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 2015

2 Company Officers of Credito Valtellinese Board of Directors Chairman Giovanni De Censi Deputy Chairman Alberto Ribolla Managing Director Miro Fiordi Directors Mariarosa Borroni Isabella Bruno Tolomei Frigerio Gabriele Cogliati Michele Colombo Paolo De Santis Paolo Stefano Giudici Gionni Gritti Antonio Leonardi Livia Martinelli Francesco Naccarato Valter Pasqua Paolo Scarallo Board of Statutory Auditors Chairman Standing Auditors Substitute Auditors Angelo Garavaglia Giuliana Pedranzini Luca Valdameri Edoardo Della Cagnoletta Anna Valli General Management General Manager Co-General Manager Deputy General Managers Miro Fiordi Luciano Camagni Umberto Colli Enzo Rocca Mauro Selvetti 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-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 REPORT PURSUANT TO ARTICLE 81-TER OF CONSOB REGULATION NO / REPORT OF THE AUDITORS

4 CONSOLIDATED HIGHLIGHTS AND ALTERNATIVE PERFORMANCE INDICATORS AT 30 JUNE 2015 STATEMENT OF FINANCIAL POSITION 30/06/ /12/2014 (in thousands of EUR) % change 30/06/2014 % change Loans and receivables with customers 18,590,813 19,004, ,446, Financial assets and liabilities 5,367,230 6,539, ,451, Equity Investments 30, , , Total assets 27,062,432 28,813, ,900, Direct funding from customers 21,898,623 20,745, ,424, Indirect funding from customers 12,279,545 11,963, ,890, of which: - Managed funds 6,602,765 5,848, ,633, Total funding 34,178,168 32,708, ,315, Equity 2,010,927 2,020, ,362, At 30 June 2015, the equity investment in Istituto Centrale delle Banche Popolari was classified as "150. Noncurrent assets held for sale and disposal groups" by 18.39%, whereas the remaining 2% was included under item "100. Equity investments". SOLVENCY RATIOS 30/06/ /12/2014 Common Equity Tier 1 capital / Risk-weighted assets (CET1 capital ratio) 11.5% 11% Tier 1 capital/risk-weighted assets (Tier1 capital ratio) 11.5% 11% Total own funds/risk-weighted assets (Total capital ratio) 13.8% 14% FINANCIAL STATEMENT RATIOS 30/06/ /12/2014 Indirect funding from customers / Total funding 35.9% 36.6% Managed funds / Indirect funding from customers 53.8% 48.9% Direct funding from customers/ Total liabilities 80.9% 72.0% Customer loans / Direct funding from customers 84.9% 91.6% Customer loans / Total assets 68.7% 66.0% CREDIT RISK 30/06/ /12/2014 % change Net bad loans (in thousands of EUR) 1,195,809 1,101, Other net doubtful loans (in thousands of EUR) 2,138,160 2,090, Net non-performing loans (in thousands of EUR) 3,333,969 3,192, Net bad loans / Loans and receivables with customers 6.4% 5.8% Other net doubtful loans / Loans and receivables with customers 11.5% 11.0% Net non-performing loans / Loans and receivables with customers 17.9% 16.8% Coverage ratio of bad loans 55.8% 56.0% Coverage ratio of other doubtful loans 19.0% 18.9% Coverage ratio of non-performing loans 37.6% 37.2% Cost of credit (*) 1.71% 3.41% (*) Calculated as the ratio between net impairment losses on loans and year-end loans. 4

5 ORGANISATIONAL DATA 30/06/ /12/2014 % change Number of employees 4,116 4, Number of branches Banc@perta line users 254, , INCOME STATEMENT DATA (in thousands of EUR) 1st half of st half of 2014 % change Net interest income 237, , % Operating income 452, , % Operating costs (250,142) (256,122) -2.33% Net operating profit 202, , % Pre-tax profit from continuing operations 40,553 16, % Post-tax profit from continuing operations 32,999 5,121 n.s. Profit for the period 50,867 3,144 n.s. OTHER FINANCIAL INFORMATION 1st half of st half of 2014 Cost/Income ratio 55.2% 55.8% 52.4% Personnel expenses / Number of employees figure calculated net of non-recurring expenses related to the implementation of the "Solidarity Fund" and of the impairment of the customer lists; figure of the first half-year of 2014 restated in accordance with the provisions of IFRS 5. 5

6 ASSIGNED RATINGS Fitch Ratings Long-Term IDR BB Short-Term IDR B Viability Rating bb Support Rating 5 Support Rating Floor No floor Outlook Stable Last "rating action" on 2 July 2015 Moody s Ratings Long-term Ratings Short-term Ratings Outlook Last "rating action" on 22 June 2015 Ba2 Not-Prime Stable DBRS Ratings Senior Long-Term Debt & Deposit Short-term Debt & Deposits Intrinsic Assessment Support Assessment Trend Last "rating action" on 18 June 2015 BBB (low) R-2 (low) BBB (low) SA-3 Negative INFORMATION ON SHARES 30/06/ /12/2014 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) 1, Group equity per share (*) (*) The calculation does not consider treasury shares in portfolio. 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, as graphically represented below (at 30 June 2015). STRUCTURE OF THE CREDITO VALTELLINESE GROUP The Organisational Model of the Group, defined as a "network company" model, assigns the reference market share to the territorial banks and the required operating support to the specialised finance and special purpose companies. Therefore, it is based on the full enhancement of the distinctive skills of each member, with the purpose of achieving the maximum efficiency and competitiveness, on their functional and operational correlation, on the adoption in the corporate process management of the same rules and methods. This allows to overcome size restrictions and to fully benefit from the advantage of proximity with regard to the areas of choice, combining effectively specialisation and flexibility, production and distribution functions. At 30 June 2015, the Credito Valtellinese Group is present in Italy with a network of 539 Branches, in eleven regions, through the territorial banks characterising the "Market Segment": - Credito Valtellinese S.c., the Parent, present with its own network of 363 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. 7

8 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: - Bankadati Servizi Informatici società consortile per Azioni is the Group s centre for ICT management and development, organisation, back office and support processes. - Stelline Servizi Immobiliari S.p.A. manages the real estate holdings of the Group companies, prepares real estate valuations to support the disbursement of credit by the territorial banks and independently develops initiatives in favour of the local communities of reference. 1 The company carrying out the insurance activities is subject to management and coordination by Credito Valtellinese and therefore included in the consolidation scope, even if not included in the Banking Group, pursuant to the supervisory provisions. 2 See previous note. 8

9 REPORT ON OPERATIONS Macroeconomic reference context 3 The general economic framework The global economic recovery continues but shows signs of slowdown due to temporary factors in advanced economies, more persistent in emerging economies; an acceleration of world trade is expected in the current year. The persistence of conditions of oversupply in the oil market has so far helped to limit the price of crude oil at levels slightly above the lows earlier this year. Factors of uncertainty such as the growth rate of official US rates and financial instability in China, which revealed itself with a sharp decline in the stock market interrupted only by massive interventions of the authorities, which could curb the growth of that country, weigh on global economy. The uncertainty on the prospects of Greece quickly increased after the interruption of the negotiations with institutions and creditor countries for the extension of the support programme, as well as following the results of the surprise referendum held by the Greek authorities. The developments over the last few weeks significantly increased the volatility of financial markets and share prices in the Eurozone. The increase in risk premiums on Government bonds of the Eurozone was however limited as a whole, thanks to the range of instruments at the disposal of the Eurosystem, to the progress in European governance and to the reforms undertaken in each country. After a difficult negotiation, on 13 July, the Eurozone leaders reached an agreement with Greece; this agreement affects the start of negotiations for a third programme supporting the approval, by the Greek Parliament, of a package of stringent and detailed measures, the first of which voted with a positive outcome already on 15 July. After the announcement of the agreement, the conditions of the financial markets have been improved. Looking ahead, a strong action by the European and national economic policies aimed at promoting the resumption of growth in Greece and in the Eurozone is essential to counter the surfacing of tensions. After starting the purchase programme of bonds of the Eurosystem, long-term interest rates of the Eurozone decreased considerably until mid April; then, they started to increase, also in response to the improved prospects for inflation and growth induced by the programme, recovering much of the previous decline. The conditions of the financial and currency markets as a whole continued to support the economic recovery and the trend of prices; inflation turned positive in May, 0.3 per cent, for the first time since the end of last year. The Executive Council of the ECB confirmed its determination to fully implement the programme; it will react to any unwanted restrictions of monetary conditions. The Italian economy started to expand again. The improvement in the confidence indexes of businesses and households was accompanied by a recovery in domestic demand that contributed again to growth. Investments, which decreased almost continuously since 2008, increased, with the first favourable signs also in the construction segment. Business plans envisage a decisive expansion of accumulation during the year for bigger companies, against a more cautious approach of medium and especially small companies. The most recent economic indicators report that growth continued in second quarter at a rate similar to that of the first quarter. 3 Source: Bank of Italy Economic Bulletin no Updated with the figures available on 10 July 2015, unless otherwise indicated. 9

10 In the April-May time interval, employment began to grow again. The unemployment rate stabilised. So far this year, the share of recruitment with permanent contracts increased significantly, encouraged by recent measures of the Government. In spring, the use of the CIG (Cassa integrazione guadagni) decreased. The percentage of companies that envisaged an expansion of employment increased, albeit the opinions of stability prevail. Inflation, negative at the beginning of the year, turned positive, but remained at historically low levels. The expectations of households and businesses foreshadow a further increase. The Italian banking system The expansive monetary conditions are gradually being transmitted to the credit market. The decline in the cost of loans continued; the easing of the lending conditions is also extending to small and medium businesses; the credit crunch for businesses eased; loans to households and manufacturing businesses increased for the first time in more than three years. In the three months ending in May, the credit crunch to the private non-financial sector was cancelled (net of seasonal effects, from -1.5 in February, year on year). The decline in loans to non-financial companies decreased (-0.5 per cent, from -2.5). The credit to households recorded a moderate increase (0.4 per cent) for the first time since March 2012; in the first quarter of the year, the new disbursement of loans increased by 15 per cent compared to the corresponding period of 2014, in line with the more favourable signs in the real estate market and benefiting from low interest rates. The drop in loans to non-financial companies decreased both for bigger companies (-1.4 per cent in the 12 months ending in May) and for smaller companies (-3.6). The trend remained different among business segments: the change in loans to manufacturing businesses turned positive (0.7 per cent), whereas loans to services and constructions continued to decrease (-1.5 and -2.6 per cent, respectively), albeit at a slower pace compared to the end of last year (-2.6 and -3.5). From February to May, total funding of Italian banks increased, reflecting both the further expansion of the deposits of residents, which more than offset the drop in bonds held by households, and the increase in Eurosystem refinancing. As a whole, deposits by nonresidents and reverse repurchase agreements towards central counterparties, which represent interbank transactions with foreign operators, remained unchanged. The easing of monetary conditions continued to be transmitted to the cost of credit. From February to May, interest rates on loans to businesses decreased further, by two and three-tenths of a point for new loans and for existing short-term loans, respectively, to 2.2 and 3.8 per cent; the cost of new loans to households fell by a tenth to 2.7 per cent. The decreases were more pronounced for fixed-rate loans, in line with the sharp drop in long-term yields recorded until mid-april. The differential with respect to the average rates applied in the Eurozone decreased by two-tenths for new loans to businesses, zeroing for those amounting to more than EUR 1 million; it remained unchanged, at approximately 40 basis points, for loans to households. The reduction in the cost of loans to businesses concerned both big and small businesses; in the first quarter, the decline continued to extend also to businesses oriented to the domestic market and to those with less balanced financial conditions. In the first three months of 2015, the flow of new bad loans adjusted in relation to loans, net of seasonal effects and year on year, decreased to 2.4 per cent, three tenths of a 10

11 point less than in the end of The growth is attributable to loans to businesses (the rate of new classifications as bad loans decreased by six tenths, reaching 3.9) and was spread to all sectors of economic activity. The rate remained almost unchanged for households at 1.5 per cent. The decrease in the deterioration of credit quality, observed from 2013 to 2014, is slow in consolidating, especially due to the still modest strength of economic recovery. Preliminary information indicates that, in the second quarter of 2015, total exposure to debtors identified for the first time as bad increased. According to the consolidated quarterly reports, in the first quarter of 2015, the profitability of the five major Italian banking groups increased compared to the same period of the previous year: the annualised return on capital and reserves (ROE) increased by approximately three percentage points, reaching 6.6 per cent. The slight decrease in net interest income (-1.3 per cent), due to the decline in trade volumes, was more than offset by the increase in commission revenues (9.7 per cent) and in income from trading. Total income increased by 9.6 per cent. The increase in the operating result (22.8 per cent) reflected the substantial stability of operating costs, which continue to benefit from the containment measures undertaken by the banks. Impairment losses on loans and receivables, albeit high, decreased (-11.8 per cent). On 11 June 2015, the Bank of Italy issued the minor provisions for implementing the reform of cooperative banks envisaged by Decree Law no. 3/2015, converted by Italian law no. 33/2015. The period of 18 months, provided by law, within which the cooperative banks with assets more than EUR 8 billion must become joint-stock companies, is effective as from the coming into force of the minor provisions. The financial market in Italy The significant easing of the conditions of the Italian financial markets in progress since the beginning of the year recorded a partial correction in the second quarter. On the sector of Government bonds, this mainly affected the rise in medium and long-term German yields. Events related to Greece led to a marked increase in financial market volatility and risk premiums, but with limited effects all in all on the primary and secondary markets of Italian Government bonds. After the sharp drop due to expectations and the start of purchases of Government bonds by the Eurosystem, from the second half of April, the yields on medium and long-term Government bonds started to increase again. The increase followed that of German rates. In the second quarter as a whole, the rate on the Italian ten-year bond increased by 89 basis points (to 2.1 per cent). The spread compared to the corresponding German bond increased by 17 basis points (to 124), affected to a limited extent by the continued uncertainty concerning the outcome of the negotiations on the help programmes for Greece. Tensions in Greece had limited effects all in all also on the primary market of Government bonds. The average rate of return upon issue increased from 0.4 per cent in April to 0.7 per cent in June; in the subsequent auctions carried out with settlement date until 14 July, the rate stood at 0.9 per cent. Even in times of increased tension, overall demand was large and in line with the levels of the previous months. The average rate of new issues remains well below the average cost of issuance of securities issued (3.4 per cent last March). The repercussions of the situation in Greece were limited also on credit risk premiums on banks: spread on credit default swaps of major Italian banks increased by 27 basis points. The yield differentials between the bonds of Italian non-financial companies and 11

12 Government bonds of the Eurozone with a high creditworthiness increased by 16 basis points to 111 points. After a sharp increase in the first three months of the year, there were significant losses in share prices against the rise in yields on Government bonds, and then the intensification of tensions arising from the situation in Greece. From the end of March, the general Borsa Italiana index decreased by 1.8 per cent (by 3.6 per cent in the Eurozone). The negative contribution due to the increase in interest rates and to the increase in premium for the risk requested by the investors was only partially offset by the improvement of expectations concerning company profits. The expected volatility of share prices, derived from the prices of the options on the stock market indexes, increased considerably. 12

13 Events of bank operations during the first half-year The most important events that characterised the management of the Creval Group during the first half of 2015 and that, if necessary, were the subject-matter of specific disclosures to markets are mentioned below. Agreement with Cerved Credit Management. Sale of the subsidiary Finanziaria San Giacomo and "REOCO" project The agreement signed on last December between Credito Valtellinese and Cerved Information Solutions S.p.A. - by means of the subsidiary Cerved Credit Management Group S.r.l. (CCMG) - for the development of a long-term industrial partnership for the management of bad loans was finalised on 1 April In this context, the sale of 100% of Finanziaria San Giacomo S.p.A. (FSG), company wholly owned by Creval and specialised in the management of bad loans of the Group, to CCMG was completed on the same date for a consideration of EUR 21.7 million. At the same time, a multi-year contract was signed for the service management by CCMG of the bad loans book of the Creval Group (85% in terms of Gross Book Value, GBV). The servicing contract envisaged the exclusive outsourcing management of the more "standardised" and "time consuming" part of the bad loans of the Creval Group in addition to the new flows that will be generated in the future (85% of total current and future bad loans), on the basis of variable market fees mainly related to annual actual collections on the managed portfolio. Creval will retain the management of the Large Tickets, as well as the operational coordination and control of the credit recovery process and of the servicing activities. The transaction, consistent with the objectives defined in the Business Plan with reference to the management of bad loans, will allow the Creval Group to extract greater value from the optimisation of the recovery, reducing the level of operating costs, and to improve the recovery rates. As part of the same agreement, a specific project was started aimed at the dynamic management and valuation of bad loans with securities on property in sales by the court (Real Estate Owned Company, REOCO). Asset repossessing of properties used as collateral for bad loans granted by the banks of the Group, initially developed by Stelline, may be further enhanced thanks to the distinctive skills of the Cerved Group combined with the experience gained in the field of real estate by Stelline. Agreement with Yard Credit Asset Management On 16 March 2015, a collaboration agreement was signed with Yard Credit & Asset Management - company of the Yard Group among the main operators of credit management present in Italy, with a high expertise for consultancy, management, credit recovery and surfacing of real assets' value services - for the management of "distressed" real estate loans of the Creval Group. Initially, the collaboration will concern a portfolio of approximately EUR 500 million of nonperforming loans, but not yet classified as bad loans. The management of these loans and receivables focused on the protection of claims requires today a new approach, more based on asset management logics, with a view to enhance the real estate property as collateral, avoiding the gradual worsening and the related increase in the Group's cost of risk. This dynamic management is particularly important in Italy, considering the time required by real estate implementations, which have a significant impact on settlement costs of guarantees. 13

14 Therefore, the collaboration agreement paves the way for a better management of all distressed real estate assets of the Creval group, by enhancing again the expertise gained by Stelline, combined with the distinctive skills of a highly specialised operator. A special Non Core Unit was established within the Loans Area, in support of the new operating process, with deleveraging and derisking objectives on the assigned portfolio. This agreement, in line with the objectives defined by the Strategic Plan, will allow to extract value from "non-core" activities, releasing financial resources for development and growth, and will contribute to reduce the stock of the assets not functional to the core business of the bank. Further simplification of the Group structure. Operating reconfiguration of Stelline and Bankadati On 17 June 2015 following their board resolutions the demerger of the business unit consisting of the property and facility management and property valuation of Stelline in favour of Bankadati, consortium company that manages the activities concerning the Information and Communication Technology (ICT), the organisation, the back office and the support processes of the Group, was approved. The demerged company will change its name in "Stelline Real Estate S.p.A." and will assume the role of REOCO of the Creval Group with a new mission exclusively dedicated to asset repossessing. As a result of the transfer of the activities of the business unit of Stelline, Bankadati will expand the operating size, providing all the support services to the banking business that will be centralised in a single consortium company. At the same time, it will change its name in "Creval Sistemi e Servizi società consortile per azioni". The operational reorganisation of the subsidiaries, which is expected to be completed no later than 30 September 2015, is in line with the objectives stated by the Strategic Plan on the simplification and rationalisation of the corporate centre structure. The new configuration will allow to further optimise the intra-group operating costs, improving the efficiency of the organisational structure, and, at the same time, develop in a more effective manner the asset repossessing activity through a dedicated vehicle. Agreement for the sale of the majority of the share capital of Istituto Centrale delle Banche Popolari On 19 June 2015, an agreement was signed for the sale to Mercury Italy S.r.l. (vehicle indirectly owned by the Bain Capital, Advent International and Clessidra Sgr funds) of the majority (85.79%) of the share capital of Istituto Centrale delle Banche Popolari Italiane (ICBPI) by the current shareholders, based on a valuation of 100% of the capital of ICBPI of EUR 2,150 million or EUR 2,000 million, depending on the final structure of the transaction compared to two cases already identified. Credito Valtellinese which holds 20.4% of the share capital of ICBPI - undertook to sell 18.4% of the share capital of ICBPI, thereby maintaining a residual investment of 2%. The transaction, which is expected to be finalised within the current year, subject to the authorisations of the competent Authorities, will result in a significant net economic effect, including the effect of revaluation of the investment held in ICBPI. In view of the sale, at 30 June 2015, the investment was classified under discontinued operations. 14

