2007 REPORTS AND FINANCIAL STATEMENTS

Transcription

1 2007 REPORTS AND FINANCIAL STATEMENTS

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3 Credito Valtellinese Società Cooperativa Registered Offices in Piazza Quadrivio 8 Sondrio, Italy Tax code and Sondrio Company Register No Register of Banks No. 489 Parent Company of the Credito Valtellinese Banking Group Register of Banking Groups No Web address: creval@creval.it Data as at 31/12/2007: Share Capital EUR 562,060,674 Reserves EUR 923,576,649 REPORTS AND FINANCIAL STATEMENTS AS AT 31 DECEMBER 2007

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5 REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS OF THE CREDITO VALTELLINESE BANKING GROUP - Highlights and Financial Statement Ratios of the Group - Creval Group organisational model - Company Officers of Creditor Valtellinese - Notice of Call - Chairman s Letter BOARD OF DIRECTORS REPORT ON GROUP OPERATIONS MACROECONOMIC REFERENCE CONTEXT MAP OF THE GROUP AND THE AREA OF JOINTLY CONTROLLED AND ASSOCIATED COMPANIES MANAGEMENT PERFORMANCE IN THE PERIOD - ANALYSIS OF THE MAIN BALANCE SHEET AGGREGATES MANAGEMENT PERFORMANCE IN THE PERIOD - ANALYSIS OF THE MAIN INCOME STATEMENT AGGREGATES STRATEGIC PLAN OBJECTIVES AND RESULTS FOR THE PERIOD ANALYSIS OF RESULTS AND OPERATIONS BY BUSINESS SEGMENT HUMAN RESOURCES MANAGEMENT AND NEW LEGISLATION QUALITY AND SOCIAL RESPONSIBILITY RATINGS OF THE CREVAL GROUP COMPANIES STOCK MARKET PERFORMANCE OF LISTED SECURITIES AND FINANCIAL INDICATORS HIGHLIGHTS FOR THE SUBSIDIARIES AUDIT SIGNIFICANT EVENTS OCCURRING AFTER THE CLOSE OF THE FINANCIAL YEAR BUSINESS FORECAST CLOSING REMARKS CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET CONSOLIDATED INCOME STATEMENT STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS EQUITY CONSOLIDATED CASH FLOW STATEMENT DIRECT METHOD NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PART A ACCOUNTING POLICIES PART B INFORMATION ON THE CONSOLIDATED BALANCE SHEET 5

6 PART C INFORMATION ON THE CONSOLIDATED INCOME STATEMENT PART D SEGMENT REPORTING PART E INFORMATION ON RISKS AND HEDGING POLICIES PART F INFORMATION ON CONSOLIDATED EQUITY PART G BUSINESS COMBINATIONS PART H TRANSACTIONS WITH RELATED PARTIES PART I SHARE-BASED PAYMENTS OTHER DOCUMENTS CONSOLIDATED FINANCIAL STATEMENTS DISCLOSURE PURSUANT TO ART 81-TER OF CONSOB REGULATION NO OF 14 MAY 1999, AS AMENDED INDEPENDENT AUDITORS REPORT 6

7 CREDITO VALTELLINESE REPORT AND FINANCIAL STATEMENTS - Highlights and Financial Statement Ratios BOARD OF DIRECTORS REPORT ON OPERATIONS PARENT COMPANY CENTENARY MANAGEMENT PERFORMANCE IN THE PERIOD - ANALYSIS OF THE MAIN BALANCE SHEET AGGREGATES MANAGEMENT PERFORMANCE IN THE PERIOD - ANALYSIS OF THE MAIN INCOME STATEMENT AGGREGATES MANAGEMENT AND INSTITUTIONAL ASPECTS PROPOSALS TO THE SHAREHOLDERS MEETING CLOSING REMARKS SEPARATE FINANCIAL STATEMENTS BALANCE SHEET INCOME STATEMENT STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT DIRECT METHOD NOTES TO THE FINANCIAL STATEMENTS PART A ACCOUNTING POLICIES PART B INFORMATION ON THE BALANCE SHEET PART C INFORMATION ON THE INCOME STATEMENT PART D SEGMENT REPORTING PART E INFORMATION ON RISKS AND HEDGING POLICIES PART F INFORMATION ON EQUITY PART G BUSINESS COMBINATIONS PART H TRANSACTIONS WITH RELATED PARTIES PART I SHARE-BASED PAYMENTS OTHER DOCUMENTS REPORT OF THE BOARD OF STATUTORY AUDITORS TO THE SHAREHOLDERS MEETING CORPORATE GOVERNANCE REPORT SEPARATE FINANCIAL STATEMENTS DISCLOSURE PURSUANT TO ART 81-TER OF CONSOB REGULATION NO OF 14 MAY 1999, AS AMENDED 7

8 INDEPENDENT AUDITORS REPORT ATTACHMENTS STATEMENT OF REVALUATIONS STATEMENT OF SIGNIFICANT EQUITY INVESTMENTS IN UNLISTED COMPANIES STATEMENT OF FEES PAID FOR INDEPENDENT AUDITOR SERVICES 8

9 Guide to consultation The Credito Valtellinese consolidated and separate financial statements as at 31 December 2007, with related accompanying documents, together form a true information system. They were prepared in accordance with IAS/IFRS international accounting standards adopted by the European Union, with format and information according to Bank of Italy Circular no. 262 of 22 December 2005, also taking into account CONSOB s regulations for listed companies. This information system aims not only to meet formal legal requirements, but is also the means of informing Shareholders, the financial community and the general public as a whole of the bank and Group's operations. Consequently, in its detailed illustrations of the different management aspects, the document intends to represent corporate events for the 2007 financial year. To facilitate reading, the chapters are preceded by a brief note on the reference regulations and its objectives. We wish you pleasant reading. 9

10 REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS OF THE CREDITO VALTELLINESE BANKING GROUP 10

11 Highlights and Financial Statement Ratios of the Group BALANCE SHEET DATA 31/12/ /12/2006 (in thousands of EUR) % change Loans to customers 13,754,333 11,445, % Financial assets and liabilities 1,346,699 1,329, % Investments in associates and companies subject to joint control 201, , % Total assets 17,228,262 14,901, % Direct deposits from customers 13,708,656 12,073, % Indirect deposits from customers 12,137,335 12,370, % of which: - Managed savings 5,870,400 6,043, % Total deposits 25,845,991 24,444, % Shareholders equity 1,576, , % BALANCE SHEET RATIOS 31/12/ /12/2006 Indirect deposits from customers / Total deposits 47.0% 50.6% Managed savings / Indirect deposits from customers 48.4% 48.8% Direct deposits from customers / Total liabilities 79.6% 81.0% Customer loans / Direct deposits from customers 100.3% 94.1% Customer loans / Total assets 79.8% 76.3% Cost/Income ratio 58.6% 63.6% CREDIT RISK 31/12/ /12/2006 % chang e Net impaired loans (in thousands of Euro) 186, , % Other net doubtful loans (in thousands of Euro) 212, , % Net impaired loans / Loans to customers 1.4% 1.6% Other net doubtful loans / Loans to customers 1.5% 1.8% Hedging of impaired loans 68.1% 68.3% Hedging of other doubtful loans 7.2% 7.7% FIGURES PER EMPLOYY (thousands of EUR, number of employees at year end) 31/12/ /12/2 006 % change Operating income / Number of employees % Total assets / Number of employees 4,952 4, % Personnel expenses / Number of employees % OTHER INFORMATION 31/12/ /12/2 006 % change Number of employees 3,479 3, % Number of branches % Banc@perta line users 106,717 95, % 11

12 INCOME STATEMENT DATA (in thousands of EUR) % change Interest margin 445, , % Operating income 678, , % Operating costs -397, , % Net income from banking activities 280, , % Income (loss) before tax from continuing operations 198, , % Income after tax from continuing operations 102,114 80, % Net income for the period 85,773 68, % - 12

13 CREVAL GROUP ORGANISATIONAL MODEL Market Credito Valtellinese Credito Artigiano Credito Siciliano Banca Artigianato e Industria Credito Piemontese Bancaperta Aperta SGR Aperta Fiduciaria Specialised Finance Mediocreval Finanziaria San Giacomo Creset Servizi Territoriali Production Deltas Bankadati Stelline The Credito Valtellinese Group adopts a banking operations model based on the development of localisation and preferential relations with its customers and territory through a network formed from a series of local banks, specialised and complementary companies, enhanced by consolidated partnerships with qualified banking and financial organisations. Creval s DNA, in fact, is based on the archetypal matrix of the cooperative bank. A hundred years after the Parent Company s foundation, the philosophy behind corporate activities is still centred on territorial origins, so as to become a clear and constant reference point for the local community and to act in close synergy with its economic and social fabric. So as to soundly implement this vision, the Group has an organisational and corporate structure that includes companies focused on banking business, the provision of specialist financial services and support, with the aim of pursuing scale and specialist economies and high levels of service. The Creval Group operates in the reference territory through the following retail banks (the "Market Sector"): - Credito Valtellinese S.c., parent company, cooperative bank listed on the MTA market organised and managed by Borsa Italiana S.p.A., whose business is centred on principles of solidarity and strongly targeted to guaranteeing improved economic, cultural and social well-being in the reference territory. Credito Valtellinese s distinguishing mark is its constant attention to the territory and to small-sized businesses. A historic trade name operating in the Italian provinces of Sondrio, Lecco, Como, Varese, Bergamo and Verbania, and with a total of 112 branches as at 31 December Credito Artigiano S.p.A., established in 1946 in Milan. In 1995 it became a member of the Credito Valtellinese Group and was admitted to listing on the stock exchange in July As at the end of 2007, the Bank had 117 branches in Milan, Rome, Florence, Prato and, more recently, also in the provinces of Pavia, Pistoia and Novara. - Credito Siciliano S.p.A., a bank established in 2002 from the merger by incorporation of the Banca Popolare Santa Venere S.p.A. and Leasingroup Sicilia S.p.A. into Banca Regionale Sant Angelo S.p.A. On 1 July 2002, Credito Siciliano also acquired the Cassa San Giacomo branch network to become one of the largest banks in Sicily. The Credito Siciliano mission is to actively participate in the economic and 13

14 collective development of the island through its own commercial network, present in all Sicilian provinces with a total of 136 branches. - Banca dell Artigianato e dell Industria S.p.A., established in Brescia at the end of 1997, on the initiative of an organising committee composed of local tradesmen, businessmen and professionals, with the aim of contributing to economic development in the Brescia area. In 2000 it became a member of the Credito Valtellinese Group. The Brescia-based bank, without neglecting reinforcement of its traditional reference territory, is also expanding into the Veneto region, implementing a project that envisages extension of the Credito Valtellinese Group influence to this region through the opening of 40 new branches. As at the end of 2007, the Bank operates in the provinces of Brescia, Vicenza, Verona and Padua with 24 branches. - Credito Piemontese S.p.A., which with effect from 25 February 2008 acquired 23 branches 10 in the city of Torino, 9 in the Torino province and 4 in the province of Alessandria from the Intesa Sanpaolo Group (ISP) as part of the sale of 198 branches launched by ISP in execution of the Antitrust Authority for competition and the market (AGCM) order of 20 December Also forming part of the group are a number of companies active in specialised finance business (the Specialised Finance Sector ): - Bancaperta S.p.A., a bank specialised in financial asset management services, private banking, property finance, ebanking and payment systems, and coordinates the activities of its subsidiaries and associated companies (Aperta SGR, Aperta Fiduciaria and Aperta Gestioni). - Aperta SGR S.p.A., an asset management company 100% controlled by Bancaperta and registered in the special register held by the Bank of Italy. In October 2005, the asset management business formerly handled directly by Bancaperta was transferred to Aperta SGR. - Aperta Fiduciaria S.r.l., a company authorised by the Italian Ministry of Productive Activities to perform static fiduciary services, including third party asset administration, fiduciary registration services, intervention in the exercise of related rights, and shareholder and bondholder representation. - Mediocreval S.p.A., a bank specialised in the provision and management of medium/long-term financing and business financing services. The Group s credit business is concentrated in Mediocreval, the objectives of which are the design and development of financing products in line with the most recent market developments. - Finanziaria San Giacomo S.p.A., a company registered since April 2006 in the general register of intermediaries operating in the financial sector pursuant to art. 106 of the Consolidated Law on Banking. The company became a member of the Credito Valtellinese Group on the same date. Consistent with the aims expressed at the time of its establishment, the Company purpose is the exercise of financial activities consisting in the purchase, management and disposal of non-performing loans. - Creset Servizi Territoriali S.p.A., established in 2006 in line with the strategic plan to reinforce the Credito Valtellinese Group in the payment systems and public authority services sector. The company was formed following the tax collection reform (Art. 3, Italian Legislative Decree no. 203 of 30 September 2005) from a business branch split from Rileno S.p.A., former concessionary for the provinces of Como and Lecco. The Group's scope also includes a number of companies to provide services complementary to banking business, with a view to achieving synergies and scale economies ("Production Sector"): - Deltas S.p.A., which provides support to the Parent Company in defining group strategies. In addition, Deltas plays a coordination and monitoring role to ensure that the various business areas of the Group are standardised to the guidelines identified by Credito Valtellinese as in the interests of the Group's growth and stability. This role, under the title of Corporate Center, involves the provision of support with regard to administration, planning, human resource management, organisation, marketing, audit, legal affairs and risk management. - Bankadati Servizi Informatici S.p.A., a company specialised in the maintenance and development of application software, is the member of the Group responsible for IT management and development. Bankadati also provides specialised services to banks not forming part of the Group, such as the Istituto Centrale Banche Popolari Italiane (ICBPI) and Banca di Cividale. - Stelline Servizi Immobiliari S.p.A. manages the property and artistic assets of all companies in the Group. The company also performs other activities, such as the preparation of property estimates and assessments in support of credit allocation by the Territorial Banks, and the development of initiatives in favour of the local communities. 14

15 Company Officers of Credito Valtellinese Board of Directors Chairman Vice Chairman Board members Members of the Executive Committee Board of Statutory Auditors Chairman Permanent Auditors Substitute Auditors Giovanni De Censi Giuliano Zuccoli Fabio Bresesti Gabriele Cogliati Michele Colombo Giovanni Continella Mario Cotelli Paolo De Santis Aldo Fumagalli Romario Franco Moro Angelo Palma Valter Pasqua Maurizio Quadrio Alberto Ribolla Vico Valassi Roberto Campidori Angelo Garavaglia Alfonso Rapella Aldo Cottica Gabriele Villa Panel of Arbitrators Permanent Arbitrators Substitute Arbitrators Emilio Berbenni Francesco Bertini Emilio Rigamonti Adriano Bassi Silvano Valenti General Management General Manager Substitute Vice General Manager Vice General Manager Vice General Manager and Executive responsible for the preparation of corporate accounting documents Miro Fiordi Giovanni Paolo Monti Franco Sala Enzo Rocca Independent auditing firm Reconta Ernst & Young S.p.A. 15

16 Notice of Call The Shareholders of Credito Valtellinese are called to an ordinary Shareholders' Meeting on 18 April 2008 at 9.30 a.m., on first call and, if necessary, the following Saturday, 19 April 2008 at 9.00 a.m. on second call, at the Don Bosco Meeting Room in Sondrio, with entrance from Piazza San Rocco no. 8, to resolve upon the following Agenda: 1. Reports of the Board of Directors and the Board of Statutory Auditors on the 2007 financial year; presentation of the financial statements as at 31 December 2007 and the proposed allocation of net income; related resolutions. 2. Determinations pursuant to art. 12 of the Articles of Association (acquisition and disposal of treasury shares); related resolutions and delegation of powers. 3. Appointment of a Director to replace a Director no longer in office and authorisation pursuant to art of the Italian Civil Code. Shareholders entitled to participate in the Shareholders Meeting and exercise the right to vote are those who have been registered in the Shareholders Ledger for at least ninety days, and who have communicated to the headquarters of Credito Valtellinese, at least two banking days prior to the date set for the meeting on first call, the notice that the intermediary assigned to the accounts is required to make as per art. 34 bis of Consob resolution no /1998. This obligation of notification is not assigned to shareholders who have their shares subscribed in an account with Credito Valtellinese or at one of the other banks in the Credito Valtellinese Group. It should be specified that pursuant to art. 33 of the Articles of Association the rules on list-based appointment of the Board of Directors do not apply to shareholders meetings such as this, which are expected to appoint directors in accordance with art of the Civil Code. In this case, the Shareholders Meeting decides by majority vote in accordance with the Shareholders' Meeting Regulation in relation to candidates presented in compliance with art. 32, final subsection of the Articles of Association. For the information of the Shareholders, it is noted that: the Board of Directors report regarding topics on the agenda shall be made available to the public at the company headquarters and at Borsa Italiana S.p.A. fifteen days before the date set for the Shareholders Meeting. Shareholders shall have the right to obtain a copy of such documents. This report shall also be published on the Credito Valtellinese web site, with regard to point 1 on the agenda, the separate and consolidated financial statements approved by the Board of Directors shall be made available at the Bank s headquarters and at Borsa Italiana S.p.A. as from 31 March 2008 and shall also be published on the Credito Valtellinese web site. Sondrio, 26 February 2008 The Chairman Giovanni De Censi This notice of call was published in the Italian Gazzetta Ufficiale no. 32 on 15 March

17 Chairman s Letter Dear Shareholders, it is an honour and a privilege for me as Chairman of Credito Valtellinese to present these Centenary Financial Statements. 12 July 2008 in fact marks a century of the Parent Company, now celebrating its hundredth financial year. An important birthday, which we would first of all like to dedicate to you, our Shareholders, the focal point and heart of our operations, and which we have decided to celebrate with a series of meaningful initiatives, detailed in this report and in the separate Financial Statements. An anniversary that invites us to take stock of our existence as a bank, now a Group, of cooperative extraction. We can proudly confirm, and with gratitude to our predecessors directors, employees and shareholders that we have remained faithful to that day, 12 July 1908, in spite of tension from constant adaptation to increasingly global scenarios and the search for better competitive approaches, and the principles that inspired our founding fathers: that is the principles of localisation, cooperation and solidarity. Even today, Credito Valtellinese, and likewise the other banks in the Group now five after the birth of Credito Piemontese on 25 February 2008 confirms and demonstrates its vocation as a local bank, attentive and proactive not only towards its customers, but in the wider social and economic context of its areas of operation. The economic and equity figures in the Directors Reports on separate and consolidated operations indicate continuation along the path of continued growth, with a significant increase in volumes traded, but always with a view to sustainable medium/long-term development and social responsibility. In occasion of this Centenary, to you our Shareholders I would like to pay special tribute, in acknowledgement of the trust you have always placed in the bank in return for the attention always reserved to you, according to the dictates of the Articles of Association, with tangible demonstrations of affection. I refer, amongst other things, to your constant support of action taken from time to time to strengthen equity, and which have always allowed their related objectives to be achieved in full. In this respect I take this occasion to say a special thank you for the total commitment to the share capital increase resolved by the extraordinary shareholders meeting on 10 February In a highly difficult context, characterised by an uncertainty that risks becoming systematic in spreading from the United States to Europe, the trust element becomes increasingly important to safeguarding and extending relations with the corporate and customer bases, maintaining an appropriate degree of good reputation, so we may be determined and realistic in facing the challenges of the competitive scenario, remaining faithful to our identity and our values. It is upon these values cooperation, autonomy, independence, openness to change, moral integrity, sense of responsibility, consistency, solidarity and subsidiarity that our Group is founded: a Group designed to grow that has now achieved visibility at national level. In this Centenary year we therefore hope to celebrate not only the past, but above all the future, preparing to face the challenge of increasingly tough competition, by appealing strongly to our original values, values that remain timeless. Giovanni De Censi 17

18 Guide to consultation This report accompanies the consolidated financial statements as at 31 December 2007 of the Credito Valtellinese Group, its purpose being to describe the management performance of all companies included in the consolidation area (intended as a single economic entity), both overall and in the various business sectors, together with the main risks and uncertainties faced. The document was prepared in accordance with art. 3, Legislative Decree no. 87 of 27 January 1992 and instructions contained in Bank of Italy Circular no. 262 of 22 December 2005, Banking financial statements: schedules and guidelines" (paragraph 3.7.1). Also included are further disclosures required by law and regulations, even where not specified in the aforementioned provisions. 18

19 Board of Directors Report on Group Operations 19

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21 MACROECONOMIC REFERENCE CONTEXT INTERNATIONAL AND EUROPEAN SCENARIO 2007 was the fourth consecutive year in which global GDP increased by over 4%, recording 5.1%, just one decimal point lower than the previous year. This vigorous growth, which until last year had no significant impact on inflation, was accompanied this year by heavy price increases in energy and raw materials on the international markets. 1 Added to this in the second part of the year was a consistent instability of the financial markets. The resulting slowing of growth was slight, but it is presumed that the greater negative impact has still to become evident. Though fears are increasing, in forecasts prepared by most opinionists and leading research centres, pessimism is still not predominant. 2 In the breakdown of contributors to global growth among the leading economic blocs, the weight of the Eurozone has increased, less than last year but after many years at a rate higher than that of the United States, which has slowed even further. Japan continues along its curve of a rather limited recovery, which for growth experts in the Asian scenario is dominated by the Chinese and Indian dynamics. Table 1 Gross Domestic Product (Percentage variation) Unemployment rate (Percentage of workforce) Inflation (Percent variation of consumer prices) United States Japan Eurozone Total OECD a 2.3 a 2.1 a a GDP deflator Source: OECD, Economic Outlook no.82, Statistical Annex Tab.1, 13, 16, 18; December As illustrated in Table 2 below, among the leading Eurozone countries the highest growth figure was again recorded by Spain, maintaining the previous year's levels, whereas Germany, which weighs most on the average, has slowed most, also as a result of the increased VAT coefficient. Three features distinguish the 2007 international scenario and forecasts for the coming years: - the financial crisis triggered by serious problems in the US sub-prime mortgages sector and related downturn in the property sector; - the increase in raw materials prices; - uncertainty regarding the performance of the US economy and risk of recession. 1) The financial crisis The financial crisis had an immediate effect, causing the strong downturn in property markets in almost all the leading countries, with more or less harsh brakes on both property investments and prices, but it was particularly strong in the United States. In 2007 the average US house prices reduced in real terms (-0.5%) for the first time in many years, and investments in the construction sector dropped by around 20%. 3 In addition to weakening the US economy in other ways, this placed the sub-prime mortgages sector in difficulty, no longer having the option of refinancing or, more simply, unable to meet the physiological 1 Prometeia, Rapporto di previsione, January 2008, Table For example, in both OECD and Prometeia forecasts, the most likely scenario is one of a slowing down, but not a fall in growth rates. Decisive in this respect are current developments in the US economy, with the risk of recession, which will be discussed below. 3 OECD, Economic Outlook, no. 82, November 2007, p

22 deterioration of the initial favourable conditions. The multiplication of the crisis was nevertheless mainly due to the widespread use in the sector of innovative financial instruments to securitise and transfer credit risk which, though they increase the system s capacity to support risk - by fragmentation, tend to separate the identity of the risk bearer from those able to monitor borrower solvency. The crisis hit strongly at the beginning of August with a declining faith and strong grip on liquidity in the money markets and interbank market, characterised by a consistent and rapid increase in the market interest rate-official benchmark spread. The overtly concerted action of the leading central banks, normally characterised by direct cash input, allowed them to effectively cope with worries regarding financial stability, substantially avoiding the bail-out operation being seen as an inducement to incautious behaviour. Regardless of its extent, on which opinionists have found difficulty in agreeing on forecasts, the direct effect on growth prospects of the financial crisis, concentrated mainly in the United States, should be modest. The indirect effects, however, are expected to be stronger, with a deterioration in the terms for business funding and household loans. If for the first of these the satisfactory profit performance in recent years in most OECD countries lead to the opinion that the capacity to face temporary crises is solid, the impact on the spending power of households, particularly in countries with a strong consumer credit tradition, could lead to a significant drop in demand, especially if this is associated with the negative effect on wealth due to a slump in property values. In more general terms, the financial sector still seems to be characterised in both the US and Europe by consistent margins of uncertainty, and therefore vulnerable to shock, which could result in an even deeper crisis than that already seen. Uncertainty is also the dominant trait in the financial sector of emerging countries, whose share prices have in some cases, as in China, seen such a strong upward trend as to arouse some perplexity, even given a true economy that is apparently solid. 2) The increase in raw materials prices The second factor characterising 2007 was the heavy increase in energy and raw materials prices. At the end of the year, oil came close to reaching USD 100 per barrel, an increase of approximately 70% on 2006, and went over the USD 100 mark at the start of This increase, even considering the significant parallel depreciation in the dollar and a strengthening of geopolitical tension, can only be attributed for the most part to the strong increase in demand from emerging countries, with China in the lead - now the second largest oil consumer at global level after the United States. The forecasts based on such an increase give little hope of consistent reductions in the coming years. These pressures, which depend on economic factors, are also accompanied by operations of a financial nature, to which the underlying trends cannot however be attributed. Until now the major countries have handled the crude oil price increase well, also as a result of the gradual diversification of energy sources and, in the Eurozone, due to favourable exchange rates. Nevertheless, further increases could have a considerable downward effect on growth, estimated by the OECD as 1 or 2 tenths of a percentage point for the member states aggregate 4, but which could be more consistent for the more exposed countries. To partly offset the increase in energy costs, increased earnings in producing countries have stimulated manufacturing import-export, particularly exports from the Eurozone and imports into Russia. The gradual appreciation of the Euro has, however, reduced these beneficial effects. Another phenomenon in part linked to the increasing dynamics on Western financial markets of Sovereign Funds, many of which relate to producing countries, kindling some worries of the risk of an arbitrary re-publicisation of privatised companies, becoming foreign State-owned, and above all of a considerable lack of transparency in a number of such operations. Strong bullish pressure has also characterised the international markets of other raw materials, such as industrial minerals and metals, nickel for example, and agricultural and food products, the prices of which were not only influenced by the increase in global demand this also explainable by the expanding role of emerging countries - but also by weather conditions in some of the major producing countries. The main risk connected to such a bull trend in prices of raw materials at global level is not only the strengthening of inflationary phenomena as such, but their association with a potential slowdown in the major blocs which as such would need to be combated by reduced margins in support of monetary policy. 3) Uncertainty regarding the performance of the US economy The final element characterising the economic scenario is the uncertainty regarding the United States true economic conditions, the answer to which will probably be decisive in outlining the scenarios for several years to come. At least until the third quarter of 2007, the slowdown in US GDP growth had no dramatic effect. Despite the heavy drop in the property sector, as already mentioned, domestic consumption remained stable and the gradual weakening of the dollar exchange rate reinforced the net contribution of exports, which recorded an annual increase of 10%, also improving the deficit situation in accounts 4 OECD, Economic Outlook, no. 82, November 2007, Table 1.5, p

23 balances, which decreased to 5.5% of the GDP (from 6.75% in 2005). The latest signals are readable from both the consumer and labour market trends, with the unemployment rate back to over 5%, and more recently from a marked monetary policy action by the Federal Reserve, lead to the belief that in the first part of 2008 the USA will hit bottom and that the risk of its technically being in recession cannot be ignored. The recession could be caused by a further and more significant weakening of the property market, which would affect domestic consumption, or by financial market difficulties even greater than those already emerged. Such a scenario, according to Prometeia, could lead to a downgrading of growth prospects for the global economy with respect to the OECD forecast illustrated in Table 1. The United States would close 2008 with a slight increase of 0.5% in GDP instead of 2%, the Eurozone would increase by 1.2% rather than 1.9% and Japan 0.7% as opposed to 1.6%. More consistent and persistent would be the consequences on the growth rates of emerging countries, which would nevertheless maintain their highly dynamic growth curves. Elements characterising the 2007 international economic scenario FINANCIAL CRISIS INTERNATIONAL ECONOMIC SCENARIO INCREASE IN RAW MATERIAL PRICES UNCERTAINTY OF US ECONOMY PERFORMANCE 23

24 THE ITALIAN SITUATION In terms of economic growth, 2007 was less positive than expected with a final GDP of 1.7% which had gradually slowed with respect to the initial forecasts of almost 2% to 1.5% in the more recent estimates. Our downward deviation of approximately one percentage point from the EMU and EU remained significant, whilst that of Spain and the United Kingdom was much more marked. This gap cannot be justified by either the deterioration in the international context in the second half of the year, or by the strengthening of the Euro which penalised Italy, but is also partly protected by the oil price increase. Our weakness is mainly due to persistent structural factors. With regard to contributions to growth on the demand side, household spending slowed due to inflation and higher mortgage costs, whilst investments recorded a better performance in terms of both manufacturing modernisation and construction. The climate of consumer confidence nevertheless stabilised during the year, whilst that of industry declined in the last quarter. The foreign balance (exports less imports) recorded a slight negative change, but there was a clear improvement in the average unit value of our export figure and in the positive manufacturing balance, unfortunately strongly offset by the negative energy figures. For 2008 it is felt that there will be a slowdown in growth, the initial forecast of 1.1% expected to drop to no more than 0.3% if the barrel price for oil stays around the USD 100 mark for the entire year. The unemployment rate dropped to 6%, however, the lowest level among the major EU countries apart from the United Kingdom. Both male and female activity rates and employment rates also increased, albeit still at comparatively low levels compared to the more advanced EU countries. In turn, labour productivity shows improvement, though at modest rates. Inflation trends were limited, and better than the EMU and EU averages. The strength of the Euro contributed to containing imported energy and raw material prices. However, the gap between inflation according to the ISTAT consumer price index and actual inflation remains wide. The gap is also confirmed by ISTAT s high-frequency purchase goods index, which in January 2008 recorded a 4.9% increase over the 2007 figure. Table 2 Gross Domestic Product (Percentage variation) Unemployment rate (Percentage of workforce) Inflation (Percent variation of consumer prices) Germany France Italy Spain EMU ( countries) United Kingdom EU (25 countries) n.a n.a n.a Source: Prometeia, Rapporto di Previsione, January 2008, table 2.4 p.27, table p. 39, table3.4.1 p.74, table p.43, table p.42, table p.42 and table p.42. For public finance, 2007 was a year of positive results that led to the imminent repeal of the excessive deficit procedure launched by the European Commission in June The deficit/gdp ratio fell by 2% despite certain expansion undertaken during the year. The main reason for this performance and the dynamics of tax pressure, which reached 43% of GDP even with recoveries on tax evasion and tax dodging to be better proven in the long term. Current spending also decreased marginally from 44.5% to 44.3%, nevertheless representing only an initial reduction in an item that weighs heavily on 24

25 public accounts. It is significant, however, that a good primary surplus has been recreated. Therefore the debt/gdp ratio has begun to fall, recording against the of Table 3 Public sector deficit (-) % of GDP Public sector debt % del PIL Germany France Italy Spain EMU United Kingdom * 44.7* 46.3* Source: Prometeia, Rapporto di previsione, January 2008 table 2.4 p.27, table p.36; except * OECD, Economic Outlook, no.82, December 2007, Annex Table 62. This leads to conclusive considerations regarding the 2008 Finance Law, composed of various linked measures including welfare reform with abolition of the income ladder. Prometeia feels the Finance Law is in line with budget policy guidelines from mid-2007, tending towards a gradual absorption of the deficit into a reallocation of the main tax resources by action to reduce the burden on certain lower-income taxpayer categories and increased public spending of a higher quality. 5 In line with the Stability Programme presented by the EU at the end of 2007, the accounts are expected to balance out by 2011 whilst the debt/gdp ratio should fall to below 100% in The programmed scale can be seen as positive, but it is subject to a good growth performance which is instead proving to be far weaker than expected. 5 Prometeia, Rapporto di previsione, January 2008, p

26 LOCAL ECONOMIES IN THE GROUP S OPERATING AREAS This section briefly analyses the 2007 performance of the economy at regional level, with regard to real and productive aspects, with particular attention to the areas in which the Group operates. Specifically, in this analysis the key indicator was represented by the demographic trend of companies, subdivided by sector (Infocamere, 2007, Movimprese database), and foreign trade as complementary signs of local economy performance (Istat 2007, Coeweb database-statistics on foreign trade). Lombardia This region that drives the national economy in 2007 showed signs of slowing down. Against the marked decrease in the manufacturing company figures (-1.7%), which this year recorded the highest drop in the last 10 years, there is no corresponding increase in the number of new companies in the services sector. The overall result for the Lombardia economy is therefore essentially one of stability (0.2%). The traditional and strong district-related sectors, such as textiles-clothing (-3.8%), timber-furniture (-2.7%) and even more so the leather industry (-6.4%) have recorded a considerable decrease in the number of active companies at regional level. However, even the more capital-intense and technology-intense sectors - chemical (-2.2%) and mechanical (-1.4%), for example - show negative new business figures. The only manufacturing segment recording positive balances in company opening-closure terms is the food industry (+2.9%). The most significant difference compared to previous years is based on the fact that the above figures cannot be interpreted as merely an indication of continued outsourcing of the Lombardia economy. Important outsourcing sectors such as trade (-1.6%) and transport (-4.2%) recorded such negative balances that they cannot be offset by performance in growing sectors such as tourism (0.6%), financial brokerage (+0.7%), real estate activities and IT services (+2.3%). Imports increase at a faster rate than exports (with a difference of around 2%) and account for the increase in deficit of the regional trade balance. Tuscany Movements in the manufacturing industry structure in Tuscany show an increase in the number of companies (+0.8%) involved in an outsourcing process. In Tuscany also, the manufacturing segments feel the impact of the dual influx of a weak domestic demand combined with a local companies loss of international market competitiveness. The effects in company opening-closure terms on secondary companies speak for themselves. Against a decline in total manufacturing (-0.9%) only two segments recorded a growth food (+1.7%) and machinery (+0.2%) whilst timber-furniture (-3.3%), textileclothing (-1.3%), leather (-0.9%) and chemicals-plastics (-0.9%) all showed a marked decrease in production. The services sector, however, shows certain signs of vitality (+0.7%), particularly tourism (+1.8%), financial brokerage (+1.7%) and real estate-it activities (+3.2%). The positive performance of the Tuscan economy is confirmed by an analysis of the trade balance figures: exports are increasing at a significantly higher rate than imports, thereby improving the balance. Veneto In 2007 the Veneto economy recorded overall stability of its business structure. Manufacturing held steady, its slight drop (-0.5%) confirming the gradual adjustment trend after the strong decreases of , and services are on the increase (+1.5%). A more detailed examination of company opening-closure figures for manufacturing shows that the food industry is growing (+2.2%), machinery (0.3%) and textiles-clothing (0.1%) are essentially stable, whilst the leather (-1.8%), timber-furniture (-1.6%) and chemical industries (- 1.3%) are down. The growth of outsourcing in this region is driven by performance in tourism (+4.5%), significantly overturning the drop of the previous year, and real estate-it consulting (+4.4%). Still positive, but to a lesser extent, is the performance in the financial brokerage sector (+2.3%), whereas transport has decreased considerably (-2.5%) and trade remains steady. Imports are growing at a slightly higher rate than exports, as is the trade balance of assets. Lazio The Lazio economy recorded a marked expansion of its productive base in 2007, with a 2.7% increase in the total number of companies compared to This trend was more evident in the services aggregate, which recorded a 3.2% increase, mainly the effect of a 10.9% leap in real estate activities. The latter therefore reinforced the growth trend of the last few years. The increase was also considerable (+6.2%) for the 26

27 monetary and financial brokerage segment, this also for some time recording a positive trend. Another growing services sector in 2007 was hotels-commercial businesses. The Lazio manufacturing sector instead showed an overall increase (+0.7%), the result however of a significant increase in the food-tobacco (+4.0%) and chemical (+2.3) industries, against a decrease in other sectors. Specifically, the Made in Italy sector companies (textiles-clothing 1.7%, leather-footwear -2.5%, timber-furniture -1.7%). This confirms the outsourcing trend of the Lazio economy, particularly in Rome. From an international trade balance point of view, the region recorded a notable deterioration, from EUR 10.7 billion in 2006 to almost EUR 12 billion in Sicily Companies active in the Sicilian economy recorded a slight overall increase in 2007 (0.7%) compared to The aggregate figure, however, shows a rather strong performance difference between the manufacturing industry and services. The latter showed an overall increase of 0.8%, deriving from highly significant increases in monetary and financial brokerage (+9%), real estate and hotels-commercial businesses, both increasing by around 3.5% over the 2006 figure. The reduced weight of these sectors on the Sicilian services economy, however, was not sufficient to generate a significant increase overall. The company opening-closures data for the manufacturing industry was particularly negative, in which all sectors proved negative, resulting in an overall -1.6%. Specifically, negative results were recorded in the Made in Italy segments, with decreases of 9.4% in active leather-footwear companies, 3.9% in timber-furniture and 3.7% in textiles-clothing. For manufacturing this was the worst performance of recent years. In foreign trade terms, the Sicilian balance reduced by around EUR 400 million between 2006 and 2007, from approximately EUR -6 billion to EUR -6.4 billion. Piedmont The Piemonte productive structure overall remained essentially stable in The number of active companies increased slightly by 0.4%, the result however of rather different performances in the services and manufacturing sectors. Manufacturing companies, in fact, reduced by 1.3% compared with 2006, as a result of the general negative trend in all sectors except the food and beverage industry. Specifically, 2007 saw a reduction in the number of companies in the three Made in Italy macro-segments (-6.2% leatherfootwear, -3.7% textiles-clothing, -2.6% timber-furniture), confirming the 2006 trend. Growth in the services industry overall was however positive, though slight (+0.7%), the figure reflecting a fairly general trend the only exception to which are companies in the transport-communications sector, which fell by 2.8% between 2006 and On the other hand, a growth was recorded by companies active in real estate activities (+2.0%) and hotels-commercial businesses (+2.2%). In foreign trade terms, the positive balance of the Piemonte economy changed only slightly, from approximately EUR 5.7 billion to EUR 5.9 billion. 27

28 Geographical area Table 4 Annual changes in no. of operating businesses MANUFACTURI NG (%) SERVICES TOTAL Trade balance (in millions of EUR) ITALY ,734 LOMBARDIA ,3991 PIEMONTE ,951 TUSCANY ,593 VENETO ,173 LAZIO ,991 SICILY ,430 Source: Infocamere, 2006, Movimprese, Istat, 2006, Coeweb Statistics on foreign trade, 28

29 THE SITUATION IN THE ITALIAN BANKING SYSTEM 6 Provided below is a summary of the analysis carried out by the Italian Banking Association with respect to trends in the main aggregates of the banking sector. Deposits ABI s initial estimates for December 2007 predict an adjustment phase in Euro deposits for all Italian banks. The tendential growth rate was +6.7%, decreasing from the +7.6% at the end of 2006 and at the same level as November 2007 figures. In absolute terms, direct deposits (consisting of current accounts, savings deposits, certificates of deposits and bonds) amounted to EUR 1,270.5 billion at the end of 2007, for an increase of around EUR 79 billion over the 2006 figure. More specifically, considering the various funding components, the end of 2007 saw a downward trend in deposits from resident customers (represented by current accounts, savings deposits and certificates of deposit) with a tendential growth rate of +2.9% (+5.2% at the end of 2006), and an acceleration in bank bonds which continue to record steady growth rates, increasing from +11.4% in 2006 to +12.3% in With regard to foreign funding, significant figures were recorded in October 2007 this component totalled around EUR billion resulting in a tendential growth rate of approximately 31.2% (+19.3% in October 2006). The foreign funding share of total funding as at October 2007 was 31.3%. In terms of flows, the net increase in foreign funding between October 2006 and October 2007 was approximately EUR billion. Italian bank deposits and bonds DEPOSITS BY RESIDENT DEPOSITS BONDS CUSTOMERS (1) Date Annual Annual Annual /millions /millions /millions growth rate growth rate growth rate Dec-06 1,191, , , Jan-07 1,176, , , Feb-07 1,181, , , Mar-07 1,194, , , Apr-07 1,210, , , May-07 1,216, , , Jun-07 1,223, , , Jul-07 1,213, , , Aug-07 1,199, , , Sep-07 1,215, , , Oct-07 1,227, , , Nov-07 1,220, , , Dec-07 1,270, , , (1) Current accounts, savings deposits and certificates of deposits. Source: Centro Studi e Ricerche ABI processing of Bank of Italy data, SI-ABI Security investments The total consistency of securities custodied by Italian banks as at October 2007 was EUR 1,727.4 billion (+1% compared with October 2006). Specifically, data analysis by financial asset type shows that in October 6 Source: ABI Monthly Outlook, Evolution of financial and credit markets, January

30 2007 there was an annual increase in BOT (+25.2%), BTP (+9.7%), CCT (+0.8%), certificates of deposit (+27.4%) and bonds (+10%), compared to a drop in shares (-21.9%) and mutual funds (-15%). Asset management Asset management by banks recorded a decrease. In October 2007 this component totalled EUR billion, indicating a negative downward turn of almost 11%. Compared to the total securities held for resident customers, again as at October 2007, the bank asset management share was 8.2% (9.3% in October 2006). Mutual investment funds In December 2007 the total Italian and foreign mutual funds and open-end UCITS decreased to around EUR billion, compared to the EUR billion in November 2007 and EUR billion at the end of 2006 (-6.4% over the year). This assets total was composed of 56.5% Italian funds, 35.4% roundtrip funds 7 and 8% foreign funds. Specifically, compared with November 2007, there was a decrease of EUR 3,438 million in bond funds, EUR 2,499 million in equity funds, EUR 921 million in flexible funds, EUR 723 million in balanced funds and EUR 235 million in hedge funds. On the other hand, cash funds recorded a EUR 181 million increase. An analysis of the breakdown of assets by fund type shows that, in the last year, the share of cash funds rose from 13.7% in November 2006 to 16.5% in December 2007, the share of flexible funds from 8.5% to 11.7% and hedge funds from 4.6% to 6.4%. The share funds quota instead decreased from 25.9% to 23.7%, balanced funds from 6.9% to 5.9% and bond funds from 40.4% to 35.8%. In 2007 the total net deposits for mutual investment funds established by Italian intermediaries was negative at EUR -53,077.9 million, dropping further from the EUR -18,613 million result for Loans The changes in loans granted by banks showed a phase of adjustment: the initial estimates recorded a tendential growth rate in total loans of +10.2% (+11.2% as at the end of 2006). The increase in Italian bank loans in particular was EUR 1,455 billion. In flow terms, there was a net increase in new loans for a total of approximately EUR 133 billion compared to the 2006 figure. Loans in Euro recorded a tendential development rate of +10.2% as at the end of 2007 (+11.6% at the end of 2006). Loans in currencies other than Euro at the end of 2007 recorded a change of +11%, a complete turnaround of the figure for December 2006 (-16.2%). It is important to emphasise, however, that the loans component in currency other than Euro represents only 1.2% of total loans. The positive change in loans continues to be sustained by both long-term and short-term loans. According to initial estimates, in fact, as at December 2007 there was an increase of 11.5% in the medium/long-term segment (+11.6% at the end of 2006) and 7.9% in short-term loans (+10.5% in December 2006). An analysis of loans by counterparty type shows that the total loans to households and non-financial businesses recorded a tendential growth rate of 12.3% in November 2007 (+10.4% as at November 2006), significantly higher than the nominal GDP growth rate in Italy. Worthy of mention also is the growth rate in the funding of non-financial businesses, 14.5% at the end of November 2007 (+10.5% in November 2006). A breakdown of loans based on economic business segment shows that, as at October 2007, the most significant increases were in the energy products segment (+82.3%), transport (+17%), hotels-commercial businesses (+10.5%) and agricultural-industrial machinery (+10.4%). Also of note is the -24.6% change recorded for the telecommunications services segment. 7 Italian funds: harmonised and non-harmonised funds registered in Italy; Roundtrip funds: harmonised and non-harmonised funds registered outside Italy and purchased mainly by Italian investors; Foreign funds: harmonised and non-harmonised funds registered outside Italy and not purchased mainly by Italian investors; 30

31 Date /millions TOTAL Annual growth rate Italian bank loans 8 /millions LOANS IN EURO Annual growth rate LOANS IN OTHER CURRENCIES Annual /millions growth rate LOANS / DEPOSITS % Dec-06 1,322, ,307, , Jan-07 1,331, ,315, , Feb-07 1,337, ,321, , Mar-07 1,344, ,329, , Apr-07 1,358, ,343, , May-07 1,364, ,350, , Jun-07 1,385, ,371, , Jul-07 1,395, ,381, , Aug-07 1,393, ,377, , Sep-07 1,403, ,388, , Oct-07 1,426, ,411, , Nov-07 1,451, ,434, , Dec-07 1,455, ,439, , SOURCE: ABI, processing of Bank of Italy data, SI-ABI. Impaired loans As at the end of October 2007, net impaired bank loans totalled EUR 17,107 million, an increase of EUR 385 million over the September 2007 figure and EUR 479 million less than the total as at October The tendential variation was -2.7% as at October 2007 (-2.3% for September 2007 and -10.2% as at October 2006). The net impaired loans/total loans ratio as at October 2007 was 1.2%, showing a slight decrease from the figure for the same period in the previous year (1.4%). Further confirmation of the continued high quality of credit is reflected in the net impaired loans/regulatory capital ratio, amounting to 6.4% in October 2007 (7.3% in October 2006). Interest rates In December 2007 the weighted average rate on the total of household and non-financial business loans is estimated by ABI to have increased slightly, as a result of ECB monetary policy and changing conditions in the interbank market, to 6.7% (8 basis points above the November 2007 level and 78 basis points above the December 2006 figure). With regard to interest rates on new business, in December 2007 the interest rates on loans in Euro to nonfinancial companies was 5.3% (5.2% in November 2007), whereas the rate on home buyer loans in Euro, summarising the fixed and floating rate performances and also affected by the change in breakdown of fixed rate and floating rate loans granted, was 5.72% (5.66% in November 2007). With regard to the two price indicators for deposits and loans to households and non-financial companies produced by ABI, the mark-up recorded an increase and the mark-down a decrease. 8 The % changes take into account changes in the financial companies sector. 31

32 Regarding the margin on deposits, the mark-down on the average rate on euro deposits from households and non-financial businesses with respect to the weighted average return on BOT (government treasury bonds) outstanding in December 2007 was 1.9 percentage points (2.06 pp in November 2007). The average mark-up rate on euro loans to households and non-financial companies compared to the return on BOT, on the other hand, was 2.2 percentage points in December 2007 (2.01 pp in November 2007). An analysis of the changes in these indicators for December 2006-December 2007 shows that the mark-up has increased, from 2.05 points to 2.22 points. In the same period, however, the mark-down decreased slightly, from 189 basis points to 187 basis points. To summarise, the spread increased by 15 basis points: from 394 bp in December 2006 to 409 bp in December As at December 2007 the differential between the average rate of interest-bearing assets in Euro of households and non-financial businesses, and the average rate on deposits in Euro from customers represented by households and non-financial businesses was 3.07 percentage points (4 basis points higher than that recorded in November 2007). 32

33 MAP OF THE GROUP AND THE AREA OF JOINTLY CONTROLLED AND AFFILIATED COMPANIES COMPOSITION OF THE GROUP The consolidated network structure of the Credito Valtellinese Banking Group as at 31 December 2007 consists of four territorial banks, seven specialised companies operating in the financial sector (three of which are banks) and four service companies. The traditional lending operations are provided within the respective local areas of competence which cover six regions by the parent company Credito Valtellinese S.c., Credito Artigiano S.p.A., Credito Siciliano S.p.A. and Banca dell Artigianato e dell Industria S.p.A. The Group companies specialised in financial activities are the following: - Bancaperta S.p.A.; - Mediocreval S.p.A; - Finanziaria San Giacomo S.p.A; - Creset Servizi Territoriali S.p.A.; - Aperta Fiduciaria S.r.l; - Aperta SGR S.p.A.; - Credito Piemontese S.p.A., formerly Creval Banking S.p.A. Lastly, the Group s complementary companies are: - Bankadati Servizi Informatici S.p.A.; - Stelline Servizi Immobiliari S.p.A.; - Deltas S.p.A. At the end of 2007, the Group was structured as follows: CREDITO VALTELLINESE Parent company 65.71% 20.81% 39.31% 40.26% CREDITO ARTIGIANO BANCA DELL ARTIGIANATO E DELL INDUSTRIA CREDITO SICILIANO 35.79% 99.78% CREDITO PIEMONTESE (*) APERTA SGR 100% 24.45% 63.44% 12.11% BANCAPERTA 31.23% MEDIOCREVAL 37.45% 31.29% 100% CRESET APERTA FIDUCIARIA 100% 100% FINANZIARIA SAN GIACOMO BANKADATI DELTAS STELLINE 80% 50% 80% 20% 50% 20% TERRITORIAL BANKS BANKS AND SPECIALISED COMPANIES PRODUCTION COMPANIES (*) New name of Creval Banking S.p.A. (with effect from 16 January 2008) 33

34 The main change made to the Group structure, with effect from 1 May 2007, was from the merger by incorporation of Crypto S.p.A. into Bankadati Servizi Informatici S.p.A., which then became the Credito Valtellinese Banking Group s only centre for ITC management and development. It should be mentioned that this operation had no effect on the shareholder structure of the merging company, Bankadati Servizi Informatici S.p.A., but allowed a simplification of the organisational set-up of the Group s IT sector, centralising all IT system management and development into a single structure with the aim of guaranteeing a higher level of management coordination. The financial statements of the companies listed in the table above were consolidated with those of the parent company Credito Valtellinese on a line-by-line basis. ASSOCIATES AND COMPANIES SUBJECT TO JOINT CONTROL The following companies were assessed using the equity method: - Banca di Cividale S.p.A., with registered office in Cividale del Friuli (Udine) and share capital of EUR 62,625,000, in which Credito Valtellinese holds a 25% equity investment; - Istituto Centrale delle Banche Popolari Italiane S.p.A., with registered office in Milan and share capital of EUR 33,148,239, in which Credito Valtellinese holds 22.5% of voting rights that can be exercised at Ordinary Shareholders' Meetings; - Banca della Ciociaria S.p.A., with registered office in Frosinone and share capital of EUR 180,000, in which Credito Valtellinese holds 37.96%; - Aperta Gestioni S.A., with registered office in Lugano (Switzerland). Bancaperta holds a 48% equity investment in the share capital of CHF 3,500,000; - Global Assistance S.p.A., an insurance company, with share capital of EUR 2,583,000, in which the parent company has a 40% equity investment; - Global Assicurazioni S.p.A., a company operating in the insurance intermediation sector with registered office in Milan, in which Bancaperta holds a 40% equity investment in the share capital of EUR 120,000; - Rajna Immobiliare S.r.l., established following the breaking up of the real estate business from Società Ripoval S.p.A. (control of which was transferred to Riscossione S.p.A. pursuant to Law no. 248/2006). Credito Valtellinese holds 50% of the share capital of EUR 20,

35 MANAGEMENT PERFORMANCE IN THE PERIOD - ANALYSIS OF THE MAIN BALANCE SHEET AGGREGATES RECLASSIFIED CONSOLIDATED BALANCE SHEET (in thousands of EUR) ASSETS 31/12/ /12/2006 % change Cash and cash equivalents 158, , Financial assets held for trading 1,284,560 1,287, Financial assets available for sale 70,288 49, Financial assets held to maturity Due from banks 760, , Loans to customers 13,754,333 11,445, Investments in associates and companies subject to joint control 201, , Property, plant and equipment and intangible assets (1) 500, , Other asset items (2) 498, , Total assets 17,228,262 14,901, (1) Includes balance sheet items 120. Property, plant and equipment and 130. Intangible assets. (2) Includes items 140. Tax assets and 160. Other assets. LIABILITIES AND SHAREHOLDERS' EQUITY 31/12/ /12/2006 % Change Due to banks 848, , Direct deposits from customers (1) 13,708,656 12,073, Financial liabilities held for trading 8,150 6, Other liabilities 626, , Provisions for specific purpose (2) 243, , Minority interests 216, , Shareholders' equity (3) 1,576, , Total liabilities and shareholders equity 17,228,262 14,901, (1) Includes items 20. Due to customers and 30. Securities issued. (2) Includes items 80. Tax liabilities, 110. Employee termination indemnities and 120. Provisions for risks and charges. (3) Includes items 140. Valuation reserves, 160. Equity instruments, 170. Reserves, 180. Share premium reserve, 190. Capital, 200. Treasury shares and 220. Profit (Loss) for the period. 35

36 Deposits Direct deposits At the end of 2006, direct deposits from customers 9 amounted to EUR 13,708.7 million, an increase of 13.5% compared with EUR 12,073.7 million in the previous year. Breaking down its components, it is noted that amounts due to customers, standing at EUR 9,858.9 million, demonstrated annual growth of 8.4%, while securities issued, amounting to EUR 3,849.7 million, increased by 29.3%. In terms of breakdown by technical form, deposit repurchase agreements reached EUR 1,123.8 million (+30.1%), while current accounts increased by 3.3% over the previous year, amounting to EUR 7,719.8 million, and other loans of EUR million recorded an increase of 33% over the 2006 figure. 14,000 Direct deposits +13.5% 12,000 EUR/milions 10,000 8,000 6,000 10,489 12,074 13,709 4,000 2, Indirect deposits As at 31 December 2007 the Group s indirect deposits totalled EUR 12,137.3 million, down 1.9% on the EUR 12,370.9 million of the previous year. Managed savings, which comprise mutual investment funds, managed customer assets and insurance savings, amounted to EUR 5,870.4 million in 2007, a decrease of 2.9% compared to EUR 6,043.1 million at the end of December Administered savings, consisting of securities that customers deposit with the Group banks, came to EUR 6,266.9 million, a decrease of 1% compared to the same figure at the end of the previous year. It should be noted that asset management makes up 48% and managed savings 52% of the total aggregate of indirect deposits. 9 This figure comprises the financial statement items 20 "Due to Customers" and 30 "Securities issued". 36

37 Indirect deposits 14, % 12,000 EUR/millions 10,000 8,000 6,000 11,587 12,371 12,137 4,000 2, Total deposits Total customer deposits, the sum of direct and indirect deposits, totalled EUR 25,846 million, an increase of EUR 1,401.4 (+5.7%) compared to EUR 24,444.6 million recorded at the end of the December ,000 Total deposits +5.7% 24,000 EUR/millions 20,000 16,000 12,000 22,076 24,445 25,846 8,000 4, This increase can be attributed entirely to direct deposit developments, which represent 53% of total deposits. Loans Lending In a policy framework of absolute prudence and risk management adopted with regard to financial asset management, the Creval Group has no exposures or commitments for the allocation of subprime or Alt-A mortgages, nor investments in financial products with such mortgages as the underlying assets or which refer to such assets, or in relation to the issue of guarantees on such products. In a situation of market turbulence, therefore, the risk profile control that has always characterised Creval Group operations in the financial sector confirmed its worth. At the end of December 2007, loans to customers amounted to EUR 13,754.3 million, an increase of EUR 2,308.5 million (+20.2%) on the EUR 11,445.8 million at the end of

38 Financing was specifically focused on small and medium-sized companies, trades and households, which have always been the fundamental customer base of the Group. Within the lending process, significant attention was focused on specific features of the sectors and local areas. 16,000 14,000 Customer loans EUR/millions 12,000 10,000 8,000 6,000 9,863 11,446 13,754 4,000 2, A breakdown of the loans portfolio by technical form demonstrates a greater trend in the medium to longterm component (mortgages and financial leasing), which reached EUR 4,974 million, recording an increase of 21.4% compared to EUR 4,096 million in the previous year. Specifically, mortgages increased significantly by 23.6%, amounting to EUR 4,103.6 million. As at 31 December 2007, loans beyond the short term represented 36.2% of total loans to customers. Technical form (in millions of EUR) % Change Current accounts 5,642 4, % Lending repurchase agreements % Mortgages 4,104 3, % Credit cards, personal loans and salary-backed loans % Financial leases % Other transactions 2,469 2, % Impaired assets % Total 13,754 11, % Unsecured loans increased by 34.8%, from EUR 1,011.5 million at the end of 2006 to EUR 1,214.2 million as at 31 December The ratio of unsecured loans to cash loans is 9%. Financing operations are specifically aimed at retail customers (households, small and medium-sized enterprises, trades), which are the primary customers of the Creditor Valtellinese Group in the local areas where it operates. The breakdown of loans by business segment and goods type, according to the classification of the Bank of Italy, demonstrates that lending is mainly focused on companies manufacturing goods or providing services (non-financial companies and personal businesses), to which over 79.3% of total loans are disbursed. The economic categories most represented include services, which absorb 50.4% of loans disbursed to the entire production system, followed by construction, with a percentage slightly greater than 15%. No other sector reached significant percentages; all remaining below 5%. Nonetheless, particular importance is taken on by the share of loans disbursed to consumer households and non-profit organisations, which represent over 16% of total loans to customers. This segmentation clearly demonstrates the Group s vocation towards retail customers and the real economy. 38

39 Sectors economic categories Financial companies 3.72% 3.47% Non-financial companies and personal businesses 79.28% 78.45% Other services for sale 31.85% 29.61% Commerce 18.59% 20.10% Construction 15.17% 13.17% Hotels and commercial businesses 4.30% 3.38% Textiles, footwear, clothing 3.64% 3.43% Other groups 26.44% 29.88% Consumer households and non-profit organisations 16.25% 17.45% External operators and other operators 0.75% 0.63% Total 100% 100% Financial business 4% Non financial businesses and personal businesses 79% Foreign operators and other operators 1% Consumer households and non-profit organisations 16% Loans by business segment 39

40 Other services 32% Commerce 19% Construction 15% Other groups 26% Textile, footwear, clothing 4% Hotels and public businesses 4% Non-financial companies and personal businesses Loans by economic segment Quality of loans Impaired net loans to customers amounted to EUR million, an increase of 3.4% compared to the previous year. The ratio of net impaired loans and net loans to customers was 1.4%, a decrease compared to the 1.6% of 2006 and essentially in line with Strategic Plan objectives. The ratio of total impaired loans to total non-performing loans also decreased; reaching 2.9% in 2007, compared to 3.3% at the end of Doubtful loans other than impaired loans (problem loans, due/overdue loans and/or restructured loans), net of value adjustments, amounted to EUR million at the end of 2007, with a weight of 1.5% on net loans to customers, compared to the 1.8% recorded for the previous year. Gross exposure Value adjustments Net exposure Gross exposure Value adjustments Net exposure (in millions of EUR) as at 31/12/2007 as at 31/12/2006 A. Non-performing loans Impaired loans Substandard loans Restructured loans Past due exposures Country risk B. Performing loans 13, ,355 11, ,064 Total 14, ,754 11, ,446 The coverage ratios of non-performing loans have the values indicated in the table below: Coverage ratio Impaired loans 68.1% 68.3% Substandard loans 10.2% 14.2% Past due exposures 2.3% 1.8% Non-performing loans 51.0% 51.4% 40

41 The financial position and investments in associates and companies under joint control Interbank position Net exposure of the Group on the interbank market, as a borrower of funds, amounts to EUR 88.4 million, essentially unchanged since the previous year (EUR 87.9 million). Financial assets and liabilities held for trading Also in 2007, the management of Group securities held for trading and cash and cash equivalents was assigned, through specific mandates, to Bancaperta, a specialised company within the Credito Valtellinese Group. In exercising this mandate, the company works closely with the General Management of the Banks, which is charged with the total oversight of the operational aspects and with taking specific decisions within the framework of the instructions handed down by the Board of Directors. Periodic reporting, generally on a monthly basis, and specifically in case of circumstances which may have a significant influence on the set management strategies, ensures constant monitoring of performance, risk profile, results and development strategies of financial asset management. Trading assets, which reached EUR 1,284.6 million, essentially unchanged since 2006, represent 94.8% of the Group s total financial assets, equal to EUR 1, Trading liabilities, represented by derivative contracts, increased from EUR 6.8 million to EUR 8.1 million (+19.1%). Financial trading assets/liabilities % Change Bonds and other debt securities % Equity securities and UCITS % Trading securities % Derivative contracts % Financial assets held for trading % Assets sold and not cancelled 1, % Trading assets 1, , % Trading liabilities % Total financial trading assets/liabilities 1, , % Financial assets available for sale Financial assets available for sale amounted to EUR 70.3 million, compared to EUR 49.2 million at the end of December 2006, and a almost fully composed of share investments, which are not attributable to trading activities. Cash flow statement The consolidated statement of cash flows, drafted according to the direct method as recommended by the Bank of Italy, demonstrates that the Group s operations in 2007 absorbed net cash flows of EUR million, compared to the EUR 38 million cash generated in the previous year. This figure is justified by the marked increase in loans to customers, and a more limited increase in deposits. Investments absorbed net cash of EUR 42 million, compared with the EUR 72 million absorbed in The difference is attributed to a decrease in the purchase of property, plant and equipment. Funding generated cash of a total EUR million, mainly from the share capital transaction executed by the Parent Company in Total net cash flows generated during the year amounted to EUR 24.5 million, an increase of 139% compared to 2006 (EUR 10.3 million); this led to an increase in cash and cash equivalents, from EUR at the beginning of the year, to EUR million at the end of

42 THE EQUITY POSITION Group shareholders equity As at 31 December 2007, the consolidated shareholders equity 10 of the Group increased by 78.8%, from EUR million to EUR 1,576.7 million. The share capital, fully subscribed and paid-up, is composed of 160,588,764 shares, with a par value of EUR 3.5. The considerable percentage increase in consolidated shareholders equity and related changes are, in addition to allocation of the previous year s result, related to the following events occurring in the first half of 2007, to be discussed in detail in the separate report on operations: - conversion in mid-april of the third and final tranche of the Credito Valtellinese 2.8% convertible bond loan; - Parent Company share capital increase against payment in the period 21 May-22 June The ratio of Parent Company s shareholders equity to net income for the year, as recorded in the financial statements as at 31 December 2007, and the corresponding values resulting from the consolidated financial statements on the same date, is illustrated below. RECONCILIATION STATEMENT OF SHAREHOLDERS' EQUITY AND NET PROFIT OF THE PARENT COMPANY AND SHAREHOLDERS' EQUITY AND NET PROFIT OF THE GROUP Shareholders' equity 31/12/ /12/2006 of which: net profit for the year Shareholders' equity of which: net profit for the year Balances following Parent Company reconciliation statement 1,549,240 63, ,459 48,121 Investee companies' results following separate financial statements: - fully consolidated 44,221 44,221 37,023 37,023 - valued at shareholders' equity 13,485 13,485 13,250 13,250 Amortisation of positive differences - relating to previous year relating to previuos years (121,469) - (121,469) - Defferences compared to carrying values, as to: - fully consolidated companies 75,944 73,434 - companies valued at shareholders' equity 42,709 35,890 Adjustments of dividends collected during the year: - relating to profit for previous year - (34,260) - (29,822) - relating to profit for the year Other consolidation adjustments: - netting of intragroup profit and loss (26,324) (1,276) (25,561) 42 - other adjustments (1,151) - (1,167) - Balances following consolidated financial statements 1,576,655 85, ,859 68,614 Regulatory capital and capital ratios The consolidated regulatory capital as at 31 December 2007, a detailed breakdown of which is provided in Part F of the Notes to the Financial Statements, together with other Equity information amounted to EUR 1,876.9 million, compared to EUR 1,134.9 million in the previous year. The increase is attributable to Tier 1 capital before deductions of EUR million, while gross Tier 2 capital increased by EUR 24 million. 10 Consolidated shareholders equity includes the financial statement items: 140 Valuation reserves ; 160 Equity instruments ; 170 Reserves ; 180 Share premium reserve ; 190 Capital ; 220 Profit (Loss) for the year. 42

43 Deductible elements, represented by share investments in qualified banks, financial companies and insurance companies increased by EUR 24.8 million. The extent of regulatory capital offers adequate support for plans to increase the size of the Group. The tier 1 capital ratio was 10.3%, whereas the total capital ratio reached 13.7%, which more than ensures compliance with the capital requirements of current regulations. At the end of the year, the Group had no outstanding loans falling within the category of large risks pursuant to supervisory regulations (loans of more than 10% of the regulatory capital). 43

44 MANAGEMENT PERFORMANCE IN THE PERIOD - ANALYSIS OF THE MAIN INCOME STATEMENT AGGREGATES RECLASSIFIED CONSOLIDATED INCOME STATEMENT (in thousands of EUR) ITEMS % change Interest margin 445, , % Net fee and commission income 192, , % Dividends and similar income 1,653 1, % Income from investments in associates and companies subject to joint control carried at equity (1) Net profit/loss on trading, hedges, disposal or repurchase activities 13,305 13, % 10,777 25, % Other operating expenses/income (4) 13,737 15, % Operating income 678, , % Personnel expenses -236, , % Other administrative expenses(2) -131, , % Net adjustments to/recoveries on property, plant and equipment and intangible assets (3) -29,450-31, % Operating costs -397, , % Net income from banking activities 280, , % Net losses/recoveries on impairment of other financial assets -75,127-58, % Net provisions for risks and charges -6,465-8, % Goodwill impairment -1, Profit (losses) on disposal of investments in associates and companies subject to joint control % Income (loss) before tax from continuing operations 198, , % Taxes on income from continuing operations -96,259-69, % Income after tax from continuing operations 102,114 80, % Income (loss) after tax from discontinued operations 0 1, % Minority interests -16,341-12, % Net income for the period 85,773 68, % (1) Profits from investments carried at equity include profits/losses on investments carried at equity included in item 240 Profits(losses) on investments in associates and companies subject to joint control"; the residual amount of this item is included in profits (loss) from disposal of investments in item 270 "Profits(losses) on disposal of investments ; (2) Other administrative expenses include tax and other recoveries recognised to item 220 Other operating expenses/income (EUR 38,603 thousand in 2007 and EUR 35,119 thousand in 2006); (3) Net adjustments to/recoveries on property, plant and equipment include items 200 Net losses/recoveries on property, plant and equipment, 210 Net losses/recoveries on intangible assets and depreciation on costs incurred for leasehold improvements included under item 220 Other operating expenses/income (EUR 5,997 thousand in 2007 and EUR 5,806 thousand in 2006); (4) Other expenses and income correspond to item 220 Other operating expenses/income net of the above reclassifications. 44

45 CONSOLIDATED ECONOMIC RESULTS Interest margin The growth in volumes traded brought the interest margin to EUR 446 million, an increase of 28.4% compared to EUR million in the previous year. Interest income reached EUR 842 million (+40%), while interest expense stood at EUR 396 million (+55.9%). The percentage ratio between the interest margin and net interest and other banking income stood at 65.7%, against 58.5% in the previous year. Interest margin EUR/millions % in thousands of EUR 2003 (*) 2004 (*) Interest margin 250, , , , ,974 Total average assets 9,835,284 10,825,958 12,288,327 13,941,546 16,064,857 Interest margin / Total assets 2.55 % 2.47% 2.42% 2.49% 2.78% (*) Net profit was not recalculated, in accordance with IAS/IFRS international accounting standards. Performance of the interest margin / total average assets 2,90% 2,80% 2,70% 2,60% 2,50% 2,40% 2,30% 2,20%

46 Net fee and commission income Net fee and commission income, EUR million compared to the EUR million of the previous year, recorded a 1.3% increase and represents a 28.4% contribution to total operating income. The following table illustrates the main types of fee and commission income, which totalled EUR million, compared to EUR 208 million in the previous year (+1.8%). Fee and commission income (in thousands of EUR) % change Financial brokerage 67,356 68, % Guarantees given 6,979 6, % Collection and payment services 45,349 47, % Current accounts and deposits 46,866 45, % Lending 29,156 26, % Tax collection services 3, % Other transactions 12,402 13, % Total fee and commission income 211, , % Net profit (loss) from trading, hedges, disposal or repurchase activities In 2007, net profit (loss) from trading amounted to EUR 10.8 million, compared to EUR 25.9 million in 2006, a decrease of 58.3%. Separating the figure shows that part of the decrease was due to profits, in 2006, from the sale of share investments classified to the Available for sale portfolio. With reference to the trading book results, the Group banks significantly reduced the amount of SICAV units held. Their replacement with bonds led to the inclusion of part of the returns on securities under interest. Also of note is the lower result achieved for the trading book with regard to the valuation component. Operating income In 2007, total operating income was EUR million, an increase of 14.3% compared to the EUR million in Operating income % EUR/millions

47 This figure confirms the Group s ability to continuously increase the profitability of its traditional banking operations. Value adjustments for impairment of loans and other financial assets Net value adjustments to loans and other financial assets essentially attributable to write downs of the Group loans portfolio amounted to EUR 75.1 million, compared to EUR 58.1 million in the previous year (+29.3%). The increase is linked to policies implemented during the period to maintain high coverage ratios on problem loans. Operating costs In 2007, operating costs the sum of personnel expenses, other administrative expenses, net value adjustments on property, plant, equipment and intangible assets, and depreciation of costs incurred for leasehold improvements, adjusted for tax and other recoveries totalled EUR million, increasing by 5.4% over the 2006 figure (EUR million). Specifically, personnel expenses increased from EUR 223 million to EUR million (+5.9%); other administrative expenses amounted to EUR million, an increase of 6.8% on the previous year. Value adjustments to tangible and intangible assets amounted to EUR 29.4 million, a decrease of 5.1% compared to EUR 31 million in The cost/income ratio the ratio of operating costs to operating income - therefore stood at 58.6%, compared to 63.6% in the previous year. This confirms the progressive improvement achieved through policy concerning the careful control of operating expenses and the expansion of profit margins. Net income from banking activities Consolidated net income from banking activities, which represents the total of operating income and expenses, reached EUR million, an increase of 30% over the EUR million of the previous year. Gross income before tax from continuing operations Due to the results indicated above, the consolidated gross operating result from continuing operations amounted to EUR million, compared to EUR 150 million in the previous year, an increase of 32.2%. Net income (loss) for the period After income tax of EUR 96.3 million (+38.6%) and minority interests of EUR 16.3 million (+30.6%), the net income for the period was EUR 85.8 million, a 25% increase on the 2006 figure of EUR 68.6 million. Consolidated return on equity ROE (the ratio of net profit for the year and average shareholders' equity, excluding net profit for the period) stands at 7.45%, an increase compared to 9.07% in

48 STRATEGIC PLAN OBJECTIVES AND RESULTS FOR THE PERIOD During 2007 the Parent Company Board of Directors approved the Strategic Plan for the Group, which establishes lines of growth in continuity with and consistent with the previous Plan and the system of values deriving from its nature as a cooperative bank on which Credito Valtellinese operations are centred. The Plan outlines strategies to further improve market and commercial performance, the efficiency and profit profile, enhance the commercial product mix and reinforce the internal audit system. To achieve these objectives, operating policies and tasks are identified to further enhance human resources excellence, efficiency and flexibility of the organisational models and IT system governance. With regard to growth objectives, two guidelines are identified, to be followed in parallel: internal line development by territorial expansion concentrated mainly in the northern and central areas of Italy, in those already covered and adjacent areas, maintaining the principle of no geographical overlap between the individual retail banks. As already indicated in last year s report, during the four-year period , 95 new branches are planned, with the objective of expanding the operational network to 500 branches by Growth by external lines will continue according to the plans previously implemented, with integration of other banks into the Group, and the stipulation of partnership agreements, also related to the purchase of minority shares in banking and/or financial companies. In terms of products, the range of services targeted to businesses will be expanded, with specific emphasis on the foreign segment and non-life insurance. With regard to private customers, the main objective is to round out the range of products and services in the consumer credit sector. The Plan also outlines a series of initiatives to improve the branch and Group organisational models, to constantly adapt to the modus operandi of changing customer needs, commencing with the strengths that distinguish Creval operations. A key factor in pursuing all these objectives is the full implementation of the equity reinforcement approved by the Credito Valtellinese shareholders meeting on 10 February 2008 described in detail in the separate report on operations which aims to: support business development projects, adequately monitor bankingrelated risks and comply in full with the requirements of supervisory regulations. For ambitious economic efficiency objectives have been set with a reduction in the cost/income ratio by over 10 percentage points and returns on shareholders equity with a gradual improvement in return on equity (ROE), up to around 10% in 2010, possibly through a further significant increase in balance sheet aggregates (increase in the gross banking product the sum of direct deposits, indirect deposits and loans to customers to over 54 billion by 2010, with a compound annual growth rate (CAGR) of approximately 12%). *** In the period in question the Group implemented operating policies to pursue the strategic objectives set by the Plan, particularly with regard to internal line expansion with the opening of 21 branches that led to increased coverage of Lombardia, Rome and a sizeable growth in the Veneto region market and external line expansion the purchase of 35 branches from the Intesa Sanpaolo Group followed in the first few months of 2008 by the launch of a new retail bank, Credito Piemontese, and the signing of an important agreement with Banca Tercas, a bank with around 100 branches mainly in the Abruzzo and Marche regions, characterised by a market approach and founding principles similar to those of Creval. In terms of products, based on the opportunities identified, a new and specific organisational segment was created the Foreign Business Unit with the aim of coordinating and managing the Group s strategic model for foreign services and the signing of a new bancassurance agreement to expand the product range, particularly non-life insurance, characterised by significant business opportunities and premium increase rates. Specific projects were also launched to improve branch layout and structure, and to increase Group IT system efficiency by upgrading to the latest generation IT technology. 48

49 The successful conclusion in July 2007 of the Credito Valtellinese share capital increase against payment for a total in the region of EUR 535 million was vital in supporting important investments necessary for external development and the opening of new branches. The exercise period for conversion of Credito Valtellinese S.c Warrants for around 21 million is due to be launched in the near future and will be another important step in consolidating the equity profile and financial leverage of the Group. To summarise, in 2007 all Group departments and collaborators were strongly involved in achieving strategic projects and the efficiency and profit objectives of the Plan. With the commitment of all personnel it was possible as illustrated in previous paragraphs to achieve a consistent improvement in the Creval Group s financial results, specifically a net consolidated income of EUR 85.8 million, a cost/income ratio of 58.6% and a ROE of 7.45%, in line with forecasts. STRATEGIC OBJECTIVES ACTION TAKEN IN 2007 INTERNAL LINE DEVELOPMENT EXTERNAL LINE DEVELOPMENT OPENING OF 21 BRANCHES AND 2008/2009 TERRITORIAL DEVELOPMENT PLAN FOR 52 NEW BRANCHES AUTHORISED PURCHASE OF INTESA SANPAOLO BRANCHES AND AGREEMENT WITH BANCA TERCAS PRODUCT RANGE EXPANSION FOREIGN DEVELOPMENT PLAN AND NEW PRODUCTS (household and business loans) EQUITY ENHANCEMENT CREDITO VALTELLINESE SHARE CAPITAL INCR INCREASE OF EUR 535 MILLION MANAGEMENT EFFICIENCY 58.6% COST-INCOME RATIO (- 5 percentage points in the period) PROFITABILITY CONSOLIDATED NET INCOME EUR 85.8 MILLION 7.45% RETURN ON EQUITY 49

50 ANALYSIS OF RESULTS AND OPERATIONS BY BUSINESS SEGMENT Whereas the previous section of the report referred to the main equity and economic results achieved by the Creval Group in 2007, the following section concentrates on a breakdown of the global results by business segment. It should first of all be mentioned that the international accounting standards (IAS 14) introduced a new section D to the Notes to the Financial Statements on Segment reporting, containing an analysis of the financial performance in terms of the type of products and services offered by the Group and the geographic areas in which it operates. This information offers those using the financial statements a more detailed analysis of corporate results, allowing a more accurate assessment of risks and profitability and, overall, providing more in-depth information about the company s various areas of business. In line with its vocation as a cooperative Group mainly targeted to retail customers households, SMEs, trades, professionals and non-profit making organisations and based on current regulations on segment reporting, the Creval Group has identified the segment as its main approach to analysing financial performance. Consistent with its organisational and corporate structure, and taking into account the set of products and services placed with customers, the overall Group business can be broken down into three significant segments: retail banking, asset management and corporate center. Business segments Figures in thousands of EUR INCOME STATEMENT DATA Net interest and other banking income Net income from banking activities Income (loss) before tax from continuing operations Retail banking Asset management Corporate center Consolidated % change % change % change % change 573, , % 29,876 27, % 47,750 30, % 651, , % 500, , % 29,876 27, % 45,700 30, % 575, , % 181, , % 26,020 24, % -9,086-13, % 198, , % BALANCE DATA SHEET Loans to customers 13,629,004 11,314, % % 124, , % 13,754,333 11,445, % Direct collections 13,708,656 12,073, % ,708,656 12,073, % - Due to customers 9,858,921 9,096, % ,858,921 9,096, % - Securities issued 3,849,735 2,977, % ,849,735 2,977, % Indirect collections 12,137,335 12,370, % ,137,335 12,370, % ORGANISATIONAL DATA Personnel 2,964 2, % % % 3,479 3, % 50

51 Breakdown of net interest and other banking income by segment as at 31/12/2007 RETAIL BANKING Retail banking which includes the lending, investment and transfer product and services mix offered to the Group s retail customers forms the core business and is a determining factor in achieving the consolidated results. The income statement and balance sheet aggregates for the segment essentially refer to the Group s retail banks and companies (Credito Valtellinese, Credito Artigiano, Credito Siciliano, Banca dell Artigianato e dell Industria, Bancaperta, Mediocreval, Creset, Aperta Fiduciaria), responsible for monitoring the reference markets and pursuing the commercial targets. In 2007, retail banking generated net interest and other banking income of EUR million, 13.3% up on the previous year. This segment contributed 88.1% to consolidated net interest and other banking income (89.7% in 2006), a figure confirming the segment s central role in the overall economy and strategies of the Creval Group. Changes in the interest margin were significant, increasing by 19.5% over the previous period as a result of a marked increase in volumes and a policy of caution in the treatment of income interest and expense. Taking into account operating costs recorded as EUR million, the 3.0% increase mainly due to the effect of the increase in workforce and general costs incurred for expansion of the territorial network income before tax from continuing operations reached EUR million (+30.2%). With regard to the balance sheet figures, it should be mentioned that total deposits increased by 5.7% and totalled EUR 25,846.0 million. Loans to customers also recorded significant progress (+20.5%), increasing from EUR 11,314.9 million to EUR 13,629.0 million. As at the end of the period, the Group operates in the retail banking sector through a commercial network of 389 branches, compared with 368 at the end of Human resources employed in this sector total 2,964, representing 85.2% of the Group workforce. In achieving the above-mentioned results, equally intense contributions from the retail banks and companies demonstrate that the efforts of their personnel are strongly cohesive and motivated with regard to the Creval Group s strategic objectives. Following an analysis of the breakdown and key characteristics of the Group s customer base, the next paragraph will discuss the more significant market-related events. 51

52 Business segments Figures in millions of EUR Retail banking % change INCOME STATEMENT DATA Net interest and other banking income % Income (loss) before tax from continuing operations % BALANCE SHEET DATA Loans to customers 13, , % Total deposits 25, , % Gross banking product 39, , % ORGANISATIONAL DATA Personnel 2,964 2, % Branches % Customer base and commercial performance indicators If the financial capital is adequately represented in the balance sheet data, then the intellectual capital (according to economic theory developed from the structural capital, relational capital and human capital, i.e. intangible assets ) is not immediately perceived from a pure, clinical analysis of the accounting results of a given period. Relational capital in particular the product of relations with stakeholders, customers, suppliers, the local community, institutions and so on contributes significantly to the consolidation and increase of the intangible value of the Bank The wealth intrinsic to retail operations lies in the customer base, i.e. relations with Group customers, based on which is the corporate approach to creating long-term value. As at 31 December 2007 the Group s customers 11 numbered 682,689, a 3.5% increase over the 659,882 for 2006, confirming the Group s capacity to attract new customer relations in the areas of new or recent branch openings, and to maintain its customer base in its provinces of origin. 682, , % Number of Group customers 11 Customers are intended as all parties with at least one active account with the Creval Group. 52

53 Customer relations are spread throughout the four territorial banks: Credito Valtellinese (30%), Credito Artigiano (30%), Credito Siciliano (38%), Banca dell Artigianato e dell Industria (2%). CREDITO SICILIANO 38% CREDITO VALTELLINESE 30% BAI 2% CREDITO ARTIGIANO 30% Breakdown of Group customers as at 31/12/2007 by bank The breakdown of customers by geographical area confirms the stronger traditional presence of the Group in northern and central areas of Italy (60.6% of total customers). However, the component representing Southern Italy and the islands, with 38.7%, represents and important share of the overall Creval customer base. ABROAD 0.7% SOUTHERN ITALY AND THE ISLANDS 38.7% NOTHERN ITALY 53.7% CENTRAL AREAS 7.0% Breakdown of Group customers as at 31/12/2007 by area of residence In line with the traditional Creval Group approach to the market, retail customers are mainly private (81%) and business (16%), whereas Public Authorities and other categories account for the remaining 3%. 53

54 PUB. AUTHORITIES AND OTHER 3% BUSINESSES 16% PRIVATE 81% Breakdown of Group customers as at 31/12/2007 by segment As confirmation of the territorial origins that distinguish Creval Group operations, the retention rate the percentage of active customers at the start of the year still holding accounts with the Group at year-end has remained high over the year, with a final figure for 2007 of 94.4%, a clear sign of a generally good level of customer satisfaction. 96% 95% 92% 93% CREDITO VALTELLINESE CREDITO ARTIGIANO BAI CREDITO SICILIANO Retention rate of Group banks as at 31/12/2007 The acquisition rate calculated as the ratio between the number of customers acquired in the year and the number at the start of the year was 10% as at the end of 2007, in line with development plans for the Group s commercial operations. 54

55 New Customers 2007 Acquisition Rate CREDITO VALTELLINESE 15,077 8% CREDITO ARTIGIANO 21,688 11% BAI 3,562 36% CREDITO SICILIANO 28,137 11% GROUP 68,464 10% Lastly, from an analysis of the cross-selling figures an increase by 3.18 products on average per customer emerges for the Group, compared with 3.21 at the end of 2007, with a 0.7% variation over the two periods. 3,72 3,54 3,69 2,53 CREDITO VALTELLINESE CREDITO ARTIGIANO BAI CREDITO SICILIANO Cross-selling for Group Banks as at 31/12/2007 Management performance and operations of the retail banks and companies CREDITO VALTELLINESE. During the period, the Parent Company reached important growth targets in volumes traded with total deposits increasing by 9.3% and loans to customers by 16.5% - as a result of expansion of the branch network and the increased customer base. In this respect the Bank achieved significant profitability levels, with income before tax from continuing operations of EUR 96 million (+40.6%) mainly from developments in the interest margin (whilst the fees and commissions component was affected by the unfavourable financial market performance), and recorded a net income of EUR 64 million (+32.2%). HIGHLIGHTS FOR CREDITO VALTELLINESE (in thousands of EUR) % INCOME (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 95,890 68, % NET INCOME 63,603 48, % TOTAL DEPOSITS 10,356,780 9,480, % LOANS TO CUSTOMERS 5,459,677 4,685, % GROSS BANKING PRODUCT 15,816,457 14,165, % EMPLOYEES % BRANCHES % 55

56 As at 31 December 2007 the Parent Company territorial network comprised 112 branches. In the period in question, the Bank opened the new Dalmine, Clusone, Lovere and Calcinate branches in Bergamo province increasing its presence in the province considerably, Alzate Brianza branch in Como and the new Verbania offices by Lake Maggiore. The Bank s workforce numbers 822 (+5.0%). In the latter part of 2007, the Parent Company was affected by important organisational changes implemented from the beginning of 2008 in certain company departments specifically involved in internal audit, details of which are provided in the chapter on Group internal audit. CREDITO ARTIGIANO. In 2007, this subsidiary considerably increased its Gross Banking Product from EUR 13,498 million to EUR 15,232 million, +12.8% - through a balanced growth in total deposits (+10.5%) and loans to customers (+18.0%). By focusing company policy on expanding volumes, thorough control over operating expenses and commercial terms applied to customers, economic margins increased more than proportionally to the increase in total trading. Income before tax from continuing operations increased from EUR 59 million to EUR 75 million (+27.2%), whilst net income recorded a 22.9% increase, closing at EUR 42 million. HIGHLIGHTS FOR CREDITO ARTIGIANO (in thousands of EUR) % INCOME (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 74,687 58, % NET INCOME 41,915 34, % TOTAL DEPOSITS 10,220,181 9,251, % LOANS TO CUSTOMERS 5,012,320 4,246, % GROSS BANKING PRODUCT 15,232,501 13,498, % EMPLOYEES % BRANCHES % In 2007 the commercial structure of Credito Artigiano expanded by 12 new branches: the Milan 24, Arese and Gorgonzola branches in the Milan area; the offices in Pavia and the Voghera branch for that province; Rome branches 16, 17, 18 and 19 and Grottaferrata in the Lazio region. The Novara and Lucca branches were also opened. At the end of the period, Credito Artigiano had 117 branches, with a growing coverage of the banking market in the cities of Milan and Rome, with a