - Total - 340, ,355 - Key: L1= Level 1 L2= Level 2 L3= Level 3 The Credit Value Adjustment (CVA) and the Debit Value Adjustment (DVA) that form the Fair value of derivatives are not significant also considering the existing margin setting agreements. The portfolio of instruments measured at fair value on a recurring basis and classified within level 3 of the fair value hierarchy mainly consists of shareholdings, subject to impairment test should the conditions occur, and of investments in fund units. In particular, at 30 June 2016, the portfolio of available-for-sale financial assets, includes the equity investment in Alba Leasing and Istituto Centrale delle Banche Popolari, the real estate fund FAB III and FAB IV, the Italian investment fund for SMEs, Fondo Anthilia, Fondo Fenice and Fondo Atlante, in particular. Level 3 also contains equity instruments measured at cost. 50

51 Annual changes of assets at fair value on a recurring basis (level 3) Financial assets held for trading Financial assets at fair value through profit or loss Availablefor-sale financial assets Hedging derivatives Property, equipment and investment property Intangible assets 1. Opening balance 1-162, Increases , Purchases , Gains recognised in: - - 3, Profit or loss of which gains on sales Equity X X 3, Transfers to other levels Other increases Decreases , Sales , Redemptions Losses recognised in: , Profit or loss , of which losses on sales , Equity X X Transfers to other levels , Other decreases Closing balance 1-179, Annual changes of liabilities at fair value on a recurring basis (level 3) There are no financial liabilities at fair value on a recurring basis (level 3). 51

52 Breakdown of the main statement of financial position items SECTION 1 LOANS AND RECEIVABLES WITH BANKS AND CUSTOMERS AND DUE TO BANKS AND CUSTOMERS Breakdown by type of item 60 of assets "Loans and receivables with banks" Type of transaction/amounts 30/06/ /12/2015 A. Loans and Receivables with Central Banks 169, , Term deposits Obligatory reserve 169, , Reverse repurchase agreements Other - - B. Loans and receivables with banks 606, , Loans 593, , Current accounts and deposit accounts 8,513 19, Term deposits 29,575 5, Other loans: 555, ,711 - Reverse repurchase agreements Finance leases Other 555, , Debt instruments 13,799 16, Structured instruments Other debt instruments 13,799 16,915 Total 776, ,089 Total fair value 776, ,123 Other loans mainly include the items related to the carried out securitisation transactions and margin tradings paid on hedging derivatives. 52

53 Breakdown by type of item 70 of assets "Loans and receivables with customers" 30/06/ /12/2015 Type of transaction/amounts Performing Non-performing Non-performing Purchased Other Performing Purchased Other Loans 15,272,556-3,302,473 15,663,708-3,356, Current accounts 3,236,439-1,321,716 3,363,506-1,370, Reverse repurchase agreements 481, , Mortgages 8,964,162-1,692,676 8,732,228-1,702, Credit cards, personal and salary-backed loans 264,168-19, ,572-19, Finance leases 480, , ,976-99, Factoring Other loans 1,845, ,100 2,021, ,465 Debt instruments 38,760-1,051 28,410-1, Structured instruments Other debt instruments 38,760-1,051 28,410-1,051 Total 15,311,316-3,303,524 15,692,118-3,357,632 Total fair value 19,438,492 19,749,822 Breakdown by debtor/issuer of item 70 of assets "Loans and receivables with customers" 30/06/ /12/2015 Non-performing Non-performing Type of transaction/amounts Purchased Performing Other Purchased Performing Other 1. Debt instruments 38,760-1,051 28,410-1,051 a) Governments b) Other government agencies c) Other issuers 38,760-1,051 28,410-1,051 - non-financial companies 2,342-1,051 5,332-1,051 - financial companies 36, , insurance companies other Loans to: 15,272,556-3,302,473 15,663,708-3,356,581 a) Governments 33, ,490-2 b) Other government agencies 72,877-5,631 52,246-5,229 c) Other parties 15,165,970-3,296,839 15,579,972-3,351,350 - non-financial companies 9,334,068-2,829,583 9,575,859-2,882,961 - financial companies 1,637,436-91,809 1,915,700-92,866 - insurance companies 2, , other 4,192, ,417 4,086, ,497 Total 15,311,316-3,303,524 15,692,118-3,357,632 53

54 Breakdown by type of item 10 of liabilities "Due to banks" Type of transaction/amounts 30/06/ /12/ Due to central banks 1,501,819 1,802, Due to banks 268, , Current accounts and deposit accounts 32,260 86, Term deposits 53,007 22, Loans 176, , repurchase agreements 71, other 105, , Payables for commitments to repurchase own equity instruments Other payables 6,322 6,740 Total 1,770,058 2,040,112 Total fair value 1,765,906 1,982,358 The item Other loans mainly includes loans received from the European Investment Bank. Breakdown of item 20 of liabilities "Due to customers" Type of transaction/amounts 30/06/ /12/ Current accounts and deposit accounts 13,585,902 13,469, Term deposits 1,646,009 1,535, Loans 2,835,837 2,502, repurchase agreements 2,476,122 2,154, other 359, , Payables for commitments to repurchase own equity instruments 58,037 59, Other payables 80,765 44,966 Total 18,206,550 17,612,269 Total fair value 18,230,813 17,618,717 Repurchase agreements mainly refer to transactions with Cassa Compensazione e Garanzia, whereas the item Other loans mainly contains medium to long-term loans received by Cassa Depositi e Prestiti in support of SMEs. 54

55 SECTION 2 OTHER FINANCIAL INSTRUMENTS Breakdown by type of item 20 of assets "Financial assets held for trading" Item/Amounts 30/06/ /12/2015 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 A. On-statement of financial position assets 1. Debt instruments 27,477 13,104-48, Equity instruments 1, , OEIC units Loans Total A 28,778 13, , B. Derivatives 1. Financial derivatives Credit derivatives Total B Total (A+B) 28,778 13, ,116 1,634 1 Breakdown by debtor/issuer of item 20 of assets "Financial assets held for trading" 30/06/ /12/2015 A. On-statement of financial position assets 1. Debt instruments 40,581 49,447 a) Governments and Central Banks 12,633 13,318 b) Other government agencies c) Banks 27,384 35,456 d) Other issuers Equity instruments 1,302 1,446 a) Banks 1 3 b) Other issuers: 1,301 1,443 - insurance companies financial companies non-financial companies 1,301 1,443 - other OEIC units Loans - - a) Governments and Central Banks - - b) Other government agencies - - c) Banks - - d) Other parties - - Total A 41,883 50,893 B. Derivatives a) Banks b) Customers Total B Total (A+B) 42,746 51,751 Breakdown by type of item 40 of assets "Available-for-sale financial assets" 55

56 30/06/ /12/2015 Item/Amounts Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1. Debt instruments 5,593,327 29, ,081,781 10,150 19, Equity instruments 9, ,581 66, , OEIC units , , Loans Total 5,603,167 29, ,444 5,148,568 10, ,686 Level 3 also contains equity instruments measured at cost. Breakdown by debtor/issuer: Available-for-sale financial assets Item/Amounts 30/06/ /12/ Debt instruments 5,623,628 5,111,911 a) Governments and Central Banks 5,510,713 5,024,316 b) Other government agencies - - c) Banks 81,026 58,658 d) Other issuers 31,889 28, Equity instruments 99, ,247 a) Banks 51,939 51,995 b) Other issuers: 47, ,252 - insurance companies financial companies 43,148 99,989 - non-financial companies 4,340 4,248 - other OEIC units 89,488 53, Loans - - a) Governments and Central Banks - - b) Other government agencies - - c) Banks - - d) Other parties - - Total 5,812,543 5,321,413 56

57 Information on shareholding relationships of investments in companies subject to joint control (carried at equity) and in companies subject to significant influence Name A. Companies subject to joint control Registered office Operating office Type of relationship Type of equity investment Investor company % held 1. Rajna Immobiliare S.r.l. Sondrio Sondrio 1 Credito Valtellinese B. Companies subject to significant influence 1. Global Assistance S.p.A. Milano Milano 2 Credito Valtellinese Sondrio Città Futura S.r.l. Milano Milano 2 Stelline Real Estate Adamello S.p.A. Milano Milano 2 Stelline Real Estate Valtellina Golf Club S.p.A Caiolo Caiolo 2 Credito Valtellinese Fidipersona Società Cooperativa Ancona Ancona 2 Cassa di Risparmio di Fano Creset - Crediti, Servizi e Tecnologie S.p.A. Milano Lecco 2 Credito Valtellinese Finanziaria Laziale S.p.A. in liquidation Frosinone Frosinone 2 Credito Valtellinese Key Type of relationship: 1 = joint control 2 = significant influence Although the investments are less than 20% of the share capital, equity investments in Fidipersona Società Cooperativa and in Adamello S.p.A. are included among equity investments in companies subject to significant influence by virtue of the significant presence in their Board of Directors and Board of Statutory Auditors of parties related to the Creval Group. Breakdown by type of item 30 of liabilities "Securities issued" 30/06/ /12/2015 Type of instrument/ Amounts A. Securities Carrying amount Fair Value Carrying amount Fair Value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1. bonds 3,488,385-3,151, ,953 3,915,335-3,517, , structured other 3,488,385-3,151, ,953 3,915,335-3,517, , other securities 175, , , , structured other 175, , , ,250 - Total 3,663,749-3,326, ,953 4,082,687-3,685, ,511 Financial instruments indicated in level 3 refer to the securities sold in connection with the securitisation Quadrivio SME 2014 and Quadrivio RMBS

58 Breakdown by type of item 40 of liabilities "Financial liabilities held for trading" 30/06/ /12/2015 Transaction type/group elements Fair Value Fair value NV L1 L2 L3 NV L1 L2 L3 A. On-statement of financial position liabilities 1. Due to banks Due to customers Debt instruments Total A B. Derivatives 1. Financial derivatives X - 1,311 - X - 1, Credit derivatives X X Total B X - 1,311 - X - 1,859 - Total (A+B) - - 1, ,859 - Key: NV = nominal or notional value L1: Level 1 L2: Level 2 L3: Level 3 Hedging derivatives: breakdown by type of hedge and level 30/06/ /12/2015 Fair Value Fair Value NV L1 L2 L3 L1 L2 L3 NV A. Financial derivatives - 339, , , ,000 1) Fair value - 339, , , ,000 2) Cash flows ) Investments in foreign operations B. Credit derivatives ) Fair value ) Cash flows Total - 339, , , ,000 Key NV = nominal value L1= Level 1 L2= Level 2 L3= Level 3 58

59 SECTION 3 OTHER ASSET AND LIABILITY ITEMS Breakdown of item 120 of assets "Property, equipment and investment property" - operational property, equipment and investment property measured at cost Asset/Amounts 30/06/ /12/ Owned 385, ,699 a) land 60,229 60,345 b) buildings 294, ,046 c) furniture 18,127 19,170 d) electronic systems 4,210 4,474 e) other 8,834 9, Assets acquired under finance lease - - a) land - - b) buildings - - c) furniture - - d) electronic systems - - e) other - - Total 385, ,699 Breakdown of item 120 of assets "Property, equipment and investment property" - property, equipment and investment property held for investment measured at cost 30/06/ /12/2015 Asset/Amounts 1. Owned 63,901 64,543 a) land 8,925 9,026 b) buildings 54,976 55, Assets acquired under finance lease - - a) land - - b) buildings - - Total 63,901 64,543 Fair value 84,858 84,601 59

60 Breakdown of item 130 of assets "Intangible assets" 30/06/ /12/2015 Asset/Amounts Definite life Indefinite life Definite life Indefinite life A.1 Goodwill X 101,960 X 101,960 A.1.1 attributable to the owners of the parent X 101,960 X 101,960 A.1.2 attributable to minority interests X - X - A.2 Other intangible assets 17,142-16,680 - A.2.1 Assets measured at cost: 17,142-16,680 - a) internally generated intangible assets 2,934-1,493 - b) other assets 14,208-15,187 - A.2.2 Assets measured at fair value: a) internally generated intangible assets b) other assets Total 17, ,960 16, ,960 With reference to the goodwill recorded at 30 June 2016, analyses were carried out in order to check the possible presence of impairment indicators and the subsequent need to calculate again the recoverable amount of the different CGUs. The CGUs, in line with what was defined in the 2015 Financial Statements, were identified as the individual legal entities, (Credito Siciliano Market CGU and Global Assicurazioni Finance CGU), less the investments in associates and companies subject to joint control classified in the portfolios of Equity investments and of Available-for-sale financial assets. They represent the lowest level at which group management estimates the return on investment and this level is not greater than the operating segments identified for the segment reporting of the group prepared according to IFRS 8 Operating segments. The analyses carried out, using the same methodological approach adopted during evaluation in the financial statements at 31 December 2015 to which reference is made, showed the following: with reference to the estimate of the cash flows, final data at 30 June 2016 was compared with the interim forecasts pointing out their deviations. The economic results of the CGUs of the first half of 2016 were substantially in line compared to what was defined in the budget; with reference to forecast figures, with reference to the CGUs to which the goodwill of the consolidated financial statements was allocated, the expected financial results determined during the impairment test for the 2015 financial statements were substantially confirmed; with reference to the long-term growth rate (g) of the cash flows used to estimate the socalled "terminal value", the figure is confirmed in line with the one used in the impairment test for the 2015 financial statements (2%); with reference to the discount rate of the cash flows, it was updated on the basis of the new information available at 30 June In particular, the cost of capital at 30 June 2016 accounted for 8.1% and, as a result, in line with the value at 31 December This was due to the combined effect of changes recorded on the Risk free rate (from 1.70% to 1.60%) and on the average beta associated with a sample of major listed Italian banks (from 1.19 to 1.20). Albeit the outlines of the scenario as well as the parameters used during evaluation may vary significantly as a result of the events that management cannot influence, the results of the 60

61 aforesaid analyses do not show the presence of factors and circumstances of impairment presumption and, as a result, confirm the carrying amounts. It is highlighted that the persisting volatility of the share prices, also following the uncertainty in the macroeconomic situation, as already observed in the financial statements, does not allow the stock market quotations, or the multipliers that they derive from, to fully express the bank's listed value based on the future growth opportunities and the ability to create sustainable value in the medium term. Finally, as a result of the adjustments made during the 2015 financial statements, the Creval Group as 30 June 2016 had no further intangible assets with definite lives. 61

62 Breakdown of item 120 of liabilities "Provisions for risks and charges Item/Amounts 30/06/ /12/ Company pension funds 39,761 36, Other provisions for risks and charges 65,922 73, legal disputes 20,699 18, personnel expenses 29,405 36, other 15,818 18,704 Total 105, ,735 Breakdown of item 160 of assets "Other assets" 30/06/ /12/2015 Amounts due from the tax authorities 72,576 86,516 Cheques drawn on the bank to be settled 52,853 38,994 Counterparts for securities and coupon payments to be received 56,470 3,999 Sundry items to be charged to customers and banks 129,561 49,273 Real estate inventory 46,414 46,142 Costs and other advance payments 2,303 5,972 Receivables related to the supply of goods and services 4,636 7,198 Leasehold improvements 4,400 4,919 Accruals not recorded separately Other items 40,595 59,606 Total 410, ,948 Breakdown of item 100 of liabilities "Other liabilities" 30/06/ /12/2015 Amounts due to tax authorities for indirect taxes 3,352 2,882 Amounts due to social security and welfare institutions 8,997 12,181 Amounts due to government agencies on behalf of third parties 66,422 50,228 Sundry items to be credited to customers and banks 43,450 39,797 Amounts available to customers 35,666 82,514 Amounts payable to employees 23,665 22,192 Value date differences on portfolio transactions 400, ,975 Items in transit between branches 831 1,252 Guarantees given and commitments 7,703 10,196 Accruals other than those capitalised 5,287 5,698 Payables related to the supply of goods and services 27,416 29,592 Sundry and residual items 251, ,625 Total 874, ,132 62

63 Non-current assets held for sale and disposal groups: breakdown by type of asset 30/06/ /12/2015 A. Individual assets: A.1 Financial assets 49,769 - A.2 Equity investments - 2,203 A.3 Property, equipment and investment property A.4 Intangible assets - - A.5 Other non-current assets - - Total A 50,633 2,478 of which measured at cost - 2,203 of which measured at fair value level of which measured at fair value level of which measured at fair value level 3 50, B. Groups of discontinued operations - - C. Liabilities associated with discontinued operations - - D. Liabilities associated with disposal groups - - At 30 June 2016, assets held for sale include 3 investment properties for which preliminary sale agreements and the so-called Gavia portfolio were signed, portfolio mainly consisting in secured non-performing claimed by Credito Valtellinese with regard to companies of the real estate sector subject-matter of a sale agreement signed on 27 May by Credito Valtellinese and Credito Fondiario. These assets belong to the reporting market segment. Information on Group share capital and reserves At 30 June 2016, equity attributable to the owners of the parent amounted to EUR 2,107 million, compared to EUR 2,183 million recorded at the end of December The main changes in the half-year are due to: dividend distribution and charity of approximately EUR 35 million; negative change in the AFS reserve of EUR 55 million mainly due to Government bonds held in the portfolio and sale of an equity investment held in Anima; negative change in actuarial reserves of approximately EUR 6 million; profit for the period of EUR 19 million. At 30 June 2016, the portfolio contained 60,000 treasury shares of EUR 100 thousand, i.e % of total shares outstanding at the end of the period. 63

64 SECTION 4 OTHER INFORMATION Breakdown of guarantees given and commitments Transactions 30/06/ /12/2015 1) Financial guarantees a) Banks - - b) Customers 61,886 54,189 2) Commercial guarantees a) Banks 12,877 13,304 b) Customers 688, ,999 3) Irrevocable commitments to grant finance a) Banks i) certain to be called on 267 2,996 ii) not certain to be called on - 7 b) Customers i) certain to be called on 5,663 - ii) not certain to be called on 599, ,016 4) Commitments underlying credit derivatives: protection sales - - 5) Assets pledged as guarantee for third-party commitments - - 6) Other commitments - - Total 1,368,771 1,538,511 Assets pledged as guarantee for the Group s liabilities and commitments Portfolios 30/06/ /12/ Financial assets held for trading 39,825 44, Financial assets at fair value through profit or loss Available-for-sale financial assets 2,661,781 2,657, Held-to-maturity investments Loans and receivables with banks 347, , Loans and receivables with customers 4,377,248 4,127, Property, equipment and investment property - - The assets indicated above were used as a guarantee for funding repurchase agreements, issue of bank drafts, derivatives as well as loan received from the European Central Bank, of loans received from the European Investment Bank and from Cassa Depositi e Prestiti. 64

65 Breakdown of management and trading services on behalf of third parties Type of service 30/06/ /12/ Execution of orders on behalf of customers a) Purchases 1. settled unsettled - - b) Sales 1. settled unsettled Portfolio management a) individual - - b) collective Custody and administration of securities a) third-party securities held on deposit: when acting as custodian bank (excluding portfolio management) 1. securities issued by companies included in the consolidation scope other securities - - b) third-party securities held on deposit (excluding portfolio management): others 1. securities issued by companies included in the consolidation scope 2,921,730 3,286, other securities 5,118,923 6,063,309 c) third-party securities deposited with third parties 7,858,430 9,143,416 d) treasury securities deposited with third parties 5,716,713 4,626, Other transactions 2,356,608 2,118,580 Item "Other transactions" refers to the market value of the insurance premiums collected. 65

66 Breakdown of the main income statement items Breakdown of item 10 of the income statement "Interest and similar income" 1st half of st half of 2015 Change 1. Financial assets held for trading 679 3, % 2. Financial assets at fair value through profit or loss Available-for-sale financial assets 30,040 43, % 4. Held-to-maturity investments Loans and receivables with banks % 6. Loans and receivables with customers 270, , % 7. Hedging derivatives Other assets 2, % Total 303, , % Item 8. Other assets conventionally includes interest income on financial liabilities that are remunerated with a negative rate. Breakdown of item 20 of the income statement "Interest and similar expense" Items 1st half of st half of 2015 Change 1. Due to central banks (882) (1,081) % 2. Due to banks (598) (844) % 3. Due to customers (34,009) (52,484) % 4. Securities issued (43,797) (62,481) % 5. Financial liabilities held for trading (426) (461) -7.59% 6. Financial liabilities at fair value through profit or loss Other liabilities and provisions (662) (29) n.s. 8. Hedging derivatives (12,476) (11,894) 4.89% Total (92,850) (129,274) % Item 7. Other liabilities and provisions conventionally includes interest on financial assets that are remunerated with a negative rate. 66

67 Breakdown of item 40 of the income statement "Fee and commission income" Type of service/sectors 1st half of st half of 2015 Change a) guarantees given 4,036 4, % b) credit derivatives c) management, trading and consulting services: 45,363 44, % 1. trading of financial instruments % 2. currency trading 2,206 2, % 3. portfolio management individual collective custody and administration of securities % 5. custodian bank placement of securities 13,671 11, % 7. order acceptance and transmission 3,239 4, % 8. consulting services % 8.1 on investments on financial structuring % 9. distribution of third party services 25,584 26, % 9.1. portfolio management 8,039 7, % individual 8,039 7, % collective insurance products 16,515 17, % 9.3. other products 1,030 1, % d) collection and payment services 39,641 41, % e) servicing for securitisation transactions f) factoring transaction services g) tax collection services h) management of multilateral trading facilities i) current account management 27,793 28, % j) other services 32,499 35, % Total 149, , % Fee and commission income included under "j) other services" mainly refers to commissions on loan transactions of EUR 28,636 thousand and commissions for rights and pledges of EUR 1,846 thousand. 67

68 Breakdown of item 50 "Fee and commission expense" Services/Sectors 1st half of st half of 2015 Change a) guarantees received (1,028) (891) 15.38% b) credit derivatives c) management and trading services: (1,118) (735) 52.11% 1. trading of financial instruments (451) (3) n.s. 2. currency trading (3) (4) % 3. portfolio management: own account for third parties custody and administration of securities (664) (728) -8.79% 5. placement of financial instruments off-premises provision of financial instruments, products and services d) collection and payment services (10,130) (11,169) -9.30% e) other services (776) (720) 7.78% Total (13,052) (13,515) -3.43% Breakdown of item 70. "Dividends and similar income" Items/Income 1st half of st half of 2015 Change Dividends Income from OEIC units Dividends Income from OEIC units Dividends Income from OEIC units A. Financial assets held for trading % - B. Available-for-sale financial assets 4,118-1, % - C. Financial assets at fair value through profit or loss D. Equity investments - X - X - X Total 4,128-1, % - Dividends on available-for-sale financial assets refer in particular to the interest in Anima Holding S.p.A. and in Istituto Centrale delle banche Popolari. 68

69 Breakdown of item 100 "Profit (loss) on sale/repurchase" Items/Income components Profit 1st half of st half of 2015 Change Losses Net profit (losses) Profit Losses Net profit (losses) Profit Losses Net profit (losses) Financial assets 1. Loans and receivables with banks ,168-1, % % 2. Loans and receivables with customers 2,044 (16,131) (14,087) 193 (659) (466) n.s. n.s. n.s. 3. Available-for-sale financial assets 3.1 Debt instruments 28,610-28,610 66,640 (6) 66, % % % 3.2 Equity instruments 21,692-21, (1) 404 n.s % n.s. 3.3 OEIC units Loans Held-to-maturity investments Total assets 52,346 (16,131) 36,215 68,406 (666) 67, % % Financial liabilities 1. Due to banks Due to customers Securities issued 418 (1,009) (591) 358 (953) (595) 16.76% 5.88% -0.67% Total liabilities 418 (1,009) (591) 358 (953) (595) 16.76% 5.88% -0.67% Profits and losses on loans and receivables from customers refer to the already mentioned sale transaction of non-performing loans occurred in the first half of 2016, profits on debt instruments mainly concern transactions of Italian Government bonds and profits on equity instruments mainly refer to the sale of shares of Anima Holding S.p.A. 69

70 Breakdown of item 80 " Profits (Losses) on trading" Transactions/Income components Gains (A) Trading income (B) Losses (C) Trading losses (D) Profits (Losses) on trading [(A+B)- (C+D)] 1. Financial assets held for trading (619) (53) (485) 1.1 Debt instruments (473) (53) (342) 1.2 Equity instruments 1 2 (146) - (143) 1.3 OEIC units Loans Other Financial liabilities held for trading Debt instruments Payables Other Financial assets and liabilities: exchange rate differences X X X X Derivatives (203) (401) Financial derivatives: - On debt instruments and interest rates (203) (401) (86) - On equity instruments and stock market share indices On currencies and gold X X X X Other Credit derivatives Total (822) (454)

71 Breakdown of item 90 " Fair value adjustments in hedge accounting" Income components/amounts A. Gains on: 1st half of st half of 2015 Change A.1 Fair value hedges - 44, % A.2 Financial assets with fair value hedges 70, A.3 Financial liabilities with fair value hedges Total hedging income (A) 70,133 44, % B. Losses on: B.1 Fair value hedges (70,543) - - B.2 Financial assets with fair value hedges - (44,667) % B.3 Financial liabilities with fair value hedges Total hedging expense (B) (70,543) (44,667) 57.93% C. Net hedging expense (A-B) (410) (260) 57.69% Net impairment losses on loans and receivables: breakdown Impairment losses Reversals of impairment losses 1st half of st half of 2015 Transactions/ Income components Individual Collective Individual Collective Derecognition Other A B A B A. Loans and receivables with banks Loans Debt instruments B. Loans and receivables with customers (11,818) (268,498) (921) 38,494 83,853-8,682 (150,208) (158,536) Purchased non-performing loans and receivables Loans - - X - - X X Debt instruments - - X - - X X - - Other loans and receivables (11,818) (268,498) (921) 38,494 83,853-8,682 (150,208) (158,536) - Loans (11,818) (268,498) (921) 38,494 83,853-8,682 (150,208) (158,536) - Debt instruments C. Total (11,818) (268,498) (921) 38,494 83,853-8,682 (150,208) (158,536) Key A = from interest B = other recoveries 71

72 Net impairment losses on available-for-sale financial assets: breakdown Transactions/Income components Impairment losses Individual Reversals of impairment losses Individual Derecognition Other A B 1st half of 2016 A. Debt instruments st half of 2015 Change B. Equity instruments - (104) X X (104) (381) % C. OEIC units - (3,847) X - (3,847) (22) n.s. D. Loans and receivables with banks E. Loans and receivables with customers F. Total - (3,951) - - (3,951) (403) n.s. Key A = from interest B = other recoveries Net impairment losses on other financial transactions: breakdown Transactions/Income components Impairment losses Reversals of impairment losses 1st half of st half of 2015 Individual Collective Individual Collective Derecognition Other A B A B A. Guarantees given - (1,401) (4,472) - 2,094-6,805 3, B. Credit derivatives C. Commitments to grant finance (644) (644) (101) D. Other transactions E. Total - (1,401) (4,472) - 2,094-6,161 2, Key A = from interest B = other recoveries Net accruals to provisions for risks and charges: breakdown Items 1st half of st half of 2015 Change Provision for legal disputes and claims from liquidators (3,916) (333) n.s. Provision for sundry risks and charges 2,033 (3,522) n.s. Total (1,883) (3,855) % Provisions for sundry risks and charges of the first half of 2015 included the contribution to the resolution fund envisaged by the European regulation Single Resolution Fund of EUR 4 million. 72

73 Breakdown of item 180 "Personnel expenses" Type of expense/amounts 1st half of st half of 2015 Change 1) Employees (142,360) (141,228) 0.80% a) wages and salaries (93,447) (95,567) -2.22% b) social security charges (29,856) (30,255) -1.32% c) post-employment benefits (5,889) (6,117) -3.73% d) pension expenses e) accrual for post-employment benefits (565) 272 n.s. f) accruals for pension and similar provisions: - defined contribution defined benefit (323) (306) 5.56% g) payments to external supplementary pension funds: - defined contribution (4,731) (5,059) -6.48% - defined benefit (70) (164) % h) costs of share-based payment plans i) other employee benefits (7,479) (4,032) 85.49% 2) Other personnel in service (633) (317) 99.68% 3) Directors and statutory auditors (2,439) (2,402) 1.54% 4) Retired personnel (954) (819) 16.48% Total (146,386) (144,766) 1.12% The comparison period was reclassified to allow a homogeneous comparison. The item e) accrual for post-employment benefits includes in the first half of 2015 a plan amendment in relation to the revaluation of post-employment benefits changed from 11% to 17% as from 1 January

74 Breakdown of item 180 "Other administrative expenses" 1st half of st half of 2015 Change Fees for professional and consulting services (20,056) (18,674) 7.40% Insurance premiums (1,866) (1,953) -4.45% Advertising (1,695) (2,156) % Postage, telephone and data transfer (3,671) (4,204) % Printed materials and stationery (769) (750) 2.53% Data processing services (14,535) (13,931) 4.34% Electricity, heating and shared property service charges (4,834) (5,141) -5.97% Administrative and logistics costs (1,526) (2,578) % Property management (5,246) (6,249) % Transport and travel (1,952) (1,913) 2.04% Security and transport of valuables (3,403) (3,626) -6.15% Membership fees (1,514) (1,555) -2.64% Audit fees (963) (758) 27.04% Commercial and financial information (2,807) (3,581) % Rent payable (11,227) (11,638) -3.53% Indirect personnel expenses (2,002) (2,042) -1.96% Entertainment expenses (248) (244) 1.64% Taxes (30,523) (31,489) -3.07% Contractual charges for treasury management services (406) (609) % Meeting costs (1,848) (1,430) 29.23% SRF contribution (7,594) - - Miscellaneous items (7,145) (3,288) % Total (125,830) (117,809) 6.81% The previous period was restated with respect to the maintenance of the systems and lease of hardware and software that were reclassified to the item property management and in the item miscellaneous items. On 3 May 2016, Italian Law Decree no. 59/2016 containing, among other things, provisions on deferred tax assets, was published on the Official Gazette. The decree was converted, with amendments, by Italian Law no. 119 of 30 June Based on the new provisions, the possibility of transforming in tax asset part of the deferred tax assets known as «qualified» pursuant to Italian Law Decree 225/2010 is guaranteed only if an annual fee is paid with reference to each financial year starting from 2015 and later, should the conditions occur, until The fee is equal to 1.5% of the difference between the amount of deferred tax assets known as «qualified» pursuant to Italian Law Decree 225/2010 recorded in the financial statements at the end of the financial year at issue and those recorded in the financial statements at 31 December 2007, plus the deferred tax assets transformed into tax assets and minus the taxes paid since The fee is not due when the calculation base is negative. The option for maintaining the possibility of transforming the qualified DTA is irrevocable. The Bank exercised the option through the payment of the annual fee related to the 2015 financial year amounting to EUR 2.1 million. This expense is allocated to the income statement of the first half of 2016 in the item Miscellaneous items of the table above. The item included also the estimate of the portion pertaining to the first half-year of the referred fee of the 2016 financial year amounting to EUR 1.1 million. 74

75 Average number of employees by category 1st half of st half of 2015 Employees: 3,917 4,022 a) executives b) total middle managers 1,528 1,542 c) other employees 2,335 2,422 Other personnel 2 7 Total 3,919 4,029 Breakdown of item other operating costs 1st half of st half of 2015 Change Amortisation of leasehold improvements (1,073) (1,442) % Real estate costs (2,616) (6,232) % Other expenses (1,300) (1,080) 20.37% Total (4,989) (8,754) % Breakdown of item other operating income 1st half of st half of 2015 Change Rent receivable 1, % Recovery of loan setup fees 1,630 2, % Income from real estate services (including income from review of prices on real estate agreements underway) % Income from data processing services 5,821 6, % Income from other services % Recovery of indirect taxes 21,530 22, % Recovery of insurance policy payments % Recovery of legal and notarial costs 5,120 6, % Changes in property works in progress % Revenues from property sales 1,006 4, % Other income 2,372 3, % Total 39,779 48, % The other operating income mainly includes recovery of expenses on services to third-party companies of EUR 1,413 thousand and post-term benefits of EUR 579 thousand. 75

76 Net gains (losses) on equity investments: breakdown Income components/amounts 1) Companies subject to joint control 1st half of st half of 2015 Change A. Income % 1. Revaluations % 2. Gains on sale Reversals of impairment losses Other income B. Expense Impairment Impairment losses Losses on sale Other expenses Net gains (losses) % 2) Companies subject to significant influence A. Income 26,941 10, % 1. Revaluations , % 2. Gains on sale 26, Reversals of impairment losses Other income B. Expense (339) (808) % 1. Impairment (173) (160) 8.12% 2. Impairment losses (20) (648) % 3. Losses on sale (146) Other expenses Net gains (losses) 26,602 10, % Total 26,610 10, % Gains on sale of EUR 26.5 million refer to additional sales price component of ICBPI, to be paid to the seller banks on the basis of the agreements signed in December 2015, by way of earn-out arising from the sale of the investment in VISA Europe held by Cartasì (controlled by ICBPI) to VISA Inc. The earn-out already defined in terms of quantity on the basis of the already existing agreements was recognised. In the first half of 2015, the item Revaluations included the measurement using the equity method of the equity investment held in ICBPI. Post-tax profit (loss) from discontinued operations Item "Profit from discontinued operations" is zero in the first half of 2016, whereas in the first half of 2015 it includes the gain related to the sale of 100% of Finanziaria San Giacomo, for approximately EUR 20 million net of taxes. 76

77 Earnings per share The basic earnings per share and diluted earnings per share are calculated in accordance with the methods described in IAS 33 - Earnings per share. The basic earnings per share are defined as the profit or loss or the result from continuing operations attributable to the owners of the parent (therefore, excluding the post-tax result from discontinued operations) attributable to ordinary equity holders and the weighted average number of ordinary shares outstanding during the period. The following table displays the basic earnings per share with the calculation details. 1st half of st half of 2015 Profit attributable to holders of ordinary shares 19,136 50,867 Profit from continuing operations attributable to holders of ordinary shares 19,136 30,796 Weighted average number of ordinary shares 1,108,812,369 1,108,812,369 Basic earnings per share Basic earnings per share from continuing operations It is specified that the earnings per share from discontinued operations is equal to EUR for the first half of There are no outstanding instruments with potential dilutive effect; therefore, diluted earnings per share are equal to basic earnings per share. 77

78 Information on risks and related hedging policies The clear identification of risks to which the Credito Valtellinese Banking Group is actually and potentially exposed constitutes the essential prerequisite for a knowledgeable assumption of said risks and their effective management, making use of the appropriate mitigation and transfer tools and techniques. In line with the regulatory provisions, with the operational and organisational characteristics that derive from its identity as a subject belonging to the co-operative credit system, from the features that characterised it in over a hundred years of its history and from its mission of service to the economic and social development of the territories where it is established, the different types of risk that the Group assumes and manages in the carrying on of its activities are: - credit and counterparty risk (including country and transfer risk); - credit valuation adjustment risk; - market risk for the trading book (including the basis risk); - operational risk; - IT risk; - interest rate risk for the banking book; - concentration risk of the loans and receivables from customers portfolio; - liquidity risk; - real estate risk; - compliance risk; - risk of money laundering and terrorist financing; - risk towards associated parties; - reputational risk; - risk deriving from securitisations; - residual risk; - strategic risk (including risk from investments); - risk of excessive leverage; - sovereign risk; - model risk; - risk related to the portion of encumbered assets (asset encumbrance). The Group adopted a detailed and strong internal control system (consisting of rules, functions, structures, resources, processes and procedures) the aims of which are reducing the risk within the limits indicated in the framework of reference for determining the risk appetite of the bank (Risk Appetite Framework, RAF), prevention of the risk that the bank is involved, even unintentionally, in illegal activities (such as money laundering, usury and terrorist financing) and compliance of the transactions with the law and supervisory regulations, as well as with policies, regulations and internal procedures. In order to maintain adequacy over time, the risk control units as a whole are assessed and checked in terms of completeness, adequacy, functionality and reliability by the risk management, compliance and internal audit departments. The appropriate development and corrective actions of any deficiency are identified and planned 78

79 at the management level, discussed and screened in the Risk Committee and submitted to Corporate Bodies responsible for strategy, management and control. The current risk management systems are consistent with the business model, strategy and risk profile of the Group. Detailed information on the general characteristics of the control systems, the risk management, measurement and control policies are contained in the Notes to the 2015 Consolidated Financial Statements (Part E Information on risks and hedging policies) and in the informative report on the third pillar at 31 December 2015 made available on the Group's website at With a special reference to the Internal control system, effective as from 1 July 2016, the definition of the new structure of the General Management and the appointment of the Chief Risk Officer responsible for the risk management and validation function are of note with a strong focus in the definition and implementation of the Risk Appetite Statement of the Group and related controlling policies. The Credito Valtellinese Group identified the relevant risks to which it is or could be exposed in line with its vocation as a cooperative banking group oriented to financing the real economy of the areas in which the Group operates (SMEs and households, in particular) and defined, within the RAF and to coincide with operational planning, targets and risk exposure limits (Risk Appetite Statement, RAS) for the 2016 financial year. The definition of the risk appetite of the Group is based on a sound and prudent management and considers the existing prudential rules, the adopted business model, the deposit and loan methods typical of the Group and the ability of the control structures to monitor and measure the risks. The Board of Directors of the Parent as the body exercising strategic supervision, ensures that the strategic plan, the Risk Appetite Framework, the capital endowment, the liquidity position, the budget and the internal control system are consistent, also considering the development of the conditions in which the Group works. Annually, the Board of Directors of the Parent also reviews the risk appetite framework and, if the conditions are met, updates them. As part of the structuring of the internal control system, the risk management processes, i.e. "all the rules, procedures, resources (human, technological and organisational) and control activities for identifying, measuring or assessing, monitoring, preventing or mitigating as well as notifying the suitable superiors of all risks assumed or which may be assumed in the various segments, at company and group portfolio level, applying integrated logic, also mutual inter-relations and the evolution of the external scenario were defined. The assumption of risks implied in the carrying out of the banking activity is allocated to certain local entities, organisational structures or specific subjects through the breakdown of delegated powers by the Board of Directors and the powers established by the organisational structure. Risk management, based on criteria of prudence, is implemented within a precise organisational context, which includes the set of internal rules, operating procedures and control structures and is broken down according to a model that integrates control methods at various levels, all converging with the objectives of ensuring efficiency and effectiveness of operating processes, safeguarding integrity of corporate assets, protecting from losses, ensuring reliability and integrity of information and verifying proper execution of activities with respect to the internal and external regulations. The risk management processes also envisage the definition of operational limits to the assumption of various types of risk, consistent with the risk appetite defined within the RAS and 79

80 of the development of the economic scenario. The system of limits on risk assumption is divided into reporting thresholds and intervention thresholds that, once exceeded, activate specific controls designed to restore normal levels. The assessment of exposure to risks is carried out on a regular basis, with the appropriate frequency and reported periodically to corporate bodies. The internal capital adequacy assessment (ICAAP) and internal liquidity adequacy assessment processes (ILAAP) are of particular note, also in terms of prudential regulations. The results of the ICAAP and ILAAP processes are summarised in the relevant Reports that represent the point of convergence and synthesis of the equity, economic and financial plans, of the risk management, capital management and liquidity management and that, on the other hand, are an essential instrument supporting strategic planning and the implementation of the corporate decisions. All-in-all, the coordinated action of governance, organisation, risk management and internal control system allow to obtain a full picture and an adequate management of the assumed risk and the awareness, looking ahead, of the expected risk. In line with its focus on retail banking, the Group is mainly exposed to credit risk. In terms of capital requirement, the exposure to operational risks is also significant: these risks are assumed in that they serve as a means for carrying out the banking business. The exposure to financial and market risks is limited, given that the objective of limiting the volatility of the forecast results would not be compatible with an intensive speculative financial activity, with a pronounced transformation of maturities and with treasury management as a profit centre rather than a service. The current composition of the assets also involves an exposure to the sovereign risk, whereas the other risks are of lesser significance. At the date of this report, the actual risk exposure complies with the tolerance thresholds set taking into account the maximum technically assumable risk, it is consistent with the capital allocation objectives and complies with both the operational limits and prudential supervision requirements. 1. CREDIT RISK In line with its focus on retail banking, the Group is mainly exposed to credit risk taken on when carrying out the traditional lending activity, regardless of the specific technical form in which the loan is granted. The purpose of the credit policies defined by the Group is: - to make concrete and operational the statutory principles that express the corporate identity - a Group with a vocation as a cooperative Bank oriented to financing the real economy of the areas in which the Group operates, SMEs and households in particular - and inspire its guidelines for carrying out its lending activity; - direct the loans portfolio composition towards the optimisation of the ratio between the expected return and credit risk, with a view to realigning the risk-adjusted profitability to the cost of capital and limiting the concentration of exposures on single counterparties/groups, on single business segments or geographical areas; - support the monitoring of the credit risk management by applying policies, processes, methods and standard IT procedures. The credit risk monitoring mainly involved two Parent Areas: the Loans Area, focused on the monitoring of credit quality by controlling all the variables of risk management, guidance and monitoring (including the segment of medium to long term loans and corporate finance) and the Risk and Control Area that, as already reported, monitors the activities and the development of the Group s internal control and risk management system. The new organisational structure, 80

81 approved by the Board of Directors of the Parent effective as from 1 July 2016, envisaged the establishment of the positions of Chief Lending Officer and Chief Risk Officer. With regard to the credit rating process, approval and management of positions, each Bank carries out the lending activity on the basis of guidelines and standard processes defined by the Parent and on the basis of delegated powers to authorise loans. In the granting of loans, guarantees are an accessory element; the granting of loans is, in fact, based on the borrower s actual capacity to repayment of the loan. Where necessary, for the purposes of credit risk mitigation, the Group acquires from its customers the typical banking guarantees, i.e. mainly, mortgages on real estate, collaterals on securities and marginally personal guarantees. The Credito Valtellinese Group makes use of a set of parameters and instruments for managing the credit risk, which includes an important element such as the internal ratings calculated through differentiated and estimated models specifically by customer segment (Corporate, SME Corporate, Small Retail, Micro Retail and Private). For the company portfolio (Corporate and Retail) and Private Retail, the distributions by official rating classes at 30 June 2016 and at 31 December 2015 are indicated below. Chart 1 - Distribution of loans to companies and private by rating class In credit risk measurement, the Loss Given Default and Exposure at Default are of note. The irregularly performing loans are classified in compliance with what is provided by supervisory regulations as: past due non-performing loans, unlikely to pay and bad loans. In order to increase the efficiency of the management and recovery of non-performing loans, the Group works with specialised operators with whom it has signed long-term industrial partnerships. Within the management of bad loans, the Group retained the strategic monitoring in the management of major exposures, (known as large ticket) in addition to the operational coordination and control of the recovery process and activities carried out by the servicer. The valuation of impairment losses of non-performing financial assets occurs analytically, i.e. for each position, on the basis of uniform rules for all Banks in the Group. 81

82 With regard to the management of non-performing financial assets, during the half-year, the Group carried out the following operations in compliance with the objectives of disposal of nonperforming loans: - in February 2016, the deed of transfer of a portfolio consisting in secured and unsecured bad exposures - known as "Cerere" portfolio - was signed with Credito Fondiario SpA for a gross book value of approximately EUR 302 million; - in May 2016, the Credito Valtellinese Group and Credito Fondiario announced the signing of an agreement for the sale of a portfolio mainly consisting of secured non-performing loan agreements - known as Gavia portfolio claimed by Credito Valtellinese with regard to companies of the real estate sector, for a gross book value ( GBV ) of approximately EUR 103 million, against a total valuation of the portfolio of approximately 41% of the GBV. The transaction is subject, as for Credito Fondiario, to the authorisation by the Bank of Italy; - in June 2016, an agreement for the sale of a portfolio consisting of secured non-performing loans - known as Arizona portfolio was signed for a gross book value ( GBV ) of approximately EUR 21 million, against a total valuation of the portfolio of approximately 35% of the GBV. Concentration risk The exposure to concentration risk, by single counterparty or group of related customers, by business segments and by geographical areas, is modest and consistent with the objectives. 82

83 Distribution of credit exposures by portfolio and credit quality (carrying amounts) Portfolio/Quality Bad loans Unlikely to pay Past due nonperforming loans Past due performing loans Other performing loans Total 1. Available-for-sale financial assets ,623,254 5,623, Held-to-maturity investments Loans and receivables with banks , , Loans and receivables with customers 1,228,602 1,810, , ,045 14,709,271 18,614, Financial assets at fair value through profit or loss Financial assets held for sale 3,527 42,675 2,204-1,363 49,769 Total at 30/06/2016 1,232,129 1,853, , ,045 21,110,553 25,064,902 Total at 31/12/2015 1,207,157 1,835, , ,682 20,847,062 24,874,750 Other performing loans include EUR 1,194,434 thousand (EUR 1,241,283 thousand at 31 December 2015) of loans past due from 1 day. 83

84 Distribution of credit exposures by portfolio and credit quality (gross amount and carrying amount) Non-performing assets Performing assets Total Portfolio/Quality Gross amount Individual impairment Carrying amount Gross amount Collective impairment Carrying amount (carrying amount) 1. Available-for-sale financial assets ,623,254-5,623,254 5,623, Held-to-maturity investments Loans and receivables with banks , , , Loans and receivables with customers 5,308,903-2,005,379 3,303,524 15,416, ,293 15,311,316 18,614, Financial assets at fair value through profit or loss X X Financial assets held for sale 103,138-54,732 48,406 1, ,363 49,769 Total at 30/06/2016 5,412,415-2,060,111 3,352,304 21,817, ,340 21,712,598 25,064,902 Total at 31/12/2015 5,620,411-2,262,405 3,358,006 21,631, ,610 21,516,744 24,874,750 Assets with a clear poor credit quality Other assets Portfolio/Quality Accumulated losses Carrying amount Carrying amount 1. Financial assets held for trading 3,998-41, Hedging derivatives Total at 30/06/2016 3,998-41,444 Total at 31/12/2015 3,998-50,305 84

85 Banking Group - On and off-statement of financial position credit exposures with banks: gross amount, carrying amount and past due brackets Type of exposure/amounts Gross amount Individual impairment Collective impairment Carrying amount Non-performing assets Performing assets A. ON-STATEMENT OF FINANCIAL POSITION EXPOSURES Up to 3 months From 3 months to 6 months From 6 months to 1 year Beyond 1 year a) Bad loans X - X - - of which: forbearance exposures X - X - b) Unlikely to pay X - X - - of which: forbearance exposures X - X - c) Past due non-performing loans X - X - - of which: forbearance exposures X - X - d) Past due performing loans X X X X - X of which: forbearance exposures X X X X - X - - e) Other performing loans X X X X 779,583 X - 779,583 - of which: forbearance exposures X X X X - X - - TOTAL A , ,583 B. OFF-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Non-performing X - X - b) Performing X X X X 21,713 X - 21,713 TOTAL B , ,713 TOTAL A+B , ,296 85

86 Banking Group - On and off-statement of financial position credit exposures with customers: gross amount, carrying amount and past due brackets Type of exposure/amounts Gross amount Individual impairment Collective impairment Carrying amount Non-performing assets Performing assets Up to 3 months From 3 months to 6 months From 6 months to 1 year Beyond 1 year A. ON-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Bad loans ,609,312 X -1,377,183 X 1,232,129 - of which: forbearance exposures ,506 X -25,234 X 29,272 b) Unlikely to pay 518,845 78, ,938 1,765,333 X -657,757 X 1,853,894 - of which: forbearance exposures 379,933 22,984 59, ,324 X -195,300 X 620,203 c) Past due non-performing loans 9,930 29,914 91, ,147 X -25,171 X 266,281 - of which: forbearance exposures 395 1,087 12,785 8,896 X -1,950 X 21,213 d) Past due performing loans X X X X 617,180 X -15, ,045 - of which: forbearance exposures X X X X 104,462 X -3, ,947 e) Other performing loans X X X X 20,478,543 X -90,205 20,388,338 - of which: forbearance exposures X X X X 234,182 X -5, ,320 TOTAL A 528, , ,399 4,534,792 21,095,723-2,060, ,340 24,342,687 A. OFF-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Non-performing 23, X -4,867 X 18,658 b) Performing X X X X 1,467,824 X -2,836 1,464,988 TOTAL B 23, ,467,824-4,867-2,836 1,483,646 TOTAL A+B 552, , ,399 4,534,792 22,563,547-2,064, ,176 25,826,333 86

87 Banking Group - Distribution of on and off-statement of financial position credit exposures with customers by business segment (carrying amount) Exposures/Counterparts A. On-statement of financial position exposures Carrying amount Governments Individu al impairme nt Collective impairmen t Other government agencies Carryin g amount Individual impairmen t Collective impairmen t A.1 Bad loans - - X - - X - of which: forbearance exposures - - X - - X A.2 Unlikely to pay 2-1 X 5,606-1,437 X - of which: forbearance exposures - - X - - X A.3 Past due non-performing loans 1 - X 24-2 X - of which: forbearance exposures - - X - - X A.4 Performing loans 5,557,055 X - 73,442 X -2,492 - of which: forbearance exposures - X - - X - TOTAL A 5,557, ,072-1,439-2,492 B. Off-statement of financial position exposures B.1 Bad loans - - X - - X B.2 Unlikely to pay - - X 2,998-7 X B.3 Other non-performing assets - - X - - X B.4 Other performing loans 1,366 X - 406,675 X -3 TOTAL B 1, , TOTAL (A+B) 30/06/2016 5,558, ,745-1,446-2,495 TOTAL (A+B) 31/12/2015 5,069, ,030-1,842-3,461 Exposures/Counterparts A. On-statement of financial position exposures Carrying amount Financial companies Individu al impairme nt Collective impairmen t Carryin g amount Insurance companies Individual impairmen t Collective impairmen t A.1 Bad loans 43,190-34,324 X - - X - of which: forbearance exposures - - X - - X A.2 Unlikely to pay 47,086-23,467 X X - of which: forbearance exposures 8,215-4,515 X - - X A.3 Past due non-performing loans 1, X - - X - of which: forbearance exposures - - X - - X A.4 Performing loans 1,828,455 X -4,202 2,381 X - - of which: forbearance exposures 1,155 X -5 - X - TOTAL A 1,920,264-57,935-4,202 2, B. Off-statement of financial position exposures B.1 Bad loans X - - X B.2 Unlikely to pay - - X - - X B.3 Other non-performing assets - - X - - X B.4 Other performing loans 139,013 X -12 1,085 X -5 TOTAL B 139, , TOTAL (A+B) 30/06/2016 2,059,371-57,989-4,214 3, TOTAL (A+B) 31/12/2015 2,448,611-62,018-6,551 3,

88 Exposures/Counterparts Non-financial companies Other parties A. On-statement of financial position exposures Carrying amount Individual impairment Collective impairment Carrying amount Individual impairment Collective impairment A.1 Bad loans 1,055,269-1,189,770 X 133, ,089 X - of which: forbearance exposures 28,289-24,417 X X A.2 Unlikely to pay 1,625, ,008 X 176,167-48,832 X - of which: forbearance exposures 579, ,063 X 32,271-7,722 X A.3 Past due non-performing loans 199,144-19,073 X 65,579-5,952 X - of which: forbearance exposures 14,650-1,349 X 6, X A.4 Performing loans 9,336,239 X -91,581 4,192,811 X -7,065 - of which: forbearance exposures 284,306 X -9,140 43,806 X -232 TOTAL A 12,215,655-1,792,851-91,581 4,568, ,873-7,065 B. Off-statement of financial position exposures B.1 Bad loans 2,527-1,874 X X B.2 Unlikely to pay 11,559-2,729 X X B.3 Other non-performing assets X 17-2 X B.4 Other performing loans 737,252 X -1, ,154 X -994 TOTAL B 752,001-4,665-1, , TOTAL (A+B) 30/06/ ,967,656-1,797,516-93,403 4,681, ,014-8,059 TOTAL (A+B) 31/12/ ,268,734-1,960, ,686 4,565, ,238-8,199 Large exposures 30/06/2016 a) Amount - carrying amount 10,595,035 b) Amount - weighted amount 1,173,040 c) Number 4 The report prepared on the basis of the new provisions envisaged by the Basel 3 regulations, effective as from 1 January 2014, shows positions that exceed the 10% threshold of the eligible capital, attributable to exposures towards the Italian Government of EUR 6,277,088 thousand, exposures towards Cassa Compensazione e Garanzia of EUR 3,357,837 thousand and, for the remaining part, to exposures towards banking and financial counterparties. 88

89 2. MARKET RISK INTEREST RATE RISK AND PRICE RISK - REGULATORY TRADING BOOK "Regulatory trading book" means the portfolio of financial instruments subject to the capital requirements for the market risks, as stated by the measures regarding supervisory reports. The trading book comprises bonds, shares and trading derivatives. The bond component of the book consists mainly of fixed-rate securities with a quite limited duration and hedged against interest rate risk. The bonds held are almost exclusively issued by banks and by the Italian Republic. The direct equity investments, residual in size, mainly involve shares listed on the Italian Stock Exchange and with high degree of liquidity. The financial instruments in the book are mostly in Euro. At the end of the half-year, there are no positions that entail exposure to commodity risks. The risk is allocated almost entirely to the Parent and the exposure remains well within established limits; the size and riskiness of the book of the territorial banks comply with the established limits. The main portion of the portfolio risk consists of the issuer risk. Risk hedging tools and techniques are used in the management of the portfolio. Risk is measured using both analytical techniques (establishing the duration of the bond portfolio with regard to interest rate risk exposure) and statistical estimate techniques of the Value at Risk (VaR) that allows to evaluate the maximum potential loss in the trading book within a given time horizon with an established level of confidence. The estimate is carried out by using the parametric approach, based on the volatility and the correlations of risk factors observed in a certain period, over a 10-day period and a 99% confidence interval. The data used is provided by Prometeia (RiskSize). During the half-year, the VaR recorded limited values with relation to the book s size and to the allocated VaR. At the end of the reporting period, the main factor to which the portfolio is exposed is the issuer risk. The importance of the issuer risk is mainly ascribable to the still modest creditworthiness of the banks and of the Italian Republic. The backtesting activities carried out with reference to the trading book confirm the reliability of the estimates carried out. Regulatory trading book VaR performance (values expressed in EUR) First half of Average Minimum Maximum 30/06/2016 Average Minimum Maximum , ,076 89

90 Regulatory trading book VaR performance Regulatory trading book Contribution of risk factors to calculation of VaR Situation at 30/06/2016 Price and specific risk Interest rate risk Currency risk Issuer risk Benefit of diversification 27.5% 2.1% 32.0% 38.4% -71.1% Regulatory trading book Breakdown of bond exposures by issuer type Situation at 30/06/2016 Sovereign issuers Public issuers Banks Insurance companies and other financial companies Corporate 31.3% 1.3% 67.4% 0.0% 0.0% 90

91 2.2 - INTEREST RATE RISK AND PRICE RISK - BANKING BOOK The banking book consists of all financial instruments payable and receivable not included in the trading book. It mainly comprises loans and receivables with banks and customers and amounts due to banks and customers and Government bonds. The interest-rate risk mainly derives from the existence in the financial statements of the bank of interest-bearing assets and onerous liabilities. Interest rate risk management aims to minimise the impact of unfavourable variations in the rates curve on the value and on cash flows generated by statement of financial position items. Limiting exposure to interest rate risk is achieved primarily by index-linking asset and liability items to money market benchmarks (usually the Euribor rate) and by balancing the duration of the asset or liability at low levels. The objectives with respect to interest rate risk exposure are considered when carrying out strategic and operational planning, both when identifying and developing new products. The Risk Management Department monitors on a monthly basis the exposure of the Banks and of the Group to the interest rate risk, and verifies the consistency with the risk appetite defined by corporate bodies within the Risk Appetite Framework and the compliance with the system of limits. Adequate information flows are provided on a regular basis and timely to corporate bodies and functions of management and control. Measurement of interest rate risk is firstly based on the economic value approach, defined as the current value of expected net financial flows generated by assets, liabilities and off-statement of financial positions. The behavioural profile of sight items, analysed on a statistical basis with a special model, is also considered in the assessment of the exposure to risk, based on the revaluation of positions in different scenarios. The exposure to interest rate risk was subject to reporting limits and actions at consolidated level, defined in terms of fair value change at the end of the reporting period (static ALM) resulting from instantaneous movements of the rate curve. To this end, both parallel shifts of fixed size (typically 200 basis points) and specific variations for each node of the interest-rate structure are considered, determined on the basis of major decreases and increases actually recorded in an observation period of 6 years (considering the 1st and 99th percentile of the distribution, respectively). Moreover, non-parallel shifts of the yield curve that are able to change its inclination (flattening, steepening and reversal of the interest rate structure) are also taken into consideration. At half-year end, the changed duration calculated for all financial statements assets and liabilities as well as the duration gap were moderate. Assuming that the rate structure makes a parallel shift upwards of 100 basis points, the fair value would decrease by EUR 38.9 million. In case of an equal downward shift, under the non-negativity restriction in nominal interest rates, the value would decrease by EUR 24.6 million. As regards income profiles, in the hypothesis of instantaneous and parallel shifts of the interest rate curve by -100 basis points (under the nonnegativity restriction in nominal interest rates), the variation of the net interest income generated by the banking book, over a time horizon of 12 months, would be negligible and less than EUR million, whereas it would equal EUR 60.3 million in the case of shifts of +100 basis points. These amounts express the effect of changes in the interest rates on the banking book, excluding modifications to the composition and size of the financial statement items. As a result, these cannot be considered as an indicator in forecasting the expected level of the net interest income. However, under the assumptions indicated, changes in the net interest income would result in equal changes in total income and minor changes in profit, if we consider the related tax effects. The banking book consists also of the shares that are held as part of more in-depth relations with specific companies or represent the instrument supporting significant initiatives undertaken in the Group s reference territory. The price risk management methods for such financial instruments, 91

92 therefore, tend more towards the management approach for investments in associates and companies subject to joint control, rather than the risk measurement techniques and instruments used for the trading book; at the end of the half-year, there were no elements able to adversely affect the value of investments held. The Group also holds a share in the Atlante fund, the enhancement of which is affected by the trend of the Italian banking sector, and fund units, mainly real-estate type, the values of which reflect the reference market trend; since the held fund units mainly pertain to the Italian market, the fragile economic situation could have a negative influence on the latter's value. Fair value hedges The hedging of interest rate risk aims to protect the banking book from fair value changes of loans caused by the movements of the interest rate curve (fair value hedge); types of derivatives used by the Group are represented by interest rate swaps (IRS) carried out with third parties. At the end of the half-year, Italian Government bonds (BTP) are recognised in the banking book of Available-for-sale financial assets with the objective of hedging the variability of the relevant fair value component linked to changes in interest rates, excluding the residual component of the credit risk, whose effects remain in the relevant Equity reserve. To this end, hedging derivatives (IRS) were used. They were entered into together with the purchase of underlying securities. The effectiveness tests carried out on a monthly basis confirmed a very high effectiveness and, anyway, within the range required by the IFRS. 3. LIQUIDITY RISK The liquidity risk to which the banks are normally exposed due to the phenomenon of transformation of maturities is the risk that the banks will not be able to meet their payment commitments due to inability to procure the funds (funding liquidity risk) and to divest their assets (market liquidity risk). Liquidity management is aimed primarily at ensuring the solvency of each individual Group Bank also in stressful or crisis conditions, not at achieving profits (an objective that may involve a trade-off with the ability of the banks to meet their commitments when they fall due and reduce the effectiveness of the risk management system). The liquidity risk management process mainly involves some specific structures that produce, in relation to their operational and monitoring activities, special reports for corporate bodies. In particular, the Finance Department is in charge of treasury management and of the supply on the inter-bank market and manages the intraday and short-term liquidity risk; the Planning and Control Department participates in defining the structural liquidity balance of the Banks and of the Group as a whole; the Risk Management Department - independently from the "operational management" of the liquidity risk - contributes to the definition of the policies and processes of risk management, develops the evaluation process of liquidity risk, supports the governing bodies in defining and carrying out activities related to the observance of the prudential regulations, and ensures accurate, complete and timely information. The liquidity risk occurs according to different exposure profiles compared to the considered timescale, to which specific arrangements for the management, measurement, mitigation and control correspond. The approach adopted for risk management envisages integration of the cash flow matching approach (which tends to make expected cash inflows coincide with expected cash outflows for each time horizon) with the liquid assets approach (which requires the financial statements to include a set number of financial instruments that can be readily converted into cash). In order to face up to the possible occurrence of unexpected liquidity requirements and thus to mitigate the relevant risk exposure, the Group provides itself with adequate short-term 92

93 cash reserves (liquidity buffer). At 30 June 2016, the Group had a negative net interbank position of EUR 1 billion and a carrying amount towards central counterparties of EUR 2.0 billion. The Group held liquidity reserves mostly consisting of Italian Government bonds and deemed appropriate to the contingent and perspective requirements. In particular, EUR 7.8 billion (amount already reduced by the haircuts) of assets eligible for refinancing with the European Central Bank, including those coming from securitisations and loans that meet the eligibility requirements. At the end of the period, almost one fifth of these assets secured the transactions with the ECB, whereas approximately one third was used with market counterparties; assets amounting to EUR 3.6 billion are free. With reference to a three-month time horizon, not tied up liquidity reserves amounted to EUR 5.0 billion. As part of the centralised treasury model that concentrates with the Parent the management of cash flows and the holding of liquid assets, the assets readily convertible into cash are mainly allocated in the portfolios of the Parent Credito Valtellinese. A portion of the securities resulting from securitisations and appropriate loans pertain, however, to the other banks of the Group. At 30 June 2016, the main source of funding consisted of retail customers (EUR 18.4 billion, accounting for 77.7% of total funding defined considering both the bank and customer components), stable and diversified. Funding from ECB (EUR 1.5 billion for long-term refinancing transactions) accounts for 6.3% of the total. In consideration of the current composition of deposits carried out by the Group, in order to assess the concentration, the degree of dependence on a limited number of counterparties is analysed, in particular, whereas transactions in currencies other than the euro and the concentration on special technical forms such as securitisations are not important. The Group monitors the stock of liabilities on sight or with a short-term to the major wholesale counterparts (institutional investors, large companies or groups, non-economic institutions) considered more sensitive to the market situation and to the real or perceived situation of the Group Banks. The degree of concentration at the end of June 2016 slightly increased compared to that at the end of the prior year and still remains at low levels. From the structural perspective, the Group carries out a modest transformation of maturities. The loan and deposit ratio was 85.1%, down from 87.8% at the end of the prior year. 4. SECURITISATION TRANSACTIONS The specific risk deriving from securitisations is defined as the "risk that the economic substance of the securitisation transaction may not be fully reflected in the decisions of risk assessment and management. The carrying out of securitisations also involves an exposure to other types of risks, different by type and entity in relation to the structure of the transactions. With regard to assessment of exposure to risk, the different profiles are taken in consideration as part of the ordinary course of business related to the different types of risk. At the reporting date, the following securitisation transactions are in place: - Quadrivio RMBS 2011; - Quadrivio RMBS 2013; - Quadrivio SME All the multi-originator transactions were carried out pursuant to Italian Law 130/1999. None of the securitisation transactions meet the criteria for the derecognition of the transferred loans and receivables that are fully represented in the asset items. For the securitisation transactions called Quadrivio RMBS 2013, the originator Banks subscribed all the ABS securities issued in connection with the factored portfolio, whereas in the Quadrivio RMBS 2011 and Quadrivio SME 2014 transactions, the originator Banks fully hold the junior tranches, without transferring any credit 93

94 risk. In January 2016, the early repayment of the multi-originator securitisation carried out in August 2012, by means of the Special purpose entity Quadrivio SME 2012 S.r.l., was finalised through (i) the repurchase of residual securitised loans by Credito Valtellinese, Credito Siciliano and Cassa di Risparmio di Fano, (ii) the early repayment of securities and (iii) the termination of the securitisation contracts. Credito Valtellinese also subscribed the following senior tranches of ABS securities issued as part of the securitisations carried out pursuant to Italian Law 130/1999 and holds securities deriving from a securitisation transaction carried out pursuant to Luxembourg laws on securitisations. As a result of the paid redemptions, the current equivalent carrying amount is EUR 31,122 thousand. 5. OPERATIONAL RISK The operational risk is defined as the risk of incurring losses due to the inadequacy or inefficiency of procedures, human resources and internal systems or due to external events, including the legal risk. It includes, inter alia, losses deriving from fraud, human error, interruption of operations, system break-down, contractual non-performance and natural disasters. Risk containment is achieved through the use of regulatory, organisational and procedural measures and training. Any critical area, identified through joint analysis of various sources of data, is examined in further depth by department managers who, together with the Risk Management Department, establish the appropriate corrective actions. Under the regulatory profile, the Group calculated the capital requirement to meet the operational risk in the consolidated financial statements by using the Traditional Standardised Approach (TSA). From the management viewpoint, risk exposure is assessed both in quantitative terms, by analysing the operating losses incurred, and in qualitative terms, through risk self-assessment. Legal risks A provision was made in the financial statements, appropriate and consistent with the policy for calculating the provisions adopted by the Group, in order to mitigate the potential economic losses resulting from the pending legal proceedings with regard to the Bank and the other banks belonging to the Group. At 30 June 2016, there are 541 actions brought against the companies belonging to the Group for an overall amount of EUR 179 million against which a total loss of EUR 17.5 million is expected. The cases mainly refer to requests for restitution for compound interests and bankruptcy clawbacks, claims for compensation for losses accrued in investments in financial instruments and other cases of damages broken down as follows. Type of cases No. of cases Relief sought (in millions of EUR) Provision made (in millions of EUR) Compound interests Bankruptcy clawbacks Investment services Other Total

95 The Group pursues careful settlement procedures, based on an in-depth analysis of the concrete grounds on which the actions are based, meaning the existence of both the subjective and objective elements. Some information concerning important actions against the Bank is summarised below. Formenti Seleco in A.S. In 2010, the Procedure started before the Court of Milan two separate legal proceedings against Credito Artigiano, now Credito Valtellinese. The first proceeding concerns the bankruptcy clawback pursuant to Article 67 of the Bankruptcy Law of the settlement remittances quantified by the counterparty in EUR 7.8 million. The second proceeding consists of an action for damages related to the case of abusive lending that the receiver started against the 19 banks severally liable totalling EUR 45 million. These disputes had a completely independent and separate process. In fact, with regard to the bankruptcy clawback, a settlement agreement of the dispute was completed and achieved. With respect to the action for damages, the Court first, and the Court of Appeal then, rejected in toto the opposing claims as groundless. Currently, the judgement is pending with the Court of Cassation. Gianfranco Ferrè in A.S. In 2012, the Procedure started a bankruptcy clawback proceedings against Credito Artigiano, now Credito Valtellinese, pursuant to Article 67 of the Bankruptcy Law with reference to the settlement remittances paid into the current account of the bankrupt company quantified by the counterparty in EUR 10.4 million. The case, which is pending before the Court of Isernia, is in the preliminary stage. The risks related to the cause are monitored by adequate provisions. Ministry of Economy and Finance On 3 February 2014, a claim form was notified to Credito Valtellinese by the MEF, in relation to the alleged non-payment by the Bank of interest due as a result of the exercise of the right of redemption of the financial instruments issued pursuant to Article 12 of Italian Law Decree no. 185 of 29 November 2008, amended and converted by Italian Law no. 2 of 28 January 2009 (Tremonti-bond). The MEF asked the Court of Rome to order the Bank to pay a total amount of EUR million. In this regard, on 18 June 2013 the Bank had informed the Ministry of its intention not to pay the amount of EUR million (corresponding to the interests accrued on a pro rata basis up to the date of redemption and calculated in proportion to the interest paid on the date of payment of the immediately previous interests) in that such interest is considered not due on the basis of an interpretation of the applicable regulations and of the issue prospectus formalised, together with the related interpretative uncertainties, in an opinion issued by a leading law firm. The Bank appeared before the court maintaining that, at the time of redemption of the Financial Instruments, there was no payment obligation of interests to Creval, in that the last consolidated financial statements available on the redemption date, or the 2012 financial statements, approved by the Board of Directors of Credito Valtellinese on 19 March 2013, showed a loss for the year. These financial instruments were included among the equity instruments and the related interests were paid through equity. Any further payments of interests must be made in the same way, i.e. with the use of a free reserve of equity. Italval Group srl Italval Group Srl started a legal action against Credito Valtellinese concerning a claim for the return of undue payment due to compound interest on current account. The plaintiff s claim is quantified in the summons in EUR 10 million against. The Bank appeared before the court challenging the other party s claim and raising objections to the prescription of the claim started in court. The accounting court-appointed expert ascertained a compound interest risk limited to 95

96 approximately EUR 0.4 million applying the methods of the plenary session. The risks related to the cause are monitored by adequate provisions. Saba Srl The plaintiff company started the case with regard to Credito Siciliano charging it with alleged irregularities in the management by the bank of the loans disbursed to the company itself (with a special reference to a building loan). The counterparty claims that, as a result of these irregularities, it would have undergone economic damages quantified in the summons in EUR 11.8 million. The judgement is in the preliminary stage and, based on acquired elements of pre-trial investigation, the claim appears unfounded. Lorental srl (former Tecnofil Group Spa) Property leasing taken out in 1991 and rescind by mutual consent in The company complains about the unlawfulness of the termination of the contract and asks for the refund of the fees paid and relevant expenses and related interests as well as the compensation for damages related to the non-acquisition of the financed property as a result of the termination of the contract. The counterparty requests the cancellation of the agreed termination because of the abuse of dominant position. Positive outcome for the Bank at the end of the first instance. Currently, the appeal promoted by the counterparty is pending. Tax dispute During the first half of 2016, there are no tax audits or notices of assessment of significant amount. With reference to the Parent, a tax dispute for the purchase of bank branches was also positively settled, within a procedure requested by the Competition Authority, whose claim amounts to EUR 1.3 million by way of stamp duty, in relation to the higher goodwill assigned compared to the one recognised and paid to the counterparty and declared in the deeds. The Provincial Tax Commission of Milan upheld the appeal of the Bank, with judgement confirmed later on by the Regional Tax Commission of Milan. The judgement is definitive. During the second half of 2014, a request for refund of the portion of tax paid pending judgement was made. Payment is still pending. The rights of the Group companies are protected by external professionals with special skills and experience, with the intention to enforce the rights of the companies in the competent administrative and legal venues. Labour related lawsuits In terms of numbers, in the half-year just ended, there is an increase in the number of risk events related to labour related lawsuits compared to the one recognised at group level at 31 December 2015, increased by two units over the last six months, with the involvement also of Creval Sistemi e Servizi albeit limited, at 30 June 2016, to a single dispute. Labour disputes in which the companies of the Group are involved at the end of the half-year and still active at least in terms of the payment of legal fees mainly concern actions for the contestation of the dismissal by former employees; albeit to a considerably lower extent, these actions are undertaken for alleged de-skilling or for disputes concerning the application of contractual regulations and/or laws governing salary aspects of the employment relationship. In terms of risk quantification, against the overall relief sought resulting from the set of judgements registered at 30 June 2016, the capital requirement of the globally considered labour dispute - adequately covered by the provisions made by the Group Companies concerned - can be prudentially estimated at just over EUR 1 million; this risk, up compared to the previous record 96

97 value, taking also into account the increase in the number of events, is divided, with a similar distribution, on Credito Valtellinese and on Credito Siciliano; to a lesser extent, on Creval Sistemi e Servizi. IT (or ICT) risk IT risk is the risk of incurring economic, reputation and market share losses in relation to the use of the Information and Communication Technology - ICT. In the integrated representation of business risks for prudential purposes (ICAAP), this type of risk is considered, in accordance with the specific aspects, among operational, reputational and strategic risks. The IT risk analysis is a tool guaranteeing the efficiency and effectiveness of the protection measures of the ICT resources. In the light of the supervisory provisions on this matter, the Group defined the overall framework for managing the IT risk as well as the methods of risk analysis and assessment. The percentage distribution of operational losses recognised in the internal database during the period is shown in terms of frequency and impact. 97

98 Operational losses - Distribution by type of event The events reported during the half-year are mainly attributable in terms of frequency to the following event types: "Execution, delivery and management of processes" (71%), "External fraud" (16%) and "Stoppage of operations and malfunctions of the systems" (7.1%). In terms of impact, losses are attributable to "External fraud" by 34.8%, to "Customers, products and business practices" by 31% and to "Execution, delivery and management of processes" by 30.2%; losses attributable to other event types are of lesser importance. 6. OTHER RISKS Sovereign risk The investment in Italian Government bonds, placed almost entirely in the AFS portfolio, involves the exposure to the credit risk of the Italian Republic that, as with any other issuer, may occur in the form of a decrease in creditworthiness or, in extreme cases, of insolvency. The investment in Spanish Government bonds, residual in size and placed in the AFS portfolio, generates a marginal exposure to the credit risk of Spain. The exposure is monitored on a regular basis and referred to corporate bodies. The outlook of the exposure to the sovereign risk profile is weighed considering adverse scenarios of varying intensity, also based on historical simulations, and their impact on the value of the portfolio and on the own funds. The exposure stood at values exceeding those recorded at the end of the prior year, due to the increase in total volumes and average portfolio duration. The table below shows the carrying amount of the exposures to sovereign debt risk, broken down by portfolio (AFS - Available-for-sale financial assets, HFT - Financial assets held for trading, HTM - Held-to-maturity investments, L&R - Loans and receivables with banks and Loans and receivables with customers). 98