15 The operational structure, the customers and the commercial performance indicators The territorial network At 30 June 2015, the branches forming the territorial network of the Credito Valtellinese Group are 539 as represented below. Other distribution channels The following other distribution channels complete the operational structure: ORGANISATIONAL DATA 30/06/ /06/2014 % change Number of ATMs Number of POS 25,707 24, At the end of June 2015, "active" Internet users in the Creval Group - customers who have performed at least one transaction in the last six months - total 254,933, compared to 243,557 at the end of the prior year, with an increase of 4.67%. Customers and commercial performance indicators At 30 June 2015, the Group s customers numbered 985,378. They numbered 935,051 at the end of 2014 and 981,559 at the end of the first quarter of The constant growth 15

16 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 97%. The cross selling indicator - equal to 4.24 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 2015, the registered workforce of the companies included in the consolidation scope of the Group consisted of 4,149 workers. These include 33 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, Alba Leasing and Cerved Group. The figure for the end of 2014 was 4,280. In terms of professional categories, the total workforce of 4,149 can be broken down as follows: - 56 executives; - 1,516 middle managers; - 2,577 workers in other professional categories. Workforce by contract category at 30 June

17 Performance of Credito Valtellinese shares The financial market in Italy in the first half-year was first characterised by a significant improvement after the announcement, at the end of 2014, of the implementation of the "Quantitative Easing" plan by the ECB. Share prices recorded sharp rises and volatility decreased. In the first quarter of the year, the general Borsa Italiana index increased by 26 per cent. The increase in listed prices was determined by the drop in interest rates and by the decrease of the premium for the risk requested by the investors, which more than offset the negative contribution due to the downsizing of expectations concerning company profits. Subsequently, the markets recorded a partial correction, especially to coincide with the escalation of the Greek crisis, which led to a marked increase in financial market volatility and risk premiums, even if, all things considered, with limited effects on the primary and secondary markets of Italian Government bonds. After the sharp increase in the first three months of the year, there were significant losses on the stock market against the rise in yields on Government bonds, and the intensification of tensions arising from the situation in Greece. From the end of March, the general Borsa Italiana index decreased by 1.8%. Volatility increased considerably. The reform introduced by the Government earlier this year and subsequently ratified by the Parliament helped to support the listed prices in the banking sector, especially of securities of cooperative banks. The compulsory transformation of cooperative banks set up as cooperatives into joint-stock companies determines the possibility, after completing the procedure of change, of a greater opposability and, above all, increases the possibility of accessing financial markets to raise new funds designed to support growth, beyond the traditional territories through the shareholding structure. The listed prices of the Italian banking sector, similar to the European one, were affected in June by the dynamics related to the Greek crisis and to the risk of exit of Greece from the EMU and the Single Currency, averted only after the close of the half-year. The European Union, in agreement with the International Monetary Fund and the European Central Bank, managed to agree a new aid and financing package with the Greek authorities. At the time of preparation of this document, the political and economic situation that concerns Greece was relatively stabilised and, as a result, the prices of the shares of the European banking system returned to "pre-crisis" levels. The performance of the Credito Valtellinese share was affected by all these factors, in line with the trends of the Italian banking system. The succession and changing of the represented trends resulted in a significant growth of the historical volatility of the security, as seen also for the other bank securities listed on Piazza Affari. As a whole, the positive overtone of the economy, the recovery of the credit market, the growth of the importance of institutional investors, in addition to some special factors the announcement of the sale of the investment in ICBPI allowed the Credito Valtellinese security to outperform the segment index, recovering the losses accumulated in the past years, with a supported recovery in volumes. Liquidity as a percentage of share capital is growing strongly, with weighted average prices on the up. In the first quarter of 2015, performance was positive (+58.1%), more than that of the Italian market as a whole (+21.8%) and that of the panel of Italian (+44.4%) and foreign (-5.8%) comparable companies. In the second quarter, performance was negative (- 5.1%), more pronounced compared both to the overall performance of the market (-3%), and to that of the panel of foreign comparable companies (-0.2%), vice versa more limited if compared to that of the panel of domestic comparable companies (-5.8%). The 17

18 trade value decreased compared to the first quarter, as well as liquidity as a percentage of share capital, whereas the weighted average prices were almost unchanged. The presence of institutional investors in the share capital is constantly growing and the coverage of the security by financial analysts expanded similarly. Currently, nine brokers express recommendations - all positive - on the Creval share. Taking as reference the values adjusted according to the AIAF method, in the first half of 2015, the average listed price for the Credito Valtellinese share was EUR 1.15, with a minimum of EUR 0.72 recorded on 12 January and a maximum of EUR 1.34 on 11 March. The average listed price of the half-year increased by 45.3% on the closing price of 2014, while the FTSE-IT Financials index recorded an 18.6% increase for the same period. FTSE Italia All-Share increased by 17.6%. The traded value of the Credito Valtellinese shares on the Italian Stock Exchange in the first half of 2015 increased considerably compared to the same period of The daily average volume in the first six months of the year stood at approximately 6.94 million shares compared to 5.3 million of the same period of Therefore, the increase was of approximately 31% in average volumes traded daily. The charts below show the trend of Credito Valtellinese share prices in the first half of The second chart shows the Credito Valtellinese share performance compared with FTSE - ALL SHARE and FTSE-IT Financial indices. 18

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20 Information on the main statement of financial position items and on consolidated income statement figures The interim results are commented upon in summary format, drawn up on a consolidated basis, reclassified according to the presentation criteria considered most appropriate for presenting a fair view of the Group s operating performance. The aggregates and reclassifications regarding items of the financial statements as envisaged in Bank of Italy Circular no. 262/05 as amended are detailed below. The reclassified consolidated statement of financial position is shown below. (in thousands of EUR) % ASSETS 30/06/ /12/2014 change Cash and cash equivalents 151, , Financial assets held for trading 114,593 61, Available-for-sale financial assets 5,519,379 6,789, Loans and receivables with banks 709, , Loans and receivables with customers 18,590,813 19,004, Equity Investments (3) 30, , Property, equipment and investment property and intangible assets (1) 657, , Non-current assets held for sale and disposal groups (3) 176,947 3,191 n.s. Other assets (2) 1,111,395 1,055, Total assets 27,062,432 28,813, (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"; (3) At 30 June 2015, the investment in Istituto Centrale delle Banche Popolari was classified as "150. Non-current assets held for sale and disposal groups" by 18.39%, whereas the remaining 2% was included under item "100. Equity investments". LIABILITIES AND EQUITY 30/06/ /12/2014 % change Due to banks 1,759,167 4,837, Direct funding from customers (1) 21,898,623 20,745, Financial liabilities held for trading 3,450 3, Hedging derivatives 263, , Liabilities associated with disposal groups Other liabilities 922, , Provisions for specific purpose (2) 200, , Equity attributable to non-controlling interests 4,269 4, Equity (3) 2,010,927 2,020, Total liabilities and equity 27,062,432 28,813, (1) Include 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". 20

21 Loans and receivables with customers At 30 June 2015, loans and receivables with customers stood at EUR 18.6 billion, down 2.2% compared to EUR 19 billion at 31 December However, the drop is reducing gradually, albeit with a different trend among business segments: the sign is already positive for manufacturing companies, whereas the construction and service sectors are still decreasing. The results of commercial operations confirm an improving trend. The new mortgages to private individuals in the half-year exceeded EUR 300 million and more than doubled compared to the same period last year. With reference to the same period, loans to businesses increased by 50%, going against the trend of recent years. The demand for new investments by manufacturing companies, which decreased almost continuously since 2008, increased. (in thousands of EUR) 30/06/ /12/2014 % change Current accounts 3,679,434 3,878, Reverse repurchase agreements 152, , Mortgages 8,703,692 8,778, Credit cards, personal loans and salary-backed loans 226, , Finance leases 551, , Other loans 1,909,528 1,532, Debt instruments 33,358 9, Total net performing loans and receivables 15,256,844 15,812, Bad loans 1,195,809 1,101, Unlikely to pay 1,638,142 1,578, Past due non-performing loans 500, , Total net non-performing loans and receivables 3,333,969 3,192, Total net loans and receivables 18,590,813 19,004, Figures at 31 December 2014 restated for a consistent comparison. Positive signs also appear with regard to credit quality. During the period, there was a slowdown in the flow of new non-performing loans, especially for the less risky categories. At the close of the half-year, non-performing loans, net of impairment losses, amounted to EUR 3.3 billion, compared to EUR 3.2 billion at 31 December Net bad loans totalled EUR 1,196 million, increasing by 8.5% compared to EUR 1,102 million as at 31 December 2014, with a coverage ratio of 55.8%. Based on the new definitions of non-performing exposure (NPE), other doubtful loans amounted to EUR 2,138 million, of which EUR 1,638 million due to "unlikely to pay" and EUR 500 million due to past-due non-performing loans. At the end of 2014, other doubtful loans, based on the definitions of non-performing financial assets in force then, totalled EUR 2,090 million. 21

22 (in thousands of EUR) Non-performing loans Gross amount Impairment losses 30/06/ /12/2014 Carrying amount coverage % Gross amount Impairment losses Carrying amount coverage % Bad loans 2,706,345-1,510,536 1,195, ,503,424-1,401,485 1,101, Unlikely to pay (*) 2,089, ,340 1,638, ,012, ,124 1,578, Past due non-performing loans 551,020-51, , ,036-54, , Total non-performing loans 5,346,847-2,012,878 3,333, ,082,136-1,890,040 3,192, Performing loans 15,373, ,616 15,256, ,942, ,249 15,812, Total loans and receivables with customers 20,720,307-2,129,494 18,590,813 21,024,152-2,019,289 19,004,863 (*) The figures as at 31 December 2014 are calculated as the sum of substandard and restructured loans. Funding from customers Direct funding amounted to EUR 21.9 billion, up by 5.6% compared to December (in thousands of EUR) 30/06/ /12/2014 % change Current accounts and deposit accounts 13,390,435 13,096, Repurchase agreements 2,139, ,227 n.s. Term deposits 1,321,099 2,008, Other 322, , Due to customers 17,173,647 15,552, Securities issued 4,724,976 5,192, Total direct funding from customers 21,898,623 20,745, The change in repurchase agreements mainly refers to the increase in transactions with Cassa di Compensazione e Garanzia. Indirect funding amounted to EUR 12.3 billion, up by 2.6% compared to EUR 12 billion at the end of December 2014, driven by the component referring to "assets under management", which totalled EUR 6.6 billion, up by 12.9% compared to EUR 5.8 billion at the end of last year. The flows of net deposits of assets under management are growing significantly, exceeding EUR 400 million from the beginning of the year. The market characterised by interest rates at record lows and abundant liquidity encourages the customers' propensity to diversify the financial saving. In this context, the strategic partnership in managed funds recently signed with the Anima group, thanks to a wide and diversified offer, contributes significantly to the development of managed assets, allowing to make the most of the particularly favourable market trend. 22

23 (in thousands of EUR) 30/06/ /12/2014 % change Asset management 2,245,469 2,117, Mutual funds 2,371,859 1,977, Insurance funds 1,985,437 1,753, Total Managed funds 6,602,765 5,848, Assets under administration 5,676,780 6,115, Total indirect funding 12,279,545 11,963, Financial assets/liabilities held for trading and available-for-sale financial assets Financial assets amounted to EUR 5.6 billion. Of these, EUR 5.4 billion were represented by Italian Government bonds, mainly classified in the AFS (Available for sale) portfolio. The valuation reserve on AFS securities, recorded among equity items net of related tax effects, was EUR 49 million (negative) compared to EUR 98 million (positive) in March The negative reserve relating to Government bonds of EUR 95 million is significantly affected by the widening of the spread on total debt in the last days of June due to the intensification of the crisis in Greece. (in thousands of EUR) 30/06/ /12/2014 Financial assets and liabilities held for trading % change Debt instruments 111,414 58, Equity instruments and OEIC units 1,473 1, Derivative financial instruments with positive fair value 1,706 2, Total assets 114,593 61, Derivative financial instruments with negative fair value -3,450-3, Total assets and liabilities 111,143 58, Available-for-sale financial assets Debt instruments 5,350,683 6,662, Equity instruments and OEIC units 168, , Total 5,519,379 6,789, Equity investments The total value of equity investments at 30 June 2015, measured at equity, was EUR 207 million, up compared to December 2014, mainly due to operating results (net of dividend distribution) and changes in valuation reserves. The investment in Istituto Centrale delle Banche Popolari was classified as "150. Non-current assets held for sale and disposal groups" by 18.39%, whereas the remaining 2% was included under item "100. Equity investments". 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. 23

24 (in thousands of EUR) 30/06/2015 equity investment % Istituto Centrale delle Banche Popolari Italiane S.p.A. 196, Global Assistance S.p.A. 3, Creset S.p.A. 2, Istifid S.p.A. 2, Other 3,034 - Total 207,250 Equity attributable to the owners of the parent The equity attributable to the owners of the parent as at 30 June 2015 amounted to EUR 2,011 million, substantially stable compared to the value recognised at the end of 2014 (EUR 2,020 million), mainly due to the profit for the period and the changes in AFS 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. 30/06/ /12/2014 Equity of which: profit for the period Equity of which: profit for the period Parent financial statements 1,963,589 54,280 1,971, ,529 Investee results as per separate financial statements: - consolidated on a line-by-line basis 3,582 3, , ,767 - equity accounted 10,311 10,311 20,458 20,458 Amortisation of positive differences: - past years -33, ,599 - Differences compared to carrying amounts for: - companies consolidated on a line-by-line basis -63, , equity investment impairment reversal and goodwill impairment recognition , ,714 - equity accounted companies 144, ,079 - Adjustments to dividends collected during the year: - on retained earnings - -18, ,761 Other consolidation adjustments: - elimination of intragroup profit and loss -11, ,767-3,086 - other impairment losses -2, , Consolidated financial statements 2,010,927 50,867 2,020, ,086 24

25 Regulatory capital and capital ratios As at 30 June 2015, total own funds, calculated by applying the rules of Basel 3 according to the transitional methods in force in 2015 and taking into account the share of the profit for the period allocated to reserves, was EUR 2,274 million, down compared to EUR 2,325 million at the end of The capital ratios, always determined on the basis of transitional methods in force in 2015, stood at: % for the phased in Common Equity Tier1 and Tier % for the phased in Total Capital ratio. 30/06/ /12/2014 Common Equity Tier 1 capital (CET1) 1,891,771 1,824,881 Tier 1 capital 1,891,771 1,824,881 Total Own Funds 2,274,172 2,325,187 Credit risk and counterparty risk 1,196,126 1,210,859 Credit valuation adjustment risk 2,297 2,353 Settlement risks - - Market risks 1,389 1,406 Operational risk 116, ,200 Other calculation elements - - Total capital requirements 1,316,012 1,330,818 Risk-weighted assets 16,450,156 16,635,237 Common Equity Tier 1 capital / Risk-weighted assets (CET1 capital ratio) 11.50% 10.97% Tier 1 capital/risk-weighted assets (Tier1 capital ratio) 11.50% 10.97% Total own funds/risk-weighted assets (Total capital ratio) 13.82% 13.98% 25

26 Income statement The reclassified consolidated income statement is shown below. (in thousands of EUR) ITEMS 1st half of st half of 2014 % change Net interest income 237, , Net fee and commission income 141, , Dividends and similar income 1,989 1, Profit of equity-accounted investments (1) 10,091 7, Net trading and hedging income (expense) and profit (loss) on sales/repurchases 50,720 89, Other operating net income (4) 11,246 9, Operating income 452, , Personnel expenses (144,766) (149,269) Other administrative expenses (2) (87,847) (88,437) Depreciation.s.mortisation and net impairment losses on property, equipment and investment property and intangible assets (3) (17,529) (18,416) Operating costs (250,142) (256,122) Net operating profit 202, , Net impairment losses on loans and receivables and other financial assets (158,315) (212,692) Net accruals to provisions for risks and charges (3,855) (3,544) 8.78 Net gains on sales of investments 6 (157) Pre-tax profit from continuing operations 40,553 16, Income taxes (7,554) (11,542) Post-tax profit from continuing operations 32,999 5,121 n.s. Profit from discontinued operations 20,070 (462) n.s. Profit for the period attributable to non-controlling interests (2,202) (1,515) Profit (loss) for the period 50,867 3,144 n.s. (1) Profit of equity-accounted investments include net gains/losses on equity-accounted investments included in item 240 "Net gains on investments". The residual amount of that item is included in gains on sales of investments, together with item 270 "Net gains on sales of investments"; (2) Other administrative expenses include recoveries of taxes and other recoveries recognised in item 220 "Other operating net income" (EUR 29,962 thousand in the first half of 2015 and EUR 29,137 thousand in the first half of 2014); (3) Depreciation.s.mortisation 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 1,442 thousand in the first half of 2015 and EUR 1,940 thousand in the first half of 2014); (4) Other income and costs correspond to item 220 "Other operating net income" net of the above reclassifications. The corresponding prior year figures were restated, in accordance with the provisions of IFRS 5, as a result of the agreement signed on 22 December 2014 with the Cerved Group whose subject matter was the development of a long-term industrial partnership for the management of non-performing loans. This agreement also included the sale of the subsidiary Finanziaria San Giacomo S.p.A. that took place on 1 April In the first half of 2015, the net interest income stood at EUR 238 million, decreasing by 4.2%, compared to EUR 248 million of the first half of last year, however improving on a quarterly basis. The net interest income shows a good performance thanks to the persistent effects of repricing of funding, notwithstanding the low levels of interest rates, 26

27 the absence of a strong recovery in volumes and a lower contribution of interest on securities. Net fee and commission income amounted to EUR 141 million, up by 6.6% year on year, mainly due to the particularly strong trend of the fee and commissions of the finance area (placement of managed funds and bancassurance), which offsets the deceleration of the components relating to lending and current account management. Net trading and hedging income and profit on sales/repurchases stood at EUR 51 million, compared to EUR 90 million of the prior year, characterised by non-recurring results. Net gains on equity-accounted investments contributed by EUR 10.1 million compared to EUR 7.7 million of the same period of Operating income totalled EUR 453 million, down compared to EUR 489 million of the first half of 2014, considering, however, that the corresponding period includes nonrecurring income from financial activities. Operating costs totalled EUR 250 million further decreasing by 256 million compared to the corresponding period of The net operating profit reached EUR 203 million, compared to EUR 233 million of the first half of Net impairment losses on loans and receivables and other financial assets totalled EUR 158 million. The cost of credit risk stood at 171 basis points and seems to move towards a phase of gradual normalisation. Provisions for risks and charges stood at EUR 4 million and include the contribution to the resolution fund envisaged by the new European regulations (Single Resolution Fund) of EUR 4 million. Pre-tax profit from continuing operations amounted to EUR 41 million, compared to EUR 17 million in the first half of 2014, which were however considerably affected by adjustment to loans related to the exercise of the Asset Quality Review then in progress. Considering the gains of approximately EUR 20 million, net of taxes, related to the sale of 100% of Finanziaria San Giacomo, income taxes estimated at EUR 8 million and profit attributable to non-controlling interests of EUR 2 million, the profit for the period amounted to EUR 51 million. 27

28 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 provisions of Article 136 of the Consolidated Banking Act - as amended by Italian Law 221/2012 and lastly by Italian Legislative Decree no. 72 of 12 May 2015, on obligations of banking representatives and, - 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 Related Subjects" (hereinafter also the "RPT Creval Procedures"), effective as from 31 December In accordance with current regulations, the document was published on the Website, at - Governance section. The RPT Creval Procedures establish the procedures and rules for ensuring transparency and substantive and procedural correctness in related party transactions and associated parties carried out directly by Credito Valtellinese or by means of its subsidiaries. They also define the cases, methods, conditions and circumstances in which, without prejudice to the obligations required, the partial or full exclusion of the application of the RPT Creval Procedures is allowed. The provisions monitoring this kind of transactions concern the following aspects: - the process of investigation, resolution and information to the Company Officers for the transactions carried out with related and associated parties, - the information to the market for related party transactions, - limits to risk assets towards associated parties. More in detail, the RPT Creval Procedures: - define the area of related and associated parties for each bank of the Group and for the Creval Group as a whole, - identify the most significant transactions, - identify the cases of partial or complete exclusion from the enforcement of the decision-making procedures (transactions involving small amounts, ordinary transactions completed at conditions equivalent to market or standard ones, transactions as per Article 136 of the Consolidated Banking Act); 28

29 - exclude from the enforcement of the provisions of the RPT Creval Procedures the transactions carried out with or between subsidiaries, even jointly, and transactions with associates provided that there are no significant interests of other related parties. 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 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. In the period in question, no significant transactions were carried out, as defined by the RPT Creval Procedures, involving the obligation to publish a market disclosure. With reference to intra-group transactions, relations with companies in the Credito Valtellinese Banking Group were established within a "company-network" organisational model - as widely illustrated in this report based on which each legal entity focuses only on its own core business, in an industrial framework that offers effective and efficient management of overall Group resources. 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 company 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 and the payment systems in Italy and abroad (Bankadati), the management of real estate assets and safety, the design and construction of real estate works, and the technical support to the disbursement of credit and leasing (Stelline Servizi Immobiliari). 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. 29

30 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. Risk management The Creval Group attaches strategic importance to risk management, measurement and control, essential activities for the creation of sustainable value in time and the consolidation of its reputation on the markets of reference and with regard to stakeholders. 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. The identification of the risks represents, on the one hand, the logical premise for defining the Risk Appetite and its Risk Statement, which is expressed in the planning for the year, and on the other hand, forms the initial phase both of the Internal Capital Adequacy Assessment Process (ICAAP) and of the Internal Liquidity Adequacy Assessment Process (ILAAP). Therefore, the risk assumes the role of point of convergence of strategic planning, capital management and risk management, and the process defining the Risk Appetite Framework (RAF), ICAAP, ILAAP and the annual operational planning - based on the identification of risks - start. The set of company risks is monitored within a precise organisational context, defined in the Group, 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 the 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. For a full description of the organisational structure and operational procedures in order to oversee the different risk areas and the methods used for the measurement and prevention of such risks, please refer to the section "Information on risks and related hedging policies" of this report. For a description of the overall approach of the Internal Audit System, reference should be made to the Report on Corporate Governance and Ownership Structures pursuant to Article 123-bis of the Consolidated Finance Act, document available at the Bank s website: - Governance section. Information on main risks and uncertainties to which the Group is exposed Consistent with the Bank's retail business model and according to the classification adopted both from academics and in the context of prudential supervision, the main types of risks that the Group is exposed to are the credit and operational risks (First Pillar Risks), liquidity and interest-rate risks (Second Pillar Risks); the current composition of 30

31 the assets also involves an exposure to the sovereign risk, whereas the other risks, in particular market and concentration 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 for the current year, which, in line with the identity, values, business model and strategic input of the Group, resolved 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. The identification and assessment of the importance of the risks to which the Group is exposed to are carried out by considering the identity, the values, the business model and the strategic objectives of the Group, the Risk Appetite Framework (RAF), the organisational structure and the operating plans. Number of factors are considered such as products and services offered to customers, markets of reference, the size and characteristics of operations with related parties in relation to company operations, the amount of statement of financial position aggregates and corresponding capital requirements, the economic situation and further events, both internal and external, with possible impact on the operations and strategies of the Group. In accordance with Italian and Community law, the Group defined a specific regulation for the current and future internal capital adequacy assessment process, in relation to the risks taken and to company strategies (ICAAP). This assessment also uses stress testing to estimate the effects on the risk of specific events (sensitivity analysis) or of joint movements of a set of economic and financial variables (scenario analysis) and to identify any potential vulnerability profiles. The main risks identified, included in the first and second pillar, subject matter of regular management assessment and summarised in the ICAAP process are set below: - credit and counterparty risk (including country and transfer risk): the possibility for the creditor that a financial obligation will not be paid at maturity or later. The credit risk occurs also as: - deterioration of the creditworthiness of counterparties with a credit line (migration risk); - increase in exposure before the insolvency of a counterparty with a credit line (exposure risk); - decrease in the rate of collection of delinquent loans (collection risk). Counterparty risk is the risk that the counterparty to a transaction concerning certain financial instruments could default before the settlement of the transaction itself. Country risk is the risk of losses caused by events that occur in a country other than Italy. Transfer risk is the risk that a bank, exposed to a subject that raises funds in a currency other than that in which it receives its main sources of income, makes losses due to the difficulties of the debtor to convert its currency into the currency of the exposure. 31

32 - market risk for the trading book (including the basis risk): the components that are relevant for the Banks of the Group are: - interest rate risk: risk of losses caused by adverse changes in interest rates; - price risk: risk of losses caused by adverse changes in share prices; - currency risk: risk of losses caused by adverse changes in prices of foreign currencies. The basis risk represents the risk of losses caused by misalignments in opposite sign positions, similar but not identical. - operational risk: 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 risk (or ICT): the risk of incurring economic, reputation and market share losses in relation to the use of the Information and Communication Technology - ICT). - interest rate risk for the banking book: risk deriving from potential changes in interest rates, in particular, it is the risk of incurring: - reduction in net interest income and, as a result, in bank profits (cash flow risk), - reduction in the present value of assets and liabilities and, as a result, of the economic value of the bank (fair value risk), due to adverse changes in interest rates. - concentration risk of the loans and receivables from customers portfolio: risk deriving from exposures to counterparties, including central counterparties, group of related counterparties and counterparties of the same economic sector, belonging to the same geographic area or carrying on the same business or dealing with the same goods, as well as from the application of credit risk mitigation techniques, including in particular, risks related to indirect exposures, such as, for example, with regard to individual guarantee providers. - liquidity risk: risk that the banks will not be able to meet their payment commitments. The failure to meet its payment commitments may be due to the following inability to: - procure the funds (funding liquidity risk); - divest their assets (market liquidity risk). Liquidity risk also includes the risk of meeting payment commitments at costs that are outside market costs, i.e. incurring high funding costs or (and sometimes concurrently) incurring capital losses in the event of divesting assets. - real-estate risk: current or prospective risk of potential losses arising from fluctuations of the value of the real estate portfolio owned by the Group, or by the reduction of the income generated by it. Therefore, the real-estate risk is configured as the possible occurrence of events that may generate negative impacts on the Group's assets such as to require a specific capital cover. - strategic risk (including risk from investments): the strategic risk is the current or future risk of drop in profits or capital arising from changes in the operating context or from wrong company decisions, inadequate decision implementation and poor responsiveness to changes in the competitive context. 32

33 The risk from investments, in relation to the different investment purposes, is the risk of: - non- or partial implementation of the strategy behind the acquisition; - non recording of the expected profits as a result of the performance of the investee. - compliance risk: the risk of incurring legal or administrative sanctions, significant financial losses or damage to reputation as a consequence of violation of mandatory provisions, laws or regulations, or self-regulation (e.g. articles of association, codes of conduct, and codes of self-discipline). - risk of money laundering and terrorist financing: money-laundering risk is the risk of incurring legal and reputational risks deriving from the possible involvement in unlawful transactions related to money laundering and financing of terrorism. - reputational risk: the current or future risk of drop in profits or capital arising from the negative perception of the image of the bank by the customers, counterparts, bank shareholders, investors or supervisory authorities. - risk towards associated parties: the risk that the proximity of certain persons to decision-making centres of the Bank might compromise the objectivity and impartiality of decisions relating to the granting of loans and other transactions with regard to these subjects, with possible distortions in the allocation of resources, the Bank s exposure to risks not adequately measured or monitored, potential damage to depositors and shareholders. risk deriving from securitisations: risk that the economic substance of the securitisation transaction may not be fully reflected in the decisions of risk assessment and management. the risk of excessive leverage: the risk that a particularly high level of debt compared to equity makes the bank vulnerable, making it necessary to take corrective measures for its business plan, including the sale of assets with recognition of losses that could result in impairment losses also on the remaining assets. residual risk: risk that the generally accepted techniques to mitigate credit risk used by banks are less effective than expected. sovereign risk: risk associated with the possibility that a Government or another sovereign issuer fails to meet its financial obligations. risks related to outsourcing: refer to the different types of risks already identified (including operational, compliance, strategic and reputational risks). For detailed information on the objectives and policies on financial risk management, as well as on the exposure of the Group to the risks, please refer to the section "Information on risks and related hedging policies" of this report. More in general, risks related to the economy and financial market trends are shown in the foreword of this report, in the chapter on the macroeconomic scenario of reference, and in the following chapter on business outlook. 33

34 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. 34

35 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. 35

36 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 projections outline, also for Italy, the gradual consolidation of economic recovery, still limited in 2015, higher in 2016, driven by the strengthening of investment spending, up again from the beginning of this year. Loan applications of businesses and households, up from the previous quarter, may strengthen further in the current quarter, favoured by the effects of monetary stimulus and by the normalisation of credit conditions. The recovery also affects employment data, which is expected to improve in two years and decrease below 12% in The strengthening of more favourable conditions gives greater visibility to the achievement of the objectives outlined in the Business Plan of the bank. A stable credit recovery is confirmed starting from the end of this year, with positive effects on net interest income and a gradual improvement in credit quality. The margins of commercial banking will be supported by the improvement of spread from customers, also due to a further reduction in funding costs, and from the increase in net fee and commission income, offsetting the expected lower contribution from interest on securities. The core operating costs are expected to further decrease in the second half of the year, incorporating the savings deriving from the implementation of the labour agreement signed in December last year. On the other hand, adjustments to loans, albeit expected to decrease gradually, will continue to affect the comprehensive income. Sondrio, 6 August 2015 The Board of Directors 36

37 CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 37

38 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 114,593 61, Available-for-sale financial assets 5,519,379 6,789, Loans and receivables with banks 709, , Loans and receivables with customers 18,590,813 19,004, Equity Investments 30, , Property, equipment and investment property 449, , Intangible assets 208, ,400 of which: - goodwill 172, , Tax assets 723, ,831 a) current 106, ,410 b) deferred 617, ,421 as per Italian Law 214/ , , Non-current assets held for sale and disposal groups 176,947 3, Other assets 387, ,735 Total assets 27,062,432 28,813,556 LIABILITIES AND EQUITY 30/06/ /12/ Due to banks 1,759,167 4,837, Due to customers 17,173,647 15,552, Securities issued 4,724,976 5,192, Financial liabilities held for trading 3,450 3, Hedging derivatives 263, , Tax liabilities: 42,475 84,522 a) current 31,175 75,736 b) deferred 11,300 8, Liabilities associated with disposal groups Other liabilities 922, , Post employment benefits 57,073 65, Provisions for risks and charges: 100, ,137 a) pension and similar obligations 33,269 34,936 b) other provisions 67,270 73, Valuation reserves -46,434 16,079 of which: associated with discontinued operations 13, Reserves 120, , Share premium reserve 39, , Share capital 1,846,817 1,846, Treasury shares (-) Equity attributable to non-controlling interests (+/-) 4,269 4, Profit (loss) for the period (+/-) 50, ,086 Total liabilities and equity 27,062,432 28,813,556 38

39 Consolidated Income Statement (in thousands of EUR) ITEMS 1st half of st half of Interest and similar income 366, , Interest and similar expense (129,274) (176,877) 30. Net interest income 237, , Fee and commission income 154, , Fee and commission expense (13,515) (21,009) 60. Net fee and commission income 141, , Dividends and similar income 1,989 1, Net trading income (16,165) Net hedging expense (260) (61) 100. Profit (loss) on sale or repurchase of: 67,145 89,809 a) loans and receivables 702 (476) b) available-for-sale financial assets 67,038 90,109 d) financial liabilities (595) Total income 431, , Net impairment losses on: (158,315) (212,692) a) loans and receivables (158,536) (210,193) b) available-for-sale financial assets (403) (443) d) other financial transactions 624 (2,056) 140. Net financial income 273, , Administrative expenses: (262,575) (266,843) a) personnel expenses (144,766) (149,269) b) other administrative expenses (117,809) (117,574) 190. Net accruals to provisions for risks and charges (3,855) (3,544) 200. Depreciation and net impairment losses on property, equipment and investment property (10,733) (10,720) 210. Amortisation and net impairment losses on intangible assets (5,354) (5,756) 220. Other operating net income 39,766 37, Operating costs (242,751) (249,817) 240. Net gains on investments 10,091 7, Net gains (losses) on sales of investments 6 (157) 280. Pre-tax profit from continuing operations 40,553 16, Income taxes (7,554) (11,542) 300. Post-tax profit from continuing operations 32,999 5, Post-tax profit from discontinuing operations 20,070 (462) 320. Profit for the period 53,069 4, Profit for the period attributable to non-controlling interests (2,202) (1,515) 340. Profit for the period attributable to the owners of the parent 50,867 3,144 Basic EPS in EUR Diluted EPS in EUR Basic earnings per share from continuing operations - in EUR Diluted earnings per share from continuing operations - in EUR

40 Consolidated Statement of Comprehensive Income (in thousands of EUR) Items 1st half of st half of Profit for the year 53,069 4,659 Other comprehensive income net of income taxes without reclassification to profit or loss 20. Property, equipment and investment property Intangible assets Defined-benefit plans 2,452 (3,310) 50. Non-current assets held for sale Portion of valuation reserves of equity-accounted investments 152 (187) Other comprehensive income net of income taxes with reclassification to profit or loss 70. Hedging of investments in foreign operations Exchange rate differences Cash flow hedges Available-for-sale financial assets (62,939) 41, Non-current assets held for sale Portion of valuation reserves of equity-accounted investments (934) 3, Total other comprehensive income net of income taxes (61,269) 40, Comprehensive income (Item ) (8,200) 45, Consolidated comprehensive income attributable to non-controlling interests (2,231) (1,576) 140. Consolidated comprehensive income attributable to the owners of the parent (10,431) 44,038 40

41 Statement of changes in consolidated equity (in thousands of EUR) Changes during the year Equity Balance at 31/12/2014 Change in opening balances Balance at 1/1/2015 Allocation of prior year profit Reserves Dividends and other allocations Changes in reserves Equity transactions 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 noncontrolling 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 period -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 noncontrolling interests 4,454 4,454-3, ,231 4,269 41

42 Changes during the year Equity Balance at 31/12/2013 Change in opening balances Balance at 1/1/2014 Allocation of prior year profit Reserves Dividends and other allocations Changes in reserves Equity transactions 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 30/06/2014 Equity attributable to owners of the parent at 30/06/2014 Equity attributable to noncontrolling interests at 30/06/2014 Share capital: a) ordinary shares 1,530,531 1,530, , ,846,817 2,879 b) other shares Share premium reserve 259, ,076-2,235 95, , Reserves: a) income related 124, ,613 3,022-2, , b) other 2,398 2,398 11,770 7,389-8, Valuation reserves -16,877-16,877-1, ,955 22, Equity instruments - - Treasury shares ,962-1, Profit (Loss) for the period 14,305 14,305-11,770-2,535 4,659 3,144 1,515 Equity attributable to the owners of the parent 1,908,071 1,908,071 5, ,332-1,275-2, ,038 2,362,029 Equity attributable to noncontrolling interests 5,188 5,188-2, ,576 4,675 42

43 Consolidated Statement of cash flows Direct method A. OPERATING ACTIVITIES (in thousands of EUR) 1st half 1st half of of Cash flow from operating activities 295, ,472 - interest income received (+) 397, ,954 - interest expense paid (-) -98, ,314 - dividends and similar income (+) 1,989 1,321 - net fee and commission income (+/-) 145, ,603 - personnel expenses (-) -155, ,797 - other costs (-) -110, ,060 - other revenue (+) 105, ,941 - taxes (-) 9,913-83,714 - costs/revenues related to disposal groups net of tax (+/-) Cash flow generated/used by financial assets 1,323, ,637 - financial assets held for trading -54,673 23,888 - available-for-sale financial assets 1,099, ,111 - loans and receivables with customers 235, ,636 - loans and receivables with banks: on sight 10,803 55,542 - loans and receivables with banks: other 139, ,829 - other assets -108,020-98, Cash flow generated/used by financial liabilities -1,674, ,490 - due to banks: on sight 8,579 71,101 - due to banks: other -3,124,359-1,005,972 - due to customers 1,495,824-23,409 - securities issued -342, ,277 - financial liabilities held for trading 853-8,483 - other liabilities 287, ,550 Cash flow from (used in) operating activities -55, ,381 B. INVESTING ACTIVITIES 1. Cash flow generated by 26,198 4,143 - dividends from equity investments 3,982 3,830 - sales of property, equipment and investment property sales of subsidiaries and business units 21, Cash flow used for -10,444-10,877 - purchase of property, equipment and investment property -7,387-7,713 - purchase of intangible assets -3,057-3,131 - purchase of subsidiaries and business units Cash flow from (used in) investing activities 15,754-6,734 C. FINANCING ACTIVITIES - issue/repurchase of treasury shares - 414,916 - dividend distribution and other -3,277-2,535 Cash flow from (used in) financing activities -3, ,381 NET CASH FLOW GENERATED/USED DURING THE PERIOD -42,529-37,734 Key: (+) generated (-) used Reconciliation 43

44 Financial statement items 1st half of st half of 2014 Cash and cash equivalents at the beginning of the period 194, ,947 Net liquidity generated/used during the period -42,529-37,734 Cash and cash equivalents at the end of the period 151, ,213 Key: (+) generated (-) used 44

45 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 consolidated annual report at 31 December 2014, 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 2014, it should be noted that the following came into force: - Commission Regulation (EU) 1361/2014 amending IFRS 3 "Business combination" with regard to the scope of application of the standard, IFRS 13 "Fair Value Measurement" related to the fair value measurement on a net basis of a portfolio of assets and liabilities and IAS 40 "Investment property" concerning its interrelation with IFRS 3; - Commission Regulation (EU) No. 2015/28 that implemented the «Annual Improvements to International Financial Reporting Standards Cycle», with reference to IFRS 2 (introduction of the definition of "service condition" and "performance condition"), IFRS 3 (amendments to the definition of contingent consideration regarding classification and measurement), IFRS 8 (introduction of new disclosure requirements regarding general disclosure and explanations regarding the reconciliation between assets of operating segments and total assets of the entity), IAS 16 and 38 regarding the application of the revaluation model and IAS 24, 37 and 39; - Commission Regulation (EU) No. 2015/29 amending IAS 19 "Employee benefits" that provides for the possibility, for defined benefit plans, of recognising the benefits of employees or third parties as reductions of the service costs under certain conditions. These amendments to IAS/IFRS apply as from the 2015 financial year. There were no significant impacts. 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 the same as those used for the financial statements at 31 December 2014, to which reference should be made. 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. 45

46 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. On 9 January 2015, the European Commission approved the Implementing Regulation 2015/227 published on the Official Gazette of the European Union on 20 February 2015, implementing a specific "technical standard", issued by the EBA (European Banking Authority) on 21 October 2013, related to the definition of "Non-performing exposures" and "Forborne exposures". Therefore, the Bank of Italy published the update to Circular 272 that defines the reporting practices to be followed for the classification of credit quality as of 1 January In detail, the previous categories of non-performing loans (due to past-due impaired, substandard, restructured and non-performing) were replaced by the new categories of "due to past-due non-performing", "unlikely to pay" and "bad loans". The disclosure on credit quality represented in the condensed interim consolidated financial statements is provided by using the new categories. The comparative figures referring to 31 December 2014 were restated to include in the category of unlikely to pay exposures previously defined as substandard loans and restructured loans. The new supervisory regulations also introduced the obligation to highlight the "Forbearance exposures" defined as exposures to customers in financial difficulties to whom the bank granted a contractual concession. These exposures form a subset of non-performing and performing loans, in relation to the risk of the exposure. With reference to contributions to deposit guarantee schemes and mechanisms of resolution, the following information is provided. The BRRD (Bank Recovery and Resolution Directive 2014/59/EU) sets out the new rules for resolution that will be applied as from 1 January 2015 to all the banks of the European Union. The measures of the BRRD will be financed by the National Fund for the resolution that each of the 28 Member States will have to set up. It is expected for the funds to be paid in advance to reach by 31 December 2024 a minimum target level of 1% of guaranteed deposits. The contributions of each entity are calculated as the ratio of the amount of its liabilities (net of own funds and protected deposits) compared to the total amount of liabilities of all the authorised banks in the territory of the country. In order to reach the target level, the financial means provided by the banks may include payment commitments to a maximum of 30%. The Single Resolution Mechanism Regulation 2014/806/EU, which will be effective as from 1 January 2016, establishes also the creation of the Single Resolution Fund (SRF), which will be managed by the new European resolution authority (Single Resolution Board SRB). The Deposit Guarantee Schemes Directive 2014/49/EU strengthens the protection of the depositors and harmonises the regulatory framework at EU level. The new directive requires all Member States to adopt an ex-ante financing system, whose target level is set at 0.8% of guaranteed deposits to be reached in 10 years. Only for 2015, given that the directive becomes effective on 3 July 2015 and expects to achieve the target level by 3 July 2024, only a half-yearly portion is believed to be due. At the date of preparation of this report, the Parliament approved the 2014 European delegation law that includes the delegation to the Government to issue decrees for the 46

47 implementation of the two directives that have not yet been issued. In this context of uncertainty, the accounting described below was defined. The contribution to the charge of Credito Valtellinese for the Single Resolution Fund (SRF) for the whole 2015 financial year was estimated in EUR 5.8 million on the basis of the information currently available. The expense was charged to the income statement in the item "net accruals to provisions for risks and charges" of EUR 4 million. In determining the portion of the annual contribution to be charged to the income statement in the first halfyear, it was assumed that 30% of the above-mentioned contribution may be covered by making payment commitments secured by collaterals consisting of low-risk assets, not encumbered by third-party rights without charging the income statement. Note that the amount of the actual contribution of the Single Resolution Board may be different from the amount charged to the income statement of the first quarter depending on the latest figures concerning the amount of liabilities, on own funds and covered deposits, on the correction of the portion of contribution based on the relevant risk of different debtor banks, etc. The amount to be charged to the income statement for the year may also vary in function of possible different interpretations regarding the method for recognising the case in question. With reference to the contribution to be paid to the Deposit Guarantee Schemes 2014/49/EU, the expense is not recognised in the income statement in the first half of 2015 considering that the event determining the need to set aside will occur in the second half of 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 2014 for statement of financial position data, and for the first half of 2014 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. On 22 December 2014, Credito Valtellinese S.c. and Cerved Information Solutions S.p.A. signed an agreement for the development of a long-term industrial partnership for the management of bad loans. This agreement envisaged the sale of the subsidiary Finanziaria San Giacomo S.p.A to Cerved Crediti Management Group S.r.l., carried out on 1 April 2015 after the sale of part of the assets to Credito Valtellinese S.c. 47

48 The transaction, in compliance with what was required by IFRS 5, was classified as "assets held for sale". Costs and revenue of the same corresponding period related to assets held for sale, net of intragroup items, were reported separately in the income statement under "Posttax profit (loss) from discontinued operations", the same corresponding period was restated consistently. The following table shows the income statement items of the first half of 2014 subject to reclassification. The same reclassification was made on the Statement of cash flows of the first half of INCOME STATEMENT ITEMS First half of 2014 IFRS 5 reclassifications 1st half of 2014 Restated 180. Administrative expenses: (267,422) (266,843) a) personnel expenses (149,767) 498 (149,269) b) other administrative expenses (117,655) 81 (117,574) 200. Depreciation and net impairment losses on property, equipment and investment property (10,726) 6 (10,720) 220. Other operating net income 37,046-37, Income taxes (11,419) (123) (11,542) The condensed interim consolidated financial statements at 30 June 2015 are accompanied by the certification of the Managing Director and of the Manager in charge of financial reporting envisaged by Article 154 bis of the Consolidated Finance Act, and is 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 2015 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 Directors report, 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 2014, document to which reference is made for detailed information. In particular, specific tests were carried out to ascertain any impairment of equity investments, securities available-for-sale, intangible assets and goodwill, subject to the 48

49 analysis of the presence of impairment indicators. The same methods and criteria shown in the 2014 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. Non-controlling 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 2014, the consolidation scope at 30 June 2015 does not include Finanziaria San Giacomo S.p.A. sold to Cerved Credit Management Group S.r.l. on 1 April 2015 and Quadrivio Finance S.r.l since the related securitisation transaction ended in the half-year. 49

50 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 1 2. Credito Siciliano S.p.A. Palermo Palermo Bankadati Soc. Cons. P.A. Sondrio Sondrio Stelline Servizi Immobiliari 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 Sme 2012 S.r.l. Conegliano Conegliano 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. 50

51 Fair value information This section includes the information on financial instruments subject to reclassification from one portfolio to another according to the rules laid down by IAS 39, and the information on the fair value hierarchy as defined by IFRS 13. The fair value is the price at which an asset can be sold or a liability can be transferred in a transaction between market participants at a certain valuation date. Therefore, it is an exit price and not an entry price. 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 2015, the Group did not make any transfers between portfolios of financial assets. No transfers related to financial assets and liabilities measured at level 3 were made. Transfers were recorded from level 2 to level 1 of financial assets of EUR 13 thousand and transfers from level 1 to level 2 of financial assets of EUR

52 Assets and liabilities measured at fair value on a recurring basis: division by level of fair value 30/06/ /12/2014 Financial assets/liabilities at fair value L1 L2 L3 L1 L2 L3 1. Financial assets held for trading 110,927 3,666-56,666 5, Financial assets at fair value through profit or loss Available-for-sale financial assets 5,412,854 3, ,443 6,696, , Hedging derivatives Property, equipment and investment property Intangible assets Total 5,523,781 6, ,443 6,753,346 5,149 92, Financial liabilities held for trading - 3, , Financial liabilities at fair value through profit or loss Hedging derivatives - 263, ,718 - Total - 266, ,951 - 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 amount to EUR 1 thousand and EUR 16 thousand, respectively. 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. The Bank has carried out an assessment of potential impacts of sensitivity to unobservable market parameters in the valuation of instruments classified in level 3 of the fair value hierarchy and measured at fair value on a recurring basis, which showed that these impacts are not significant compared to the represented situation. At 30 June 2015, the portfolio of available-for-sale financial assets, within level 3, includes the equity investment in Alba Leasing, the real estate fund FAB III and FAB IV, the Italian investment trust for SMEs, the Anthilia fund and the Fenice fund, in particular. 52

53 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 Available-forsale financial assets Hedging derivatives Property, equipment and investment property Intangible assets 1.Opening balance , Increases , Purchases , Gains recognised in: Profit or loss of which gains on sales Equity X X 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 , 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). 53

54 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.s.mounts 30/06/ /12/2014 A. Loans and Receivables with Central Banks 67, , Term deposits Obligatory reserve 67, , Reverse repurchase agreements Other - - B. Loans and receivables with banks 642, , Loans 603, , Current accounts and deposit accounts 30,119 38, Term deposits 748 1, Other loans: 573, ,406 - Reverse repurchase agreements Finance leases Other 573, , Debt instruments 38,471 29, Structured instruments Other debt instruments 38,471 29,014 Total 709, ,489 Total fair value 709, ,674 Other loans mainly include the items related to the carried out securitisation transactions and margin tradings paid on hedging derivatives. 54

55 Breakdown by type of item 70 of assets "Loans and receivables with customers" 30/06/ /12/2014 Type of transaction.s.mounts Performing Non-performing Performing Non-performing Purchased Other Purchased Other Loans 15,223,486-3,333,969 15,803,384-3,192, Current accounts 3,679,434-1,372,381 3,878,825-1,335, Reverse repurchase agreements 152, , Mortgages 8,703,692-1,672,939 8,778,572-1,557, Credit cards, personal and salary-backed loans 226,751-19, ,145-19, Finance leases 551, , , , Factoring Other loans 1,909, ,466 1,532, ,524 Debt instruments 33, , Structured instruments Other debt instruments 33, , Total 15,256,844-3,333,969 15,812,767-3,192,096 Total fair value 19,615,383 19,433,361 Data at 31 December 2014 restated for a consistent comparison. Breakdown by debtor/issuer of item 70 of assets "Loans and receivables with customers" 30/06/ /12/2014 Non-performing Non-performing Type of transaction.s.mounts Performing Purchased Other Performing Purchased Other 1. Debt instruments 33, , a) Governments b) Other government agencies c) Other issuers 33, , non-financial companies 4, , financial companies 28, , insurance companies other Loans to: 15,223,486-3,333,969 15,803,384-3,192,096 a) Governments 40, , b) Other government agencies 54, ,412-5,014 c) Other parties 15,127,790-3,333,966 15,743,849-3,187,082 - non-financial companies 10,113,303-2,896,398 10,504,837-2,785,222 - financial companies 1,052,696-75,606 1,323,627-57,197 - insurance companies 9, , other 3,952, ,939 3,904, ,637 Total 15,256,844-3,333,969 15,812,767-3,192,096 55

56 Breakdown by type of item 10 of liabilities "Due to banks" Type of transaction.s.mounts 30/06/ /12/ Due to central banks 1,503,212 4,536, Due to banks 255, , Current accounts and deposit accounts 58,008 49, Term deposits 25,539 65, Loans 140, , repurchase agreements other 140, , Payables for commitments to repurchase own equity instruments Other payables 31,912 24,773 Total 1,759,167 4,837,374 Total fair value 1,683,516 4,830,954 Breakdown of item 20 of liabilities "Due to customers" Type of transaction.s.mounts 30/06/ /12/ Current accounts and deposit accounts 13,390,435 13,096, Term deposits 1,321,099 2,008, Loans 2,374, , repurchase agreements 2,139, , other 235, , Payables for commitments to repurchase own equity instruments 51,700 52, Other payables 35,601 51,679 Total 17,173,647 15,552,676 Total fair value 17,179,839 15,554,129 Repos also refer mainly to transactions with Cassa di Compensazione e Garanzia. 56

57 SECTION 2 OTHER FINANCIAL INSTRUMENTS Breakdown by type of item 20 of assets "Financial assets held for trading" 30/06/2015 Item/Amounts 31/12/2014 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 A. On-statement of financial position assets 1. Debt instruments 109,453 1,961-55,165 2, Equity instruments 1, , OEIC units Loans Total A 110,926 1,961-56,665 2,979 - B. Derivatives 1. Financial derivatives 1 1, , Credit derivatives Total B 1 1, ,142 - Total (A+B) 110,927 3,666-56,666 5,121 - Breakdown by debtor/issuer of item 20 of assets "Financial assets held for trading" 30/06/ /12/2014 A. On-statement of financial position assets 1. Debt instruments 111,414 58,144 a) Governments and Central Banks 71,276 16,863 b) Other government agencies c) Banks 39,483 40,517 d) Other issuers Equity instruments 1,473 1,500 a) Banks 4 3 b) Other issuers: 1,469 1,497 - insurance companies financial companies non-financial companies 1,469 1,497 - other OEIC units Loans - - a) Governments and Central Banks - - b) Other government agencies - - c) Banks - - d) Other parties - - Total A 112,887 59,644 B. Derivatives a) Banks 917 1,307 b) Customers Total B 1,706 2,143 Total (A+B) 114,593 61,787 57

58 Breakdown by type of item 40 of assets "Available-for-sale financial assets" 30/06/ /12/2014 Item/Amounts Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1. Debt instruments 5,347,227 3, ,661, Equity instruments 65,627-52,792 34, , OEIC units , , Loans Total 5,412,854 3, ,443 6,696, ,898 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 5,350,683 6,662,097 a) Governments and Central Banks 5,314,286 6,634,218 b) Other government agencies - - c) Banks 36,023 27,505 d) Other issuers Equity instruments 118,419 86,004 a) Banks 8,789 8,803 b) Other issuers: 109,630 77,201 - insurance companies financial companies 98,977 35,137 - non-financial companies 10,638 41,631 - other OEIC units 50,277 41, Loans - - a) Governments and Central Banks - - b) Other government agencies - - c) Banks - - d) Other parties - - Total 5,519,379 6,789,606 58

59 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 Investor company Type of equity investment 1. Rajna Immobiliare S.r.l. Sondrio Sondrio 1 Credito Valtellinese % held B. Companies subject to significant influence 1. Global Assistance S.p.A. Milano Milano 2 Credito Valtellinese Istituto Centrale delle Banche Popolari S.p.A. Milano Milano 2 Credito Valtellinese Sondrio Città Futura S.r.l. Milano Milano 2 Stelline S.I Sondrio Città Centro S.r.l. in liquidation Sondrio Sondrio 2 Stelline S.I Istifid S.p.A. Milano Milano 2 Credito Valtellinese Finanziaria Laziale S.p.A. in liquidation Frosinone Frosinone 2 Credito Valtellinese Adamello S.p.A. Milano Milano 2 Stelline S.I Valtellina Golf Club S.p.A Caiolo Caiolo 2 Credito Valtellinese Fidipersona Società Cooperativa Ancona Ancona 2 Cassa di Risparmio di Fano Creset S.p.A. Sondrio Sondrio 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. At 30 June 2015, the investment in Istituto Centrale delle Banche Popolari was classified as "150. Non-current assets held for sale and disposal groups" by 18.39%, whereas the remaining 2% was included under item "100. Equity investments". Breakdown by type of item 30 of liabilities "Securities issued" 30/06/ /12/2014 Type of instrument/ Amounts Carrying amount Fair value Carrying amount Fair value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 A. Securities 1. bonds 4,576, ,135 3,626, ,034 5,018, ,534 3,986, , structured other 4,576, ,135 3,626, ,034 5,018, ,534 3,986, , other securities 148, , , , structured other 148, , , ,885 - Total 4,724, ,135 3,774, ,034 5,192, ,534 4,161, ,029 Financial instruments indicated in level 3 refer to the securities sold in connection with the securitisation Quadrivio SME 2014 and Quadrivio RMBS

60 Breakdown by type of item 40 of liabilities "Financial liabilities held for trading" 30/06/ /12/2014 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 - 3,450 - X - 3, Credit derivatives X X Total B X - 3,450 - X - 3,233 - Total (A+B) - - 3, ,233 - 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/ /12/2014 Fair value Fair value NV L1 L2 L3 L1 L2 L3 NV A. Financial derivatives - 263, , , ,000 1) Fair value - 263, , , ,000 2) Cash flows ) Investments in foreign operations B. Credit derivatives ) Fair value ) Cash flows Total - 263, , , ,000 Key NV = nominal value L1= Level 1 L2= Level 2 L3= Level 3 60

61 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 401, ,536 a) land 59,812 60,839 b) buildings 308, ,461 c) furniture 20,217 21,418 d) electronic systems 4,045 4,024 e) other 8,793 9, Assets acquired under finance lease - - a) land - - b) buildings - - c) furniture - - d) electronic systems - - e) other - - Total 401, ,536 Breakdown of item 120 of assets "Property, equipment and investment property" - property, equipment and investment property held for investment measured at cost 30/06/ /12/2014 Asset/Amounts 1. Owned 48,459 48,032 a) land 7,262 6,287 b) buildings 41,197 41, Assets acquired under finance lease - - a) land - - b) buildings - - Total 48,459 48,032 1) Fair value 58,092 56,162 61

62 Breakdown of item 130 of assets "Intangible assets" Asset/Amounts Definite life 30/06/ /12/2014 Indefinite life Definite life Indefinite life A.1 Goodwill X 172,154 X 172,154 A.1.1 attributable to the owners of the parent X 172,154 X 172,154 A.1.2 attributable to non-controlling interests X - X - A.2 Other intangible assets 35,949-38,246 - A.2.1 Assets measured at cost: 35,949-38,246 - a) internally generated intangible assets b) other assets 35,287-37,451 - A.2.2 Assets measured at fair value: a) internally generated intangible assets b) other assets Total 35, ,154 38, ,154 According to IAS 36, goodwill must be subject to impairment test on an annual basis or every time there is objective evidence that events may have reduced the recoverable amount below its carrying amount. The IFRS require the impairment test to be made by comparing the carrying amount of the item being assessed with its recoverable amount. An impairment loss must be recognised where the recoverable amount is lower than the carrying amount. To this end, goodwill must be allocated to individual cash generating units of the acquirer or groups of such cash generating units (hereinafter "CGU") so that these units may benefit from the synergy of the combination, independently of whether the other assets or liabilities related to the acquisition were assigned to that unit or group of units. The recoverable amount of the equity investment is the higher between its fair value net of costs to sell and its value in use. For the purpose of the impairment procedure, the Group used the value in use for the recoverability check of the recorded goodwill. The value in use is determined by discounting future cash flows defined on the basis of forecasts that cover a 5-year period of the CGUs approved by the Directors. The projections after the period covered by the plan, based on a constant growth rate of 2%, i.e. the long-term growth average rate estimated on the basis of the forecasts on the expected inflation rate. The cash flows generated over the selected time period of planning and that can be distributed to shareholders allow in any case to maintain a satisfactory degree of capitalisation in terms of Tier 1 and Total Capital (10% Tier 1 ratio target and 10.5% Total capital ratio) compatible with the nature and the expected development of assets. Already in the 2014 financial statements, compared to the parameters defined in the 2013 financial statements, steps were taken to increase the capitalisation coefficient target in compliance with the preliminary indications formulated to date by the Bank of Italy on "prudential monitoring threshold" for the Creval Group. Moreover, it is pointed out that the results of the impairment test carried out on the goodwill recorded in the consolidated financial statements at 31 December 2014 showed the need for a full goodwill impairment loss of approximately EUR 56 million with regard to the Carifano market CGU and of EUR 75 million with regard to the Credito Valtellinese market CGU. 62

63 With reference to the goodwill recorded at 30 June 2015, 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 2014 financial statements - considering the absence of residual intangible assets referable to Carifano - were identified as the individual legal entities, (Credito Valtellinese market CGU, 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 Available-for-sale financial assets. They actually 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 in accordance with IFRS 8 Operating segments. The analyses carried out, using the same methodological approach adopted during evaluation in the financial statements at 31 December 2014, showed the following: with reference to the estimate of the cash flows, final data at 30 June 2015 was compared with the interim forecasts pointing out their deviations. The economic results of the first half of 2015 increased as a whole compared to what was defined in the budget. The higher contribution to the comprehensive income, compared to the budget, is primarily due to the positive trend of the net interest income, favoured by a significant reduction in funding costs, as well as by higher profits made as a result of the sale and subsequent reorganisation of the treasury securities portfolio. The higher benefit of the mentioned income statement components more than offset the higher - than expected - impairment losses on loans and receivables; with reference to forecast figures, the expected comprehensive income identified during the impairment test for the 2014 financial statements - albeit in the presence of its partial reorganisation among the different income statement elements - is substantially confirmed; the long-term growth rate (g) of the cash flows used to estimate the so-called "terminal value" is in line with the one used in the impairment test for the 2014 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 2015 accounts for 8.0% and, as a result, lower than the value (8.8%) referring to 31 December 2014 due to the combined effect of changes recorded on the Risk free rate (from 2.87% to 2.04%) and on the average beta associated with a sample of major listed Italian banks (from 1.18 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 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. With reference to intangible assets with definite lives, mainly represented by the customer lists, whose amounts (all in all equal to EUR 19.1 million at 30 June 2015) are the subject- 63

64 matter of progressive amortisation, analyses on the important variables for the purposes of their enhancement were carried out. No critical factors were to report compared to the situation and to the estimate of the recoverable amount calculated for the 2014 financial statements and therefore, the amounts recorded are confirmed. 64

65 Breakdown of item 120 of liabilities "Provisions for risks and charges" Item/Amounts 30/06/ /12/ Company pension funds 33,269 34, Other provisions for risks and charges 67,270 73, legal disputes 16,793 17, personnel expenses 42,796 52, other 7,681 3,650 Total 100, ,137 Breakdown of item 160 of assets "Other assets" Amounts due from the tax authorities for withholdings on interest paid to customers and other amounts due 30/06/ /12/ ,604 78,744 Cheques drawn on the bank to be settled 70,710 49,304 Counterparts for securities and coupon payments to be received 9, Sundry items to be charged to customers and banks 95,572 42,539 Real estate inventory 45,944 44,906 Costs and other advance payments 4,122 5,953 Receivables related to the supply of goods and services 7,606 10,070 Leasehold improvements 5,260 6,396 Accruals not recorded separately Other items 65,487 36,485 Total 387, ,735 Breakdown of item 100 of liabilities "Other liabilities" 30/06/ /12/2014 Amounts due to tax authorities for indirect taxes 4,457 5,940 Amounts due to social security and welfare institutions 8,413 12,467 Amounts due to government agencies on behalf of third parties 74,772 42,000 Sundry items to be credited to customers and banks 36,765 32,705 Amounts available to customers 84,663 83,413 Amounts payable to employees 21,123 10,926 Value date differences on portfolio transactions 336, ,763 Items in transit between branches 6,743 4,051 Guarantees given and commitments 9,256 9,880 Accruals other than those capitalised 5,643 6,798 Payables related to the supply of goods and services 27,815 34,713 Sundry and residual items 306, ,402 Total 922, ,058 65

66 Non-current assets held for sale and disposal groups: breakdown by type of asset 30/06/ /12/2014 A. Individual assets: A.1 Financial assets - - A.2 Equity investments 176,947 - A.3 Property, equipment and investment property - - A.4 Intangible assets - - A.5 Other non-current assets - - Total A 176,947 - B. Groups of discontinued operations B.1. Financial assets held for trading - - B.2 Financial assets at fair value through profit or loss - - B.3 Available-for-sale financial assets - - B.4 Held-to-maturity investments - - B.5 Loans and receivables with banks - - B.6 Loans and receivables with customers - 53 B.7 Equity investments - - B.8 Property, equipment and investment property - - B.9 Intangible assets - - B.10 Other assets - 3,138 Total B - 3,191 C. Liabilities associated with discontinued operations C.1 Payables - - C.2 Securities - - B.3 Other liabilities - - Total C - - D. Liabilities associated with disposal groups - - D.1 Due to banks D.2 Due to customers - - D.3 Securities issued - - D.4 Financial liabilities held for trading - - D.5 Financial liabilities at fair value - - D.6 Provisions D.7 Other liabilities Total D On 19 June 2015, an agreement was signed for the sale to Mercury Italy S.r.l. (vehicle indirectly owned by the Bain Capital, Advent International and Clessidra Sgr funds) of the majority (85.79%) of the share capital of Istituto Centrale delle Banche Popolari Italiane (ICBPI) by the current shareholders. Credito Valtellinese which holds 20.39% of the share capital of ICBPI - undertook to sell 18.39% of the share capital of ICBPI, thereby maintaining a residual investment of 2%. In view of the sale, at 30 June 2015, the equity investment, for the portion of 18.39%, is classified as discontinued operations and belongs to the segment other assets of segment reporting. 66

67 With reference to 31 December 2014, the above-mentioned figures refer to the sale of the subsidiary Finanziaria San Giacomo to Cerved Credit Management Group, occurred on first April Information on Group share capital and reserves At 30 June 2015, equity attributable to the owners of the parent amounted to EUR 2,011 million, compared to EUR 2,020 million recorded at the end of December The main changes in the half-year are due to: - negative change in the AFS reserve mainly due to Government bonds and to the equity investment in Anima held in portfolio of EUR 63 million, - positive change in actuarial reserves of approximately EUR 2 million, - profit for the period of EUR 51 million. At 30 June 2015, the portfolio contained 60,000 treasury shares of EUR 100 thousand, i.e % of total shares outstanding at the end of the period. 67

68 SECTION 4 OTHER INFORMATION Breakdown of guarantees given and commitments Transactions 30/06/ /12/2014 1) Financial guarantees a) Banks 25,990 25,817 b) Customers 37,563 19,922 2) Commercial guarantees a) Banks 13,774 15,091 b) Customers 828, ,027 3) Irrevocable commitments to grant finance a) Banks i) certain to be called on 1,485 2,510 ii) not certain to be called on 7 7 b) Customers i) certain to be called on 6,870 10,508 ii) not certain to be called on 720, ,734 4) Commitments underlying credit derivatives: protection sales - - 5) Assets pledged as guarantee for third-party commitments - - 6) Other commitments - - Total 1,634,290 1,844,616 Assets pledged as guarantee for the Group s liabilities and commitments Portfolios 30/06/ /12/ Financial assets held for trading 54,815 50, Financial assets at fair value through profit or loss Available-for-sale financial assets 2,237,066 3,213, Held-to-maturity investments Loans and receivables with banks 286, , Loans and receivables with customers 4,069,910 3,404, Property, equipment and investment property - - The assets indicated above were used as a guarantee for funding repurchase agreements, issue of bank drafts, derivatives and loan received from the European Central Bank. 68

69 Breakdown of management and trading services 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) other third-party securities held on deposit (excluding portfolio management): others 1. securities issued by companies included in the consolidation scope 3,385,284 3,670, other securities 6,471,421 6,290,140 c) third-party securities deposited with third parties 10,610,902 10,312,681 d) treasury securities deposited with third parties 5,752,026 6,106, Other transactions 1,985,437 1,753,773 69

70 Breakdown of the main income statement items Breakdown of item 10 of the income statement "Interest and similar income" Items 1st half of st half of 2014 % change 1. Financial assets held for trading 3,741 1, Financial assets at fair value through profit or loss Available-for-sale financial assets 43,848 41, Held-to-maturity investments Loans and receivables with banks 938 2, Loans and receivables with customers 317, , Hedging derivatives Other assets n.s. Total 366, , 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 2014 % change 1. Due to central banks (1,081) (3,155) Due to banks (844) (2,033) Due to customers (52,484) (89,546) Securities issued (62,481) (70,376) Financial liabilities held for trading (461) (572) Financial liabilities at fair value through profit or loss Other liabilities and provisions (29) Hedging derivatives (11,894) (11,195) 6.24 Total (129,274) (176,877) Interest income on foreign currency financial assets 1st half of st half of 2014 % change Interest income on foreign currency assets

71 Interest expense on foreign currency financial liabilities 1st half of st half of 2014 % change Interest expense on foreign currency liabilities (153) (317) Breakdown of item 40 of the income statement "Fee and commission income" Type of service/sectors 1st half of st half of 2014 % change a) guarantees given 4,762 5, b) credit derivatives c) management, trading and consulting services: 44,993 36, trading of financial instruments currency trading 2,432 2, portfolio management individual collective custody and administration of securities custodian bank placement of securities 11,141 6, order acceptance and transmission 4,286 4, consulting services on investments on financial structuring distribution of third party services 26,585 21, portfolio management 7,841 6, individual 7,841 6, collective insurance products 17,399 13, other products 1,345 1, d) collection and payment services 41,618 40, e) servicing for securitisation transactions f) factoring transaction services g) tax collection services h) management of multilateral trading facilities i) current account management 28,137 29, j) other services 35,285 39, Total 154, , Fee and commission income included under "j) other services" mainly refers to commissions on loan transactions of EUR 32,005 thousand and commissions for rights and pledges of EUR 1,840 thousand. 71

72 Breakdown of item 50 "Fee and commission expense" Services/Sectors 1st half of st half of 2014 % change a) guarantees received (891) (7,804) b) credit derivatives c) management and trading services: (735) (769) trading of financial instruments (3) (6) currency trading (4) (2) portfolio management: own account for third parties custody and administration of securities (728) (761) placement of financial instruments off-premises provision of financial instruments, products and services d) collection and payment services (11,169) (10,951) 1.99 e) other services (720) (1,485) Total (13,515) (21,009) Fee and commission expense of the first half of 2014 mainly include fees and commissions paid to the Italian Government on bonds issued by the Bank and fully repaid during

73 Breakdown of item 80 "Net trading income (expense)" Transactions/Income components Gains (A) Trading income (B) Losses (C) Trading losses (D) Net trading income [(A+B)- (C+D)] 1. Financial assets held for trading 130 3,408 (4,042) (18,809) (19,313) 1.1 Debt instruments 117 3,407 (4,000) (18,809) (19,285) 1.2 Equity instruments 13 1 (42) - (28) 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 1, Derivatives 396 4,766 (4) (4,766) 1, Financial derivatives: - On debt instruments and interest rates 396 4,766 (4) (4,766) On equity instruments and stock market share indices On currencies and gold X X X X 1,580 - Other Credit derivatives Total 526 8,174 (4,046) (23,575) (16,165) Trading losses on debt instruments mainly refer to transactions on Government bonds. 73

74 Breakdown of item 90 "Net hedging income (expense)" Income components/amounts A. Gains on: 1st half of st half of 2014 % change A.1 Fair value hedges 44, A.2 Financial assets with fair value hedges - 65, A.3 Financial liabilities with fair value hedges Total hedging income (A) 44,407 65, B. Losses on: B.1 Fair value hedges (65,997) B.2 Financial assets with fair value hedges (44,667) - - B.3 Financial liabilities with fair value hedges Total hedging expense (B) (44,667) (65,997) C. Net hedging expense (A-B) (260) (61) Net impairment losses on loans and receivables: breakdown Impairment losses Reversals of impairment losses 1st half of st half of 2014 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 (10,153) (249,579) (240) 32,210 56,818-12,408 (158,536) (210,193) Purchased non-performing loans and receivables Loans - - X - - X X Debt instruments - - X - - X X - - Other loans and receivables (10,153) (249,579) (240) 32,210 56,818-12,408 (158,536) (210,193) - Loans (10,153) (249,579) (240) 32,210 56,818-12,408 (158,536) (210,193) - Debt instruments C. Total (10,153) (249,579) (240) 32,210 56,818-12,408 (158,536) (210,193) Key A = from interest B = other recoveries 74

75 Net accruals to provisions for risks and charges: breakdown Items 1st half of st half of 2014 % change Provision for legal disputes and claims from liquidators (333) (2,379) Provision for sundry risks and charges (3,522) (1,165) Total (3,855) (3,544) 8.78 Provisions for sundry risks and charges include the contribution to the resolution fund envisaged by the new European regulations (Single Resolution Fund) of EUR 4 million. Breakdown of item 180 "Personnel expenses" Type of expense/amounts 1st half of st half of 2014 % change 1) Employees (141,228) (145,677) a) wages and salaries (97,390) (97,584) b) social security charges (30,255) (30,571) c) post-employment benefits (6,117) (5,478) d) pension expenses e) accrual for post-employment benefits 272 (1,293) f) accruals for pension and similar provisions: - - defined contribution defined benefit (306) (474) g) payments to external supplementary pension funds: - - defined contribution (5,059) (4,755) defined benefit (164) (113) h) costs of share-based payment plans i) other employee benefits (2,209) (5,409) ) Other personnel in service (317) (369) ) Directors and statutory auditors (2,402) (2,411) ) Retired personnel (819) (812) 0.86 Total (144,766) (149,269) 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

76 Breakdown of item 180 "Other administrative expenses" 1st half of st half of 2014 % change Fees for professional and consulting services (18,674) (16,330) Insurance premiums (1,953) (1,953) 0.00 Advertising (2,156) (2,016) 6.94 Postage, telephone and data transfer (4,204) (4,641) Printed materials and stationery (969) (1,015) Maintenance and lease of hardware and software (2,666) (2,807) Data processing services (13,931) (14,899) Electricity, heating and shared property service charges (5,141) (5,586) Administrative and logistics costs (2,578) (2,692) Property management (4,989) (5,011) Transport and travel (1,913) (2,017) Security and transport of valuables (3,626) (3,925) Membership fees (1,555) (1,258) Audit fees (758) (741) 2.29 Commercial and financial information (3,581) (3,591) Rent payable (11,638) (12,127) Indirect personnel expenses (2,042) (1,787) Entertainment expenses (244) (266) Taxes (31,489) (30,489) 3.28 Contractual charges for treasury management services (609) (719) Meeting costs (1,430) (1,436) Miscellaneous items (1,663) (2,268) Total (117,809) (117,574) 0.20 Average number of employees by category 1st half of st half of 2014 Employees: 4,022 4,153 a) executives b) total middle managers 1,542 1,543-3rd and 4th level c) other employees 2,422 2,550 Other personnel 7 12 Total 4,029 4,165 76

77 Breakdown of item other operating costs 1st half of st half of 2014 % change Amortisation of leasehold improvements (1,442) (1,940) Other expenses (7,312) (8,275) Total (8,754) (10,215) Other operating costs mainly include costs to produce and manage property of EUR 6,232 thousand. Breakdown of item other operating income 1st half of st half of 2014 % change Rent receivable Recovery of loan setup fees 2,316 2, Income from real estate services (including income from review of prices on real estate agreements underway) Income from data processing services 6,147 5, Income from other services Recovery of indirect taxes 22,582 22, Recovery of insurance policy payments Recovery of legal and notarial costs 6,892 6, Other income 8,777 8, Total 48,520 47, The other operating income includes proceeds from sales of property of EUR 4,340 thousand, changes in property works in progress of EUR 850 thousand, income and recoveries for leasing services of EUR 1,207 thousand and insurance repayments of EUR 198 thousand. 77

78 Post-tax profit (loss) from discontinued operations: breakdown Income components/sectors Group of assets/liabilities 1st half of st half of 2014 % change 1. Revenue Costs (305) (585) Gain (loss) on disposal groups and associated liabilities Gains (losses) on sales 20, Taxes (324) Profit (loss) 20,070 (462) n.s. Item "Gains (losses) on sales" includes the gain recorded in the second quarter of 2015, related to the sale of 100% of Finanziaria San Giacomo, for approximately EUR 20 million net of taxes. Breakdown of income taxes on discontinued operations 1st half of st half of 2014 % change 1. Current taxation (-) (356) (36) Change in deferred tax assets (+/-) (47) Change in deferred tax liabilities (-/+) Income taxes for the period (-1+/-2 +/-3) (324)

79 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 year. The following table displays the basic earnings per share with the calculation details. 1st half of st half of 2014 Profit (loss) attributable to holders of ordinary shares 50,867 3,144 Profit (loss) from continuing operations attributable to holders of ordinary shares 30,796 3,605 Weighted average number of ordinary shares 1,108,812, ,693,674 Basic earnings (loss) per share Basic earnings (loss) per share from continuing operations It is specified that earnings per share from discontinued operations are equal to EUR for the first half of 2015 (0.001 in the first half of 2014). There are no outstanding instruments with potential dilutive effect; therefore, diluted earnings per share are equal to basic earnings per share. 79

80 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 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); - market risk (including the basis risk); - operational risk; - IT risk; - interest rate risk; - concentration risk; - liquidity risk; - real estate risk; - compliance risk; - money-laundering risk; - risk towards associated parties; - reputational risk; - risk deriving from securitisations; - residual risk; - strategic risk (including risk from investments); - risk of excessive leverage; - sovereign risk. The risks related to the outsourcing of corporate functions and of the information system refer to the different types of risks already identified. The review of the current exposure to risk, carried out on the basis of the assessment made on the occasion of the preparation of the ICAAP Report, and the future risk assessment, carried out also on the basis of the commercial programming provided by the different competent organisational units, did not report substantial changes in risk types and profiles. In line with its focus on retail banking, the Group is mainly exposed to credit risk. In terms of internal capital, 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 quite 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 risk profile at the end of the reporting period is consistent with the risk appetite defined 80

81 by the Board of Directors for the current year, which, in line with the identity, values, business model and strategic input of the Group, resolved 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. Annually, the Board of Directors of the Parent reviews the risk appetite framework and, if the conditions are met, updates them. The risk appetite, which is a reference for defining the strategic plan and the logical premise for planning, is defined for the risks considered relevant for the Internal Capital Adequacy Assessment Process (ICAAP). The results of the above described process are summarised in the relevant Report that represents the point of convergence and synthesis of the equity, economic and financial plans, the risk management and capital management on the one hand, and an essential instrument to support strategic planning and the implementation of the corporate decisions on the other. The regular monitoring activities have pointed out the current and future adequacy of the total capital to meet the relevant risks and maintain an adequate standing on the markets. The strategic coordination of the Group and the unit operational management are insured, within the framework of the strategic guidelines resolved by the Board of Directors of the Parent and, on the basis of the system of delegated powers, by the Managing Directors and by the General Management of the Parent Credito Valtellinese. These also make use of the Management Committee and of the Group Committees for the purpose of a shared decisionmaking. The organisational structure of the Group meets the requirement of ensuring the constant carrying-out by the Parent Credito Valtellinese of a deep and incisive controlling action with regard to the members of the Group, from a strategic, management, technical and operational viewpoint, and this as a result of a stringent institutional, operational and functional connection with the subsidiaries. Four Areas of Coordination (Commercial, Credit, Finance and Operations, Risks and Controls) referable to the members of the General Management became operational as from last year. In particular, the task of the Risk and Control Area, under the Managing Director, among other things, is to monitor the activities and the development of the Group s internal control and risk management system, favouring the coordination and integration between the company s development and control functions in order to create a full protection of the risk management processes of the Group. The company's control functions are based, from an organisational viewpoint, in three separate Departments of Credito Valtellinese: - the Auditing Department, responsible for the activities related to the internal audit function; - the Risk Management Department, responsible for the activities related to the risk control and validation functions; - the Compliance Department, responsible for the activities related to compliance and antimoney laundering functions. The three control functions form the internal control system, regulated by the prudential supervisory regulations and by the company policy defined in the "Control coordination 81

82 document". In particular, the Risk Management Department, broken down in specialised Divisions and Services, is responsible for: - contributing to the definition of the Risk Appetite Framework (RAF) of the Group and the operational limits to the assumption of various types of risk; proposing the quantity and quality parameters required for defining the RAF, which also refer to stress scenarios and, in case of amendments to the operating contexts of the bank, the adjustment of such parameters; verifying compliance with RAF; - expressing opinions in advance on the compliance with RAF of most significant transactions, by acquiring if possible, depending on the type of operation, the opinion of other departments involved in the risk management process; - overseeing the internal capital adequacy assessment (ICAAP) and the internal liquidity adequacy assessment processes provided by the prudential supervisory regulations; - providing the Banks and the Group with reliable models and instruments, updated and adjusted for the management of risks implied in the business activity and in compliance with the regulatory provisions; - identifying, measuring and monitoring the relevant risks, verifying compliance with the exposure limits that may be established and assessing capital adequacy. The Management makes also use of the collaboration of contacts at the other Companies of the Group. 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 communicating to the appropriate hierarchical levels the assumed risks - involve corporate governance systems through a number of Bodies, each with its own specific functions. The risk management processes are properly documented and the various responsibilities are clearly assigned. The actual adequacy of the main risk management processes is assessed at regular intervals by the Risk Management Department; the results are submitted to internal audit by the Auditing Department and reported to the Board of Directors, showing any anomaly and shortfall of the improvement actions. 1. CREDIT RISK General aspects The credit risk is primarily defined as the insolvency risk or default of the counterparty, i.e. as "the possibility for the creditor that a financial obligation will not be paid at maturity or later". The credit risk occurs also as: - deterioration of the creditworthiness of counterparties with a credit line (migration risk); - increase in exposure before the insolvency of a counterparty with a credit line (exposure risk); - decrease in the rate of collection of delinquent loans (collection risk). Therefore, as part of the lending activity, the Bank, acting as lender, is exposed to the risk that some loans may not be paid, due to the deterioration of the financial conditions of the 82

83 debtor, either at maturity or later and should therefore be derecognised in all or in part. The possible causes of non-fulfilment are mainly due to the inability of the borrower to repay the debt (liquidity shortage, insolvency, etc.). This risk is 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. Organisational aspects Two Parent Areas are mainly involved in the credit risk monitoring: 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 Loans Area reports directly to: - the Loans Department of the Parent, whose task is to manage and check the risk-taking process related to credit disbursement and monitor the global activities concerning the granting of loans for requests from Italian or foreign banks; and for Financial companies, monitoring constantly their trend and related uses; - the Dispute Department, whose main task is to supervise and coordinate the issues related to the management and disposal of non-performing loans according to management policies and the strategic objectives defined at the Group level, monitoring their consistency and effectiveness over time. Moreover, the Dispute Department handles the relations with the Servicer Cerved Credit Management Group S.r.l. with which on 1 April 2015, the Parent finalised an agreement for the development of a long-term industrial partnership for the management of bad loans; - the Business Finance Department, which is responsible for monitoring the valuation and structuring the medium to long-term loans such as Specialized Lending, Acquisition Finance, Corporate Lending and Syndicated loans. Moreover, it must ensure, also by coordinating the work of external lawyers, the monitoring of all aspects (contractual, pricing and guarantees) related to pertaining operations, and coordinate the Advisory activities (Mini Bond and Restructuring) in addition to monitoring the restructuring process of the relevant positions of the Bank and coordinating the activities related to the operations included in the scope of structured finance and restructuring; - the Loan Policies and Monitoring Service that has the task of monitoring the credit process, defining the policies and methods required for assessing and managing credit risks, by supporting the member of the General Management responsible for the "Loans Area" and by coordinating the activity carried out by the Loans Department of the Parent 83

84 and of the Banks of the Group, as well as by the structures of the other Companies of the Group with reference to the credit system, in order to implement a shared guideline for a coordinated management of the credit risk within the Group. The organisational model of the Loans Department of the Parent is broken down in Divisions and Services. In detail: - the Private, Retail Enterprises and Corporate SME Origination Department oversees the granting of loans to customers belonging to the Private, Retail Enterprises and Corporate SME segment; - the Corporate and Relevant Position Origination Department oversees the granting of loans to customers belonging to the Corporate segment and/or relevant positions; - the Credit Performance Management Department supervises the systematic monitoring of irregular loans for the Group shown by the company processes ensuring the effective management of positions, including support to regional networks, in order to guarantee the minimisation of the risk. The structure also manages and coordinates the operating units of territorial banks by analysing the causes that led to impairment; - the Secretary and Guarantee Management Service carries out secretarial duties for the Loans Department and releases sureties in favour of third parties, carrying out operations concerning their accounting and management; - the Non Core Unit Service manages the deleverage of credit exposures identified as non strategic, ensuring the identification of the best way-out strategies with a view to reducing the business cost and by means of a proactive and dynamic management. The Service was established by signing an agreement with the company Yard Credit & Asset Management aimed at identifying practical way-out strategies to place on the market guaranteed assets with reference to an overall portfolio of approximately EUR 500 million of real estate loans classified as unlikely to pay. The organisational structures of Loans Departments of subsidiary Banks, more simplified than the Parent, are engaged in loan origination and trend management. With reference to the Risk and Control Area, already described in the previous paragraph, note the role of the Risk Management Department in loans. In particular, by means of the Credit Risk Department, the Management: - assesses the adequacy of the loan trend management process, verifies the adequacy of the recovery process, monitors the evaluation of guarantees; - develops, manages and maintains methods and models of credit risk measurement, concentration and determination of impairment losses on loans portfolio; - monitors, with the support of the competent corporate functions, the data quality system with reference to the figures used as part of the internal systems for the measurement of credit risks; - identifies, measures or assesses, monitors, prevents or mitigates as well as communicates to the appropriate hierarchical levels the credit risks (including insolvency and concentration risk, counterparty risk, residual risk, country risk and transfer risk) to which the business is exposed, by using the models developed by the competent Service and methodology approaches, techniques, procedures, applications and instruments reliable and consistent with the level of complexity of the Bank and Group operations; - prepares the interim report related to the monitored risks for the Governing and control Bodies and for the company structures involved. 84

85 By means of the Risk Validation and Integration Department, the Management: - ensures the independent verification of minimum quantitative and organisational requirements contemplated by the Supervisory Regulations for the validation of the Internal Rating Systems, through controls centralised on internal estimate models of risk components, on the main affected processes and on the related supporting IT systems; - sees to the integration of the risk measures in the business processes and supports the competent departments in the preparation of the internal reference regulations; - coordinates, in collaboration with the development functions and with the Internal Validation Service, the planning activities for the adoption, updating and development of internal systems for the measurement of credit risk consistently with the suggestions made by the internal control functions. Finally, by means of the Rating Desk Service, the Management monitors the rating assignment process by assigning the final rating to the Corporate positions and by evaluating the override proposals formulated by the branches with regard to the Corporate SMEs and Retail Enterprises. 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. With regard to all the macro-segment credit risks (Corporate, Retail and Private), the credit rating process is based on the internal rating system, which is essential for assessing the creditworthiness of borrowers. During the half-year, the granting and resolution process was updated significantly by entering the Expected Loss as a decisive element for the decision-making body. The innovation of the model for determining the decision-making scopes based on expected loss brackets allows to best direct the risk-taking policies. The decision-making process related to the credit is supported by internal procedures (Electronic Credit Line and Rating) that manage the credit process (contact with customers, set up, credit disbursement and management) and the rating assignment process, respectively. The entire credit process is constantly reviewed and subject to careful inspections. All the territorial banks of the Group renewed the quality certification of the "Loan application, granting and management" process that Credito Valtellinese has been awarded since The certification activities entail a constant and stringent verification of the entire lending process, the drafting of documents (Quality Manual and Operating Instructions) adequately examined by top management and distributed to the various departments of the company, as well as the timely updating of controls carried out by the appropriate Loans Department and by the Auditing Department. The purpose of this process is to ensure the most precision in assessing risk, maintaining a lean, efficient assessment and management process. 85

86 Management, measurement and control systems 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). The rating has an important role in the process of granting, renewal and review of the credit, in that it represents an essential and indispensable element for assessing the counterparty s creditworthiness. The rating assignment activities summarise the analyses of all the quantitative and qualitative information available in support of the credit set up process, enhancing at the same time the direct relation with the customers and the knowledge gained over time of their specific characteristics. The Group s master scale consists of 9 rating classes to which the related PDs (Probability of Default) correspond, i.e., the probability that a counterparty belonging to a particular rating class passes to the default state within a time horizon of one year. The rating models are estimated on the basis of statistical analysis of historical data of the Credito Valtellinese Group and their purpose is to assess the counterparty risk both during the process of granting a new credit line and during the process of monitoring the development of the risk profile of each counterparty and of the overall loans portfolio. In particular, the final rating assigned to a counterparty belonging to the Corporate and Retail macro-segments is the result of a statistical calculation process, supplemented by a quality component. The statistical rating summarises the information concerning the financial statements (financial statements module), the performance of the counterparty with regard to the bank (internal performance module) and to the banking system and financial companies (external performance module CR or CRIF module) and the economic and environmental context in which the enterprise operates (geo-sectorial module). The result expressed by the statistical rating is supplemented by the information coming from a quality questionnaire and can be changed in relation to adverse events and to the possible belonging to an economic group. The rating model for the Private Retail segment is broken down to the acceptation component - in order to assess the creditworthiness of the counterparty in the case of first application for a credit line/increase in the existing credit lines and in the monitoring component, in order to assess the creditworthiness of the counterparty with the credit line unchanged. In order to take due account of the different risk profiles associated with the macro-types of products, components of acceptance and monitoring are differentiated on the basis of the product required and for which the counterparty has already a credit line. The final overall rating assigned to a counterparty belonging to the Private segment is the result of a statistical calculation process. The statistical rating summarises in a different way - depending on whether the acceptance or monitoring component is being assessed - the information concerning the social and demographic component (social and demographic module), the performance of the counterparty with regard to the bank (internal performance module) and to the banking system and financial companies (external performance module and CRIF module). The result expressed by the statistical rating can be changed in relation to adverse events. Another parameter used by the Group for measuring the credit risk is the Loss Given Default (LGD) that represents a loss rate in case of default, i.e. the expected value (possibly affected by adverse scenarios) of the ratio, expressed in percentage terms, between the loss due to default and the amount of exposure at the moment of default (Exposure At Default, EAD). In 86

87 order to calculate the value of LGD, bad loans LGD and the Danger Rate are estimated and then two additional components are applied: the downturn effect and indirect costs. In addition to be used in the assessment and granting process of the loan, the rating also affects the calculation of the risk-based pricing and guides the decision of the managers when classifying positions based on their performance. Moreover, with respect to the valuation of the Performing Loans and receivables from customers portfolio, the Group developed the method of "Incurred but not reported losses", which uses the values of expected loss duly adjusted to take account of the average delay between the deterioration of the financial conditions of the debtor and the actual classification under default status of each exposure. As part of this process, the Risk Management Department defined the method for determining the "Rate of depreciation of performing loans" considering, in particular, in addition to the estimate of the PD and LGD parameters, the determination of the Loss Confirmation Period (LCP) parameter. The rating system as a whole is constantly verified by the internal validation function and by the internal audit function in order to guarantee the compliance with what is provided by the Supervisory Regulations in order to use the internal models for determining prudential capital requirements. For the company portfolio (Corporate and Retail) and Private Retail, the distributions by official rating classes at 30 June 2015 and at 31 December 2014 are indicated below. Chart 1 - Distribution of loans to companies and private by rating class 87

88 With regard to the concentration risk, the objectives with respect to exposure are defined as part of the Risk Appetite Framework resolved by the Board of Directors of Credito Valtellinese and are duly considered when carrying out strategic and operational planning, and at the time of lending. The risk management process is regulated by a specific regulation that formalises the performance of the risk management activities regarding such types of risks, defines the tasks and responsibilities assigned to the various organisational units in charge, and sets out, among other things, the strategic guidelines, management policies, measurement methods, exposure limits, information flows and any corrective action that may be necessary. Concentration risk is limited by splitting up and diversifying the portfolio and through the resolution, by the Board of Directors, of maximum credit line amounts divided by Bank and maximum exposure limits vis-à-vis Banks and Financial companies. Concentration risk measurement is the responsibility of the Risk Management Department and it makes these measurements on a centralised basis on behalf of all Group Banks. Risk measurement is carried out at both an individual and consolidated level in order to fully identify and allocate the main sources of exposure to risk at the legal entity level. The approach followed in order to measure the concentration risk of the loans and receivables from customers portfolio differs in accordance with whether it is generated by concentration per single party or group of related customers or geo-sectorial concentration. The Granularity Adjustment approach noted in the regulatory provisions in force is used to measure the concentration risk per single party or group of related customers. This approach allows the Bank to determine the internal capital in connection with the concentration risk per single party or per group of related customers of a portfolio characterised by imperfect diversification. Information on the positions classified as "large exposure" is also important as part of the risk concentration per single party or group of related customers. In order to measure the geo-sectorial concentration risk, the method proposed by ABI is followed. This method allows the bank to estimate the internal capital in connection with the geo-sectorial concentration risk as "add-on" of the capital requirement for credit risk hedging, according to the distance of the level of concentration by economic sector/ateco business code of the Group s loans portfolio compared to the concentration level of the national banking system. The distance is measured by comparing the Herfindahl concentration index by economic sector/ateco business code of the Group s loans portfolio and the same index calculated using the figures of the national banking system. By comparing the two indices, using a simulation algorithm, the internal capital for hedging the geo-sectorial concentration risk is calculated. With regard to counterparty risk, that is to say the risk that the counterparty of a transaction concerning certain financial instruments is in default before the settlement of the transaction itself, the operations carried out - limited in terms of volumes and focused on non-complex instruments traded on regulated markets or with counterparties of high credit standing - involve a very modest exposure. In line with the adopted business model, these types of transactions are limited in number and size. Credit risk mitigation techniques 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. The guarantees used by the Group are normally collaterals - relating to real estate property or financial instruments - and to a lesser extent, personal guarantees. As mentioned in the previous paragraphs, during the half-year, the Group signed important agreements in order to improve the management of guarantees with a special reference to 88

89 the non-performing portfolio. Specifically: - As part of the agreement with Cerved Credit Management Group S.r.l. for the management of non-performing loans (bad loans), a specific project was formally started for strengthening the management and enhancement monitoring of non-performing loans (NPLs) with securities on property in sales by the court (Real Estate Owned Company, REOCO). This project includes the strengthening of asset repossessing and enhancement of the securities on properties, through the distinctive skills of the Cerved Group combined with the experience gained in the field of real estate by Stelline, company that has actually always been in charge of the management of real estate assets of the Group and provides - both within the Group and to external customers - valuation, consultancy and management services in the real estate sector; - the Board of Directors of the Parent approved the demerger of the business unit consisting of the property and facility management and property valuation of Stelline in favour of Bankadati, consortium company that manages the activities concerning the Information and Communication Technology (ICT), the organisation, the back office and the support processes of the Group. In line with what is stated in the previous point, the demerged company, with the new name "Stelline Real Estate S.p.A.", assumes the role of REOCO of the Group with a mission, also with the support of the industrial partner Cerved Credit Management, exclusively dedicated to asset repossessing; - a collaboration agreement was started between the Parent and Yard Credit & Asset Management - company of the Yard Group ("Yard") among the main operators of credit management present in Italy, with a high expertise for consultancy, management, credit recovery and surfacing of real assets' value services - for the management of "distressed" real estate loans of the Creval Group. The collaboration will initially focus on a portfolio of approximately EUR 500 million of positions classified as unlikely to pay. As part of the agreement, the Group set up also a special Non Core Unit, within the Loans Area, in support of the process, with deleveraging and derisking objectives on the assigned portfolio. The indicated agreements pave the way for a better management of all real estate assets of the Creval group, thanks to the distinctive skills of the partner Companies, by enhancing also the expertise gained by Stelline Servizi Immobiliari ("Stelline"). As part of the ICAAP process, the Group has also provided for the assessment of residual risk, i.e. the risk that the recognised techniques used to mitigate credit risk are less effective than expected. The use of these techniques may in fact expose the Group to a series of further risks (for example of an operational or legal nature) which, if they occur, may lead to a greater lending risk than had been expected due to the lower effectiveness or actual unavailability of the protection. The residual risk is mainly managed by acting on the procedural and organisational plan. In order to reduce the residual risk, organisational changes were introduced aimed at strengthening the second level controls. The Auditing Department is assigned the third-level controls designed to ensure timely compliance with the obligations relating to the management of guarantees. With reference to the eligibility of guarantees for determining asset requirements, the Group reviewed and regulated in a more stringent manner the process that guides and applies their eligibility and admissibility requirements. Non-performing financial assets The irregularly performing loans are classified in compliance with what is provided by 89

90 supervisory regulations as: past due and/or overdue non-performing (divided by, if any, mortgage lien), unlikely to pay and bad loans. This new classification was introduced as from 1 January 2015 and replaces the one previously in force that envisaged the categories of past due, substandard, restructured and non-performing loans. The valuation of impairment losses occurs analytically for each position on the basis of uniform rules for all Banks in the Group. For non-performing loans classified as "unlikely to pay loans", which have a limited unitary amount, or as "past due loans", the expected loss is calculated by homogenous categories according to internal statistical models and analytically applied to each position. The other doubtful loans are individually assessed by the Group Bank Loans Departments and by the Dispute Department of the Parent (for bad loans portfolio) on the basis of methods and rules defined by the internal policy on the matter. As mentioned in the previous paragraphs, during the half-year, the Group signed some important agreements in order to improve the management of non-performing portfolio: - with Cerved Information Solutions S.p.A, by means of the subsidiary Cerved Credit Management Group S.r.l., for the development of a long-term industrial partnership for the management of bad loans, in order to increase the efficiency of the management and recovery of non-performing loans. The Group will retain the strategic monitoring in the management of major exposures, in the operational coordination and control of the credit recovery process and of the servicing activities; - with Yard Credit & Asset Management for the management of "distressed" real estate loans of the Group. The collaboration will initially focus on a portfolio of approximately EUR 500 million of positions classified as unlikely to pay. Moreover, during the half-year, the loan trend management process was strengthened. In particular, the processing of regular positions showing signs of potential impairment (known as predictive monitoring) had become mandatory. Moreover, during the half-year, the Group further fine-tuned the valuation model of impairment losses. In particular, during the half-year, the internal Regulation "Methods for the assessment of non-performing loans" that defines valuation processes and uniform rules for all Banks in the Group was revised. 90

91 Banking Group - On and off-statement of financial position credit exposures with banks: gross amount and carrying amount Type of exposure/amounts A. ON-STATEMENT OF FINANCIAL POSITION EXPOSURES Gross amount Individual impairment Collective impairment 30/06/2015 Carrying amount a) Bad loans - - X - b) Unlikely to pay - - X - c) Past due non-performing loans - - X - d) Other assets 490,215 X - 490,215 TOTAL A 490, ,215 B. OFF-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Non-performing - - X - b) Other 43,318 X ,466 TOTAL B 43, ,466 TOTAL (A+B) 533, ,681 Banking Group - On and off-statement of financial position credit exposures with customers: gross amount and carrying amount Type of exposure/amounts A. ON-STATEMENT OF FINANCIAL POSITION EXPOSURES Gross amount Individual impairment Collective impairment 30/06/2015 Carrying amount a) Bad loans 2,706,345-1,510,536 X 1,195,809 b) Unlikely to pay 2,089, ,340 X 1,638,516 c) Past due non-performing loans 551,020-51,002 X 500,018 d) Other assets 21,052,965 X -116,616 20,936,349 TOTAL A 26,400,186-2,012, ,616 24,270,692 B. OFF-STATEMENT OF FINANCIAL POSITION EXPOSURES a) Non-performing 18,942-4,260 X 14,682 b) Other 1,583,491 X -4,144 1,579,347 TOTAL B 1,602,433-4,260-4,144 1,594,029 TOTAL (A+B) 28,002,619-2,017, ,760 25,864,721 91

92 Distribution of credit exposures by portfolio and credit quality (carrying amounts) Banking group Other companies Total Portfolio/Quality Bad loans Unlikely to pay Past due non-performing loans Past due performing loans Other assets Non-performing Other 1. Financial assets held for trading , , Available-for-sale financial assets ,350, ,350, Held-to-maturity investments Loans and receivables with banks , , , Loans and receivables with customers 1,195,809 1,638, , ,259 14,325,518-7,067 18,590, Financial assets at fair value through profit or loss Financial assets held for sale Hedging derivatives Total at 30/06/2015 1,195,809 1,638, , ,259 20,203, ,906 24,764,163 Total at 31/12/2014 1,101,939 1,578, , ,599 22,126, ,242 26,566,789 Data at 31 December 2014 restated for a consistent comparison. Other assets include EUR 915,659 thousand (EUR 1,610,971 thousand at 31 December 2014) of loans past due from 1 day. Non-performing loans include exposures subject to granting of EUR 513,970 thousand, whereas performing loans include exposures subject to granting of EUR 419,963 thousand. 92

93 Distribution of credit exposures by portfolio and credit quality (gross amount and carrying amount) Portfolio/Quality Non-performing assets Performing Total Gross amount Individual impairment Carrying amount Gross amount Collective impairment Carrying amount Carrying amount A. Banking group 1. Financial assets held for trading X X 113, , Available-for-sale financial assets ,350,309-5,350,309 5,350, Held-to-maturity investments Loans and receivables with banks , , , Loans and receivables with customers 5,346,847-2,012,878 3,333,969 15,366, ,616 15,249,777 18,583, Financial assets at fair value through profit or loss X X Financial assets held for sale Hedging derivatives X X - - Total A 5,347,221-2,012,878 3,334,343 21,131, ,616 21,127,914 24,462,257 B. Other companies included in the consolidation scope 1. Financial assets held for trading X X Available-for-sale financial assets Held-to-maturity investments Loans and receivables with banks , , , Loans and receivables with customers ,067-7,067 7, Financial assets at fair value through profit or loss X X Financial assets held for sale Hedging derivatives X X - - Total B , , ,905 Total at 30/06/2015 5,347,221-2,012,878 3,334,343 21,433, ,616 21,429,819 24,764,162 Total at 31/12/2014 5,082,510-1,890,040 3,192,470 23,443, ,249 23,374,319 26,566,789 93

94 Distribution of on and off-statement of financial position credit exposures with customers by business segment Exposures/Counterparts A. On-statement of financial position exposures Carrying amount Governments Individual impairment Collective impairment Carrying amount Individual impairment Other government agencies A.1 Bad loans - - X - - X A.2 Unlikely to pay - - X 1 - X A.3 Past due non-performing loans 1 - X - - X Collective impairment A.4 Other exposures 5,426,306 X - 55,608 X -3,480 TOTAL A 5,426, , ,480 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 5 - X B.4 Other exposures 5,613 X - 432,791 X -3 TOTAL B 5, , Total at 30/06/2015 5,431, , ,483 Total at 31/12/2014 6,667, ,326-1, Exposures/Counterparts A. On-statement of financial position exposures Carrying amount Financial companies Individual impairment Collective impairment Carrying amount Individual impairment A.1 Bad loans 33,166-41,076 X - - X A.2 Unlikely to pay 34,462-6,740 X X A.3 Past due non-performing loans 7, X - - X Insurance companies Collective impairment A.4 Other exposures 1,377,679 X -2,587 9,553 X - TOTAL A 1,453,285-48,640-2,587 9, 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 exposures 19,826 X ,160 X -5 TOTAL B 19, , Total at 30/06/2015 1,473,237-48,663-3,221 10, Total at 31/12/2014 1,420,058-46,204-2,194 11,

95 Exposures/Counterparts A. On-statement of financial position exposures Carrying amount Non financial companies Individual impairment Collective impairment Carrying amount Individual impairment A.1 Bad loans 1,034,666-1,290,387 X 127, ,073 X A.2 Unlikely to pay 1,448, ,801 X 155,191-39,788 X A.3 Past due non-performing loans 413,321-42,297 X 78,718-7,880 X Other parties Collective impairment A.4 Other exposures 10,119,147 X -105,025 3,948,055 X -5,524 TOTAL A 13,015,973-1,737, ,025 4,309, ,741-5,524 B. Off-statement of financial position exposures B.1 Bad loans 2,480-2,282 X X B.2 Unlikely to pay 10,952-1,809 X X B.3 Other non-performing assets X 40-4 X B.4 Other exposures 981,450 X -2, ,506 X -1,094 TOTAL B 995,391-4,143-2, , ,094 Total at 30/06/ ,011,364-1,741, ,433 4,449, ,835-6,618 Total at 31/12/ ,469,665-1,630, ,934 4,418, ,557-6,327 95

96 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. General aspects 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. The risk is allocated almost entirely to the Parent and the exposure remains well within established limits. The issuer risk component is the main portion of the portfolio risk. Management process and measurement methods for the interest rate risk and the price risk Investment policies are based on criteria that aim to limit market risk for the components that the Group intends to consciously assume: - interest rate risk; - price risk; - currency risk. As a general rule, the Bank does not enter into transactions that entail exposure to commodity risks. At the end of the period, there are no positions of this type. Risk hedging tools and techniques are used in the management of the portfolio. The risk management process regarding the market risk for the trading book is governed by a specific corporate regulation approved by the Board of Directors of the Parent Company and periodically reviewed. This regulation formalises the performance of the risk management activities regarding such types of risks, defines the tasks and responsibilities assigned to the various organisational units in charge, and sets out, among other things, the strategic directions, management policy, measurement methods, exposure limits, information flows and any corrective action that may be necessary. Therefore, investment and trading is carried out in compliance with the mentioned policies and is implemented as part of an extensive system of assigned management powers and according to detailed regulations envisaging defined management limits in terms of instruments, amounts, investment markets, issue and issuer types, sectors and ratings. In accordance with the mission of the retail banking Group that mainly assumes credit risk with respect to specific customer segments, the financial assets are mainly used to ensure protection of the overall technical equilibrium of the Banks and the Group. Management of the trading book is specifically aimed at optimising income from the financial resources available, with the obligation of restraining variability of the forecast results from the Finance Area and individual and consolidated profits. The Risk Management Department is responsible for the identification of algorithms, rules 96

97 and parameters required for the development of methods and models for measuring the market risk, as well for their implementation and maintenance in computing applications. The Risk Management Department monitors on a daily basis the exposure of the banks of the Group to the market risk and verifies the consistency with the risk appetite defined by corporate bodies 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. 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). The VaR measures the maximum loss the trading book may incur based on volatility and historic correlation of the individual market risk factors (interest rates, share prices and exchange rates) and credit risk of the issuer. 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). This model is not used to determine the minimum capital requirement with respect to market risk. The Group uses a single model to monitor the risk to which the trading book is exposed. Therefore, the tables below illustrate information on VaR, inclusive of all risk factors that determine it. During the half-year, the VaR recorded quite limited values with relation to the book s size and to the allocated VaR. However, due to the sudden increase in the volatility of risk factors, on two occasions VaR rose above the reporting limit identified by the internal regulations. 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 First half of Average Minimum Maximum 30/06/2015 Average Minimum Maximum 5,292, ,228 12,075,781 2,238, , , ,860 97

98 Regulatory trading book VaR performance Regulatory trading book Contribution of risk factors to calculation of VaR Price and specific risk Situation at 30/06/2015 Interest rate risk Currency risk Issuer risk Benefit of diversification 8.7% 31.2% 38.3% 95.5% -73.6% Regulatory trading book Breakdown of bond exposures by issuer type Sovereign issuers Public issuers Banks Situation at 30/06/2015 Insurance companies and other financial companies Corporate 64.1% 0.6% 35.4% 0.0% 0.0% The sensitivity of the portfolio to interest rate variations is limited (the amended duration of the bond component equals 2.1). In the event of parallel shifts in the interest rate curve by -100 basis points (under the nonnegativity restriction in nominal interest rates), the consequent decrease in the interest income, over a time horizon of 12 months, would equal EUR -10 thousand, whereas it would equal EUR 601 thousand in the event of shifts of +100 basis points. The indicated changes, which are directly reflected on the net interest income, would be more than offset by changes of opposite sign of the value of the book (EUR +1,652 thousand and -2,149 thousand, respectively, in the two assumed scenarios). The overall asset and income impact, taking also account of tax effects, would be limited. 98

99 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. General aspects, management procedures and methods of measuring interest rate risk and price risk The risk management process regarding the interest rate risk for the banking book is governed by a specific corporate regulation approved by the Board of Directors of the Parent and periodically reviewed. This regulation formalises the various activities carried out by the different company departments within the scope of rate risk management and sets out, among other things, the strategies, the management policies, the measurement methods, the exposure limits, the information flows and any mitigation procedure. Interest rate risk management aims to minimise the impact of unfavourable variations in the rates curve on the value of the Group 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. Measurement of interest rate risk on the bank portfolio is 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. Given that the present value of the expected cash flows depends on the interest rates, their variation affects the fair value of each bank and of the Group as a whole. This measurement is based on pre-set variations of the structure of the rates applied to on and off-statement of financial position items at the end of the reporting period. The reactivity to interest rate variations is measured by both sensitivity indicators (approximate amended duration in the simplified regulatory model) and revaluation of the assets, liabilities and unrecognised items (internal management model). The changes in the economic value that result are then normalised in proportion to own funds. The Risk Management Department is responsible for the identification of algorithms, rules and parameters required for the development of methods and models for measuring the interest rate risk, as well for their implementation and maintenance in computing applications. In order to better assess the exposure to the interest rate risk, a model was updated to treat on demand items with a theoretical maturity and frequency of rate review of one day (contractual profile) but deemed to be more stable on the basis of the statistical analysis of the persistence of volumes and the stickiness of the rates (behavioural profile). The statistical analysis identified a "core" component of the on demand items whose behaviour is replicated by a portfolio that, given a suitable combination of fixed rate and floating rate instruments, allows both the expected decrease in volume and the stickiness of the interest rates to be considered. The time decay profile of the core component was made endogenous by using the "mean life", which represents a development of the volume analysis model and allows to represent the profile of behavioural maturity of on demand items on a holding period not determined in advance. In order to seize any significant behavioural difference between the different categories of customers, the analysis was performed separately for each customer segment (Retail, SME and Other). 99

100 Regarding exposure to interest rate risk, reporting limits and actions at consolidated level were approved, defined in terms of fair value variation 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. The Risk Management Department monitors on a daily basis the exposure of the Banks and of the Group to the market risk and verifies the consistency with the risk appetite defined by corporate bodies 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. The banking book consists also of the shares that are held as part of more in-depth relations with specific companies or represent the instrument supporting significant initiatives undertaken in the Group s reference territory. The price risk management methods for such financial instruments, therefore, tend more towards the management approach for investments in associates and companies subject to joint control, rather than the risk measurement techniques and instruments used for the trading book. 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; types of derivatives used are represented by interest rate swap (IRS) carried out with third parties. The hedge accounting of the Credito Valtellinese Group is carried out through the specific fair value hedge of assets specifically identified (specific hedging). The Risk Management is responsible for verifying the effectiveness of the hedging of interest rate risk for the purpose of hedge accounting, in compliance with the IFRS. At the end of the period, Italian Government bonds (BTP) in the banking book of Availablefor-sale financial assets are hedged, 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, 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. The hedge effectiveness is measured, specifically for each hedged tranche, as follows: - at the initial date, the hedged component is defined by identifying the fixed coupon of a theoretical security (inclusive of the base component between the target hedging rate, i.e. 6-month Euribor, and the risk free rate, represented by the Eonia rate) in such a way that it has, on the basis of the current rate curve, a fair value equal to the amortised cost of the hedged BTP on the effective date of the relevant hedging derivative; - the following fair value changes of this theoretical security are calculated (after adjusting the new base component) by comparing the new value, on the basis of the rate curve existing on the date of analysis, with the amortised cost of the BTP existing on that date (or with the amortised cost on the effective date, if the reference date is before) and are recorded in the Income Statement when the adjustment in the price (fair value) of the 100

101 BTP is recorded in the financial statements (whereas the residual fair value change is recorded in equity); - these fair value changes are compared to the fair value changes recorded by the relevant hedging IRS, less (only for the purposes of the effectiveness test) the previous described component of reverse entry in the Income Statement (net interest income) of the upfront implicitly received at source. Cash flow hedges No cash flow hedges are pending or were carried out. Banking book: internal models and other sensitivity analysis methods The measurement of the exposure to interest rate risk is performed through an internal model that provides a full-valuation approach to all positions that are interest-bearing assets and liabilities, as well as off-statement of financial position items. In detail, the model includes the following phases: - calculation of net present value of assets, liabilities and off-statement of financial position items and calculation of the previously translated as fair value; - definition of a scenario with regard to a change in the interest-rate curve (i.e., parallel translation or steepening, flattening or reversal of the curve with respect to deadlines deemed most relevant); - recalculation of the net present value of on and off-statement of financial position instruments with the new interest-rate curve and calculation of the new economic value in connection with the revalued instruments; - calculation of the variation in the economic value as the difference of the ante and postshock value of the rates. As mentioned in the section dedicated to "Qualitative information", the proper representation in terms of risk and profitability of demand negotiations required their modelling to estimate both the persistence of aggregates and the actual index-linking level of interest rates. Customer loyalty gives on-sight items a much higher actual duration than contractual duration. Moreover, for these items, the extent and ways of redefining the interest rate depends, in addition to the market rate trend, also on the specific characteristics of each relation between the bank and the customer. At the end of the period, the changed duration calculated for all financial statements assets and liabilities as well as the duration gap are moderate. Assuming that the rate structure makes a parallel shift upwards of 100 basis points, the fair value would decrease by EUR 78.8 million. In case of an equal downward shift, under the non-negativity restriction in nominal interest rates, the value would increase of EUR 69.6 million. As regards income profiles, in the hypothesis of instantaneous and parallel shifts of the interest rate curve by -100 basis points (under the non-negativity 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 equal EUR -0.4 million, whereas it would equal EUR 50.0 million in the case of shifts of +100 basis points. These amounts express the effect of changes in the interest rates on the banking book, excluding modifications to the composition and size of the financial statements 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. 101

102 2.3 CURRENCY RISK General aspects, management processes and measurement methods for currency risk The Group, as a rule, does not operate on the foreign exchange market on its own account for speculative purposes. Foreign currency transactions are mainly related to the operations of spot and forward customers. The amounts of assets and liabilities in foreign currency are modest. Currency derivatives consist of forward trading. As regards management processes and measurement methods for currency risk in the trading book, refer to that set forth in the paragraph "Interest rate risk and price risk - Regulatory trading book - Qualitative information". All foreign currency positions generated by transactions with customers are managed together with the Finance Department of the Parent through analysis of open gaps (nonoffset positions). The monitoring of currency risk is based on defined limits in terms of maximum acceptable loss, forward gap position and overall open gap position. 3. LIQUIDITY RISK General aspects, management processes and measurement methods for 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 its payment commitments. The failure to meet its payment commitments may be due to the following inability to: - procure the funds (funding liquidity risk); - 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). Therefore, the actual assumption of risk is subordinate to maintaining the bank s technical equilibrium. The opportunity cost associated with the holding of liquid assets is taken into account within the Bank s profitability valuations. The pursuit of a limited exposure to liquidity risk is reflected in the composition of statement of financial position aggregates of the Banks, characterised by a moderate transformation of maturities. The approach adopted for risk management envisages integration of the cash flow matching approach (which tends to make expected cash inflows coincide with expected cash outflows for each time horizon) with the liquid assets approach (which requires the financial statements to include a set number of financial instruments that can be readily converted into cash). In order to face up to the possible occurrence of unexpected liquidity requirements and thus to mitigate the relevant risk exposure, the Group provides itself with adequate short-term cash reserves (liquidity buffer). The threshold of tolerance to liquidity risk is understood as a maximum risk exposure considered sustainable within the "ordinary course of business" (going concern) supplemented by "stress scenarios" and is measured by using the techniques outlined below. During the meeting of 9 December 2014, the Board of Directors of the Parent, as part of the annual review of the Group RAF and when defining the Risk Appetite Statement for 2015, 102

103 indicated the relevant techniques and thresholds that define the risk appetite. The exposure to risk occurs and is managed according to four different profiles compared to the considered time horizon: - intraday liquidity that deals with the daily management of treasury balances and the settlement of transactions in the payment method; - short-term liquidity that aims at optimising cash flows and balancing the liquidity requirements in a quarterly horizon; - medium-term liquidity in perspective, concerning the implementation of the funding plan of the financial year or of 3-12 months following the end of the reporting period; - structural liquidity that forms part of planning and assumes an overall business strategy. Each of them has different exposure profiles, methodology approaches, techniques, mitigation instruments, corrective actions. As the considered time horizon increases, the levels of freedom of management increase: they cover structural and strategic interventions (e.g. securitisations, operations on the capital, amendments to the Group structure, acquisitions and transfers, supervision.s.bandonment of market segments). On the other hand, in the very short term, the reaction to unexpected and sudden tensions is based on the use of existing cash reserves (liquidity buffer). Limiting liquidity risk exposure, aimed at ensuring Group solvency, including in highly critical situations, is mainly pursued through a distinct set of organisational management decisions and safeguarding measures, the more significant being: - constant attention to the technical situations of the Bank and Group in terms of balanced structuring of asset and liability expiry dates, with special regard to short term maturities; - the diversification of funding sources, with respect to the technical form, counterparties and markets. The Group intends to maintain a highly stable retail funding both in the form of deposits and in the form of debt represented by securities placed directly through the branch network. Reliance on market funds (interbank funding and issues targeting institutional investors) is therefore reduced and in line with a limited exposure to liquidity risk; - the holding of assets readily convertible into cash to be used as guarantees for financing transactions or that can be sold directly in the event of stressful situations; - the preparation of a Contingency Funding Plan. The liquidity risk management process mainly involves some specific structures. The A.L.Co. Committee provides advice to the top management for deciding the proposals of risk assumption and mitigation and defining any corrective action aimed at re-balancing risk positions of the Group or of each Bank. The Finance Department is in charge of the treasury management and of the supply on the inter-bank market; it manages the intraday and short-term liquidity risk by using financial instruments on reference markets and can propose funding and mitigation operations of the structural liquidity risk. The definition of the structure and responsibilities of the unit responsible for managing the treasury as a supplier or recipient of funds for different business units considers the fact that it operates primarily as a service function. The Planning, Control and General Affairs Department, within the annual and multi-annual 103

104 planning process of the different Group components, 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 carrying-out of stress tests plays an important role in risk management because it allows to evaluate more accurately the exposure to risks and their trend in adverse conditions, their mitigation and control systems and the adequacy of capital and organisational methods. Stress tests consider both idiosyncratic adverse events (bank specific) and systemic adverse events (market wide) based on their importance for company operations in terms of liquidity and assess the possible impacts of their occurrence both individually (uni-factorial analysis) or jointly (multi-factorial analysis; combined scenarios). With the aim of capturing and highlighting different aspects of potential vulnerability, some basic tests are performed concerning: - the profile of concentration of financing sources (tests with different levels of severity) and the outflow of wholesale deposits; - the reduction in retail deposits; - the increased use of irrevocable credit lines to large corporates; - the reduction of liquidity reserves due to the decrease in market values, the loss of eligibility requirements or the application of further haircuts. The combined impact of the said tests on the Group s overall liquidity net balance is analysed. In order to identify in advance the onset of potential adverse situations that - due to specific factors concerning the Group or to system factors - could change the expected trend of the net balance of cumulated liquidity and cause the exceeding of the limits, several variables are monitored. The large set of examined quantitative and qualitative elements is summarised in two anticipating indicators that aim to represent the potential deterioration of the specific situation of the Group or of the more general market conditions. The two summary indicators are used either separately or together in the assessment of the exposure to liquidity risk. Exposure to risk is monitored in relation to all the time horizons of the structural maturity ladder in terms of unbalance between liabilities and assets of the same time horizon; the reference indicator is represented by the "Gap ratio" beyond one year. The model for dealing with on sight items, which is mentioned in the paragraph relating to the interest rate risk, is also used in the assessment of the exposure to liquidity risk. In addition to the maturity ladder, through which the structural liquidity profile is investigated, the liquidity risk is also assessed in the short and very short term as part of the treasury activity based on the amount of "Overall liquidity net balance" (sum between the "Cumulative net balance of positions due" and liquidity reserves), recognised over a period of three months and with reference to specific and different time ranges. The definition of reporting thresholds and operating limits constitutes a fundamental tool for managing and reducing both the short-term and structural liquidity risk. With regard to the medium-term perspective, the planning prepared annually for Banks and for the Group as a whole also shows the potential liquidity requirements and the effects of the expected trend of the aggregates on the profile of operational and structural liquidity; the 104

105 Funding Plan defines for the planned year the funding objectives and activities consistent with the short-term requirements and with the preservation of the structural balance. The different organisational structures involved in the management of liquidity risk produce, in relation to their operational and monitoring activities, special reports for corporate bodies. The Risk Management Department monitors the current and future exposure to risk on the basis of liquidity balances and anticipating indicators, verifies the consistency with the risk appetite defined by corporate bodies and the compliance with the system of limits; prepares weekly an analysis on the historical trend of the operational liquidity position of the Group for the Management Committee. With the same frequency, the Finance Department prepares a report on the General situation of liquidity for the General Management; another report is produced on a monthly basis for the A.L.Co. Committee. On a monthly basis, the Risk Management Department submits a report on the exposure to operational and structural liquidity risk (including the results of the stress tests and the analyses on the concentration profile of the funding) to the A.L.Co. Committee and to the Board of Directors of the Parent. The budget, showing the liquidity requirements of the Banks and of the Group is prepared every year by the Planning, Control and General Affairs Department; on a monthly basis, the A.L.Co. Committee examines the situation identified and, if necessary, proposes change to the original financial planning according to the needs. The Group s regulations contemplate specific procedures for managing situations where limits are exceeded and for handling issues, which define information flows, corporate bodies involved and possible interventions. As already mentioned, the Group adopted a Contingency Funding Plan which, prepared in accordance with the prudential supervisory provisions, defines and formalises the organisational escalation, the objectives and the management leverage required for protecting - through the preparation of strategies for managing the crisis and procedures for finding financing sources in the case of emergency - company assets in situations of extreme and unexpected cash drain. The elements characterising the emergency plan are set below: - definition and formalisation of an action strategy approved by the corporate bodies defining specific policies on certain aspects in the management of liquidity risk; - cataloguing of the various types of liquidity stress to identify the nature (specific or systemic); - legitimation of the emergency actions by the management. The management strategy to be adopted in case of liquidity tensions clearly outlines responsibilities and related tasks during a crisis situation; - estimates of the liquidity that can be obtained from the different financing sources. The Group s liquidity situation did not require the Contingency Funding Plan procedures to be implemented. At 30 June 2015, the Group had a negative net interbank position of EUR 1 billion, in respect of which it held liquidity reserves mostly consisting of Italian Government bonds and deemed appropriate to the contingent and perspective requirements of the Group as a whole. In particular, EUR 7.3 billion (amount already reduced by the haircuts) of assets eligible for refinancing with the European Central Bank, including securities coming from securitisations and loans that meet the eligibility requirements. At the end of the reporting period, approximately 30% of these assets were used with market counterparties and 21% secured the transactions with the ECB; 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 4.9 billion. As part of the centralised treasury model that concentrates with the Parent the management of 105

106 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 securitisation and appropriate loans pertain, however, to the other banks of the Group. At 30 June 2015, the main source of funding consisted of retail customers (EUR 18.3 billion, accounting for 77.4% of total funding), stable and diversified. Funding from ECB (EUR 1.5 billion for long-term refinancing transactions) accounts for 6.4% 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 maturity 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 2015 slightly increased compared to that at the end of the previous 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 84.9%, down from 91.6% at the end of the previous year. Based on the results of the Internal Liquidity Adequacy Assessment Process (ILAAP), the liquidity position that the Group undertook during the half-year was adequate and consistent with the business model and with the actual operations of the various entities and of the Group as a whole. 106

107 4. SECURITISATION TRANSACTIONS The 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 definition of the risk appetite deriving from securitisations pertains to the Board of Directors of the Parent Credito Valtellinese, which considers the existing prudential rules, in line with the adopted business model. During the meeting of 9 December 2014, the Board of Directors, when defining the Risk Appetite Statement for 2015, resolved a low propensity to risk deriving from securitisations. 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. The following risks - considered as significant within the Risk Appetite Framework as well - are identified: - operational risk (with relevance of the legal component as well); - counterparty risk; - credit risk; - reputational risk; - liquidity risk; - interest rate risk for the banking book; - compliance risk. The Group is also exposed to cross collateralisation risk. As part of the medium-term planning and management of liquidity requirements, the subscribed securities resulting from own loans securitisation are one of the instruments that form the so-called counterbalancing capacity (which, in a broader horizon and in more complex scenarios, monitors the solvency entrusted in the short term to liquidity reserves). According to this definition, securitisations are carried out in order to increase the degree of liquidity of the assets and the availability of financial instruments eligible for refinancing with the European Central Bank or usable as collateral for funding transactions with institutional and market counterparties. Always responding to funding needs in the medium to long term, the Group can structure a securitisation with subscription of the securities by third parties, thereby obtaining an immediate supply of liquidity. The need to structure securitisations of loan assets can also arise as part of capital management decisions, if the Groups want to implement a strategy for the transfer of credit risk, resulting in lower capital absorption and enhancement of prudential ratios. In operational terms, the exposure to risks coming from securitisations is generated by the Finance Department, which deals with the structuring and finalisation of the transactions based on the resolutions of the Board of Directors of the Parent and of the Bank that participate in the transaction and on the indications of the Managing Director and of the General Management of each Bank, where appropriate. Limiting exposure to risks originating from the securitisation is achieved through organisational, procedural and methodological choices. The overall management is carried out on a centralised basis for all Group Banks. In view of the complexity of securitisations, the Group has a dedicated organisational supervision within the Finance Department of the Parent, with both structuring and transaction management tasks. We also make use of 107

108 consultants and partners of high standing. In general, the internal audit system of the Group makes sure that the risks deriving from such transactions - including the reputational risks originating, for example, from the use of structures or complex products - are managed and evaluated by means of policies and procedures to ensure that the economic substance of these transactions is fully in line with their risk assessment and with the decisions of the Company bodies. Upon the occurrence of the management need to structure a new securitisation, where this qualifies as the most important transaction, the Risk Management Department receives before the Finance Department all the details required for assessing the specific risk profiles in relation to the Group RAF. Appropriate new instruments for monitoring, managing and mitigating risk exposure are activated, if necessary. From the management viewpoint, the Finance Department monitors on a regular basis the performance of flows and payments related to securitised loans and relevant securities; collaborates to the production of reports for different structures of the Group competent in this field; produces the informative reports contractually agreed upon and the information requested by and intended for administrative and financial counterparties, rating agencies, investors. 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. In particular, the Risk Management Department prepares on a quarterly basis the Risk Management Report for the General Management and the Board of Directors of the Group Banks, which also monitors the exposure to credit risk, interest rate risk of the banking book, liquidity risk, operational risk, reputational risk and risks related to banking book securities. The analyses carried out by the Management on the profiles of operational liquidity, structural liquidity and interest rate risk exposure take also into account the impact of the securitisations. The relevant risk profiles with respect to existing securitisations are also assessed as part of the annual ICAAP Report. During the half-year, the multi-originator securitisation carried out in May 2009, was paid in advance by means of the Special purpose entity Quadrivio Finance S.r.l., through (i) the repurchase of residual securitised loans by Credito Valtellinese S.C., Credito Siciliano S.p.A. and Banca Popolare di Cividale S.c.p.A. (company outside the Credito Valtellinese Banking Group), (ii) the early repayment of securities and (iii) the termination of the securitisation contracts. During the half-year, Credito Valtellinese has also subscribed the following senior tranches of ABS securities issued as part of the securitisations carried out pursuant to Italian Law 130/1999: - securities originated by the company Agos Ducato S.p.a. by means of the Special purpose entity Sunrise S.r.l., with underlying consumer credits for a total equivalent value of EUR 10,000,000; - securities originated by the company Alba Leasing S.p.a. by means of the Special purpose entity Alba 7 SPV S.r.l., with underlying leases for a total equivalent value of EUR 10,000,000; - securities originated by the company Futuro S.p.a. by means of the Special purpose entity Quarzo CQS S.r.l., with underlying consumer credits repayable by means of the transfer of one fifth of the salary or pension and by means of extensions of payments for a total equivalent value of EUR 4,000,

109 5. OPERATIONAL RISK General aspects, management processes and measurement methods for 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. The wide variety of operational risks is not normally associated with banking or business activities. These risks may originate either internally or externally and their scope may extend beyond the corporate structure. As a result of the process defining the risk appetite, the Board of Directors of the Parent, in line with the adopted business model and considering that the operational risk is not associated with any return, set as its management objective the minimisation of exposure to operational risk. Consistently, the Board established the strategic guidelines and risk management policies, which were made known to the internal departments and are reviewed on a regular basis. Operational risk management is part of an integrated management strategy that aims to contain overall risk also by preventing propagation and transformation of the risks. Operational risk management is based on the following guidelines: - to increase overall operating efficiency; - to avoid the occurrence or reduce the likelihood of events that may potentially generate operating losses through appropriate regulatory, organisational, procedural and training measures; - to mitigate the expected impact of said events; - through insurance arrangements, to transfer risk that the Bank does not intend to maintain; - to protect the reputation and brand of the Banks and of the Group. The identification, assessment and monitoring of operational risks tend to carry out mitigation interventions. Finally, specific types of risks are transferred through a series of insurance policies offering a wide-ranging coverage on different types of potentially damaging events. With respect to the organisational structures and management processes, the Risk Management Department contributes to the definition of the risk management policy at Group level, develops the operational risk assessment process, supports the Governing Bodies in defining and carrying out the activities related to the observance of the prudential regulations and ensures accurate, complete and timely information. In particular, the Operational Risk Service deals with the development and management of the models concerning operational risks, supervises the systematic and structured loss data collection from various departments of the company, carries out the analyses required, assesses the operational risks on an adequate basis and can propose appropriate management measures and mitigation instruments. The timely and accurate recognition of the events that may actually or potentially generate operating losses is carried out by a network of company contacts using a special application 109

110 that allows to register and keep identifying information, damage estimates, accounting and extra-accounting final data and the effects of mitigation through insurance instruments. The Risk Management Department is responsible for the identification of algorithms, rules and parameters required for the development of methods and models for assessing and measuring the operational risk and performs this task on a centralised basis on behalf of all Group Banks. Risk exposure is assessed and measured, at a separate and consolidated level, with reference to a wide range of phenomena that can lead to operating losses. The model for the assessment and measurement of operational risk is based on the combined use of: - internal operating loss data, collected by the network of company contacts; - assessments in perspective, prepared with an appropriate statistical technique and based on subjective estimates concerning the probability of occurrence, extent of the impact and the effectiveness of the controls related to certain events (risk self-assessment); - operational context factors and of the internal control system, called Key Risk Indicators, aimed at a forward-looking representation, which reflect the improvement or the worsening of the bank risk profile in a timely manner, following any changes in the operational segments, human resources, technology and organisation, or the internal control system; - external data of operational loss, surveyed in the Italian Database of Operational Losses (DIPO), to which the Group belongs with the status of "total group member". The analyses, assessments and comparisons carried out allow to formulate an overall assessment by relevant operating segments of the level of exposure to operational risks, and to understand any change in the reporting period. Moreover, the carrying out of stress tests allows to check the effects of the general increase of operational risk associated with the manifestation of widespread and significant operating losses. The results of the assessment are used for management purposes to prevent and mitigate operational risks. In order to ensure corporate bodies full knowledge and governance of the risk factors and make available to the persons in charge of the company departments the information pertaining to them, the Risk Management Department produces and distributes at regular intervals (quarterly, half-yearly and yearly) information flows on operational risks that offer a full representation of the different operational risk profiles and of the mitigation measures implemented during the reporting period or that are expected to be implemented in the future. Moreover, specific reports are prepared at the end of the risk self-assessment and the relevant follow-up. The Risk Management Department receives in turn information flows, both by other control departments (Auditing and Compliance) and by other management departments (e.g. Operations, ICT, Human Resources, Legal, physical and logical safety), which complete the knowledge of operational risk profiles and allow to monitor activities and projects for mitigating operational risks. 110

111 The manifestation of any critical situation gives rise to corrective and mitigating actions, the effects of which are monitored and made known to the corporate bodies according to the ordinary reporting methods. The disaster recovery plan laying down the technical and organisational measures to deal with events that result in the unavailability of data processing centres is part of problem management. The plan, designed to allow the operation of relevant computerised procedures in sites other than those of production, is an integral part of the business continuity plan, controlled by the Business Continuity and Compliance Service of Bankadati. As from the 31 December 2014, the Group extended to all of its components the use of the Traditional Standardised Approach (TSA) for calculating the capital requirement to meet operational risks. A number of requirements are necessary for the supervisory regulations to adopt the standardised method; in particular, the body must have a properly documented management and assessing system of the operational risk and the various responsibilities must be clearly assigned; and this system must be subject to independent regular reviews carried out by an internal or external subject with the skills required. In this regard, a self-assessment is carried out as well as a specific series of checks by the internal audit function. The self-assessment process, carried out annually, consists of a formalised set of procedures and activities aimed at assessing the quality of the operational risk management system, as well as its compliance over time with regulatory requirements, company operational requirements and the development of the market of reference. The process is carried out by the Risk Management Department, which also uses the documents prepared by the Planning, Control and General Affairs Department and other organisational units of the Group. The process develops along the applicable guidelines outlined in the Group Policy concerning "The assessment of the risk management processes" and is based on the following profiles: governance; credit risk management policies; organisation of the risk management department; methods and instruments for identifying, measuring and managing risks; monitoring and reporting; prevention and mitigation of risks; management of critical issues. These profiles also include the information and assessment elements concerning the components characterising the operational risk management system according to the supervisory regulations. The assessment of each profile is complemented by the indication of areas and lines of improvement. An overall rating is then formulated on the basis of the profile assessments. The assessment of the risk management system is complemented by the assessments related to the process of production of the supervisory reports, with a special reference to the calculation of the capital requirement to meet the operational risk and to the reporting of the operational losses recorded for the different business lines. The results, verified by the internal audit function, are submitted on an annual basis to the Board of Directors, which resolves on the existence of the eligibility requirements for the adoption of the standardised approach. 111

112 Legal risks A provision was made in the financial statements, appropriate and consistent with the international financial reporting standards compliant with the policy for calculating the provisions adopted by the Group, in order to cover the economic risks resulting from the pending legal proceedings with regard to the Banks and the other companies belonging to the Group. The amount of the provision is estimated on the basis of a number of elements mainly concerning the estimate on the outcome of the case and, in particular, the likelihood of losing the case with the conviction of the Bank, and the elements of quantification of the amount that the Bank could be obliged to pay to the counterparty if it loses the case. The estimate on the outcome of the case (risk of losing in a lawsuit) considers, for each position, the legal aspects inferred in court, assessed in the light of the case law, actual evidences presented during the proceedings and the development of the proceedings, as well as, for subsequent encumbrances, the outcome of the first level judgement, as well as past experience and any other useful element, including the opinions of experts, making it possible to take into proper account the expected unfolding of the dispute. The amount due in case of an adverse outcome is expressed in absolute value and shows the estimated value based on the court findings, considering the amount requested by the counterparty, the technical estimate carried out internally based on the accounting records and/or presented during the trial and, in particular, the amount assessed by the courtappointed expert (ctu) - if provided - as well as legal interests, calculated from the notification of the application initiating proceedings and any expense due for adverse outcome. If it is not possible to obtain a reliable estimate (failure to quantify the claims for compensation by the claimant, presence of uncertainties of law and of facts that make any estimate unreliable), no provisions are made as long as it is impossible to foresee the outcome of the proceedings and reliably estimate the amount of any loss. At 30 June 2015, there are 529 actions brought against the companies belonging to the Group for an overall amount of EUR million against which a total loss of EUR 14.2 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 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. 112

113 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 a/c 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. In the light of internal accounting evidences and of the opinion of the court-appointed expert in the course of proceedings, a provision of EUR 1.1 million was made to the provision for risks. 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 (Tremontibond). 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. At the first hearing, held on 15 January 2015, the Court granted the parties the terms pursuant to Article 183, paragraph VI, of the Italian Code of Civil Procedure for the filing of the briefs and fixed the next hearing on 25 June 2015, subsequently adjourned until 16 November 2015 due to the unavailability of the Judge. These financial instruments were included among the equity instruments that fall within the scope of IAS 32 and 39; therefore, they do not fall within the scope of IAS 37 Provisions, contingent liabilities and contingent assets. There were no specific provisions in the income statement. 113

114 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 million against which a provision for risks and charges of EUR 1.1 million was prepared. 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 approximately EUR 0.4 million applying the methods of the plenary session. 114

115 Tax dispute During the first half of 2015, there are no tax audits or notices of assessment of significant amount. With reference to previous disputes, the Parent Credito Valtellinese and the company Mediocreval S.p.A., today merged by the same Parent, received in 2013 notices of payment and imposition of penalties with reference to the substitute tax on syndicate loans signed abroad for a total amount of about EUR 200 thousand among taxes, interests and sanctions, divided almost equally between the two banks. Appeals were immediately filed with the competent Tax Commissions against the notices of settlement to defend the correct operations of the banks. In this regard, the following is provided: - with reference to the notice of settlement related to Credito Valtellinese, on 15 May 2015, the competent Tax Authorities ordered the request for nullification by internal review; - with reference to the notice of settlement related to Mediocreval, noting that the enacting clause of the sentence of inadmissibility of the appeal of first instance before the Provincial Tax Commission of Sondrio was notified on 15 April 2014, against which an appeal was immediately filed to the Regional Tax Commission, the appeal hearing was held on 25 June The judgement is still pending. 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 Milano upheld the appeal of the Bank, with judgement confirmed later on by the Regional Tax Commission of Milano. 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. Always with reference to Credito Valtellinese, the notice of contention concerning the nondisclosure of a money transfer operation abroad was settled, as part of the so-called currency tax monitoring. With reference to other Group companies, there are no significant tax disputes to report. 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, during the half-year ended 30 June 2015, the number of labour-related lawsuits is substantially stable compared to those at group level at 31 December 2014, with an increase of just one event during the first six months of In terms of risk quality, labour disputes in which the companies of the Group are involved at 30 June 2015 are divided equally between actions undertaken for alleged de-skilling or for disputes concerning the application of contractual regulations and/or laws governing salary aspects of the employment relationship and actions concerning the contestation of dismissals with regard to the employee. In terms of risk quantification, against the overall relief sought resulting from the set of judgements registered at 30 June 2015, 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 is slightly increasing compared to the value recognised at 31 December

116 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 process of IT risk analysis consists of several departments, in particular of the ICT Management and Safety Department and Risk Management Department and consists of the following phases: - determining the potential risk to which a business or internal product/service is exposed as a result of a potential occurrence of an IT risk scenario. The potential risk is determined by combining the impact assessments expressed by the Users in charge of the business or internal products/services of direct concern, with the probability of occurrence of the threats applicable to IT services used for the supply of business or internal products/services, in the absence of any kind of technical, procedural or organisational counter-measures; - determining the residual risk to which a business or internal product/service is exposed as a result of a potential occurrence of an IT risk scenario, considering the state of implementation of existing controls on IT services used for the supply of business or internal products/services; - processing the residual risk aimed at identifying technical or organisational mitigation measures suitable for limiting any residual risk exceeding the company acceptance threshold, by adopting alternative or further measures of risk limitation, submitted to the approval of the Body with management responsibilities. When assessing the risks on the components of the IT system and already existing applications, the Group takes into account the data available concerning IT security incidents occurred in the past. The process of risk analysis is repeated annually and, in any case, in the presence of situations that can affect the overall IT risk level. The percentage distribution of operational losses recognised in the internal database during the period is shown in terms of frequency and impact. 116

117 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" (52.2%), "External fraud" (31.1%) and "Customers, products and business practices" (9%). In terms of impact, losses are attributable to "External fraud" by 71.6%, to "Execution, delivery and management of processes" by 24.4% and to "Customers, products and business practices" to 3.7%; losses attributable to other event types are of lesser importance. 6. OTHER RISKS In addition to the risks described above, the Credito Valtellinese Group identified and monitors the following other risks. Risk of excessive leverage The risk of excessive leverage is defined by the prudential regulations as "the risk that a particularly high level of debt compared to equity makes the bank vulnerable, making it necessary to take corrective measures for its business plan, including the sale of assets with recognition of losses that could result in impairment losses also on the remaining assets". During the meeting of 9 December 2014, the Board of Directors of the Parent Credito Valtellinese, when defining the Risk Appetite Statement for 2015, confirmed a low propensity to the risk of leverage. The strategic and management objective is the control of the risk by reducing the asset trend within the limits compatible with a long-term equilibrium, so as not to risk the stability of the Group. The risk of excessive leverage concerns the entire financial statements, the exposures deriving from the holding of derivatives and the unrecognised assets of the Banks and of the Group and is taken when carrying on the core business. It is closely related to the activities of planning and capital management; the degree of exposure to risk is an expression of the strategic lines and development prepared by the Board of Directors of the Parent, by the Managing Director and by the General Management to the extent of its authority. The exposure to risk is mitigated by means of capital management and asset management, within the lines defined by the Group s strategic plan in force each time. Moreover, the possible increase in the risk related to the recognition of expected or realised losses that could reduce the equity available is also considered. 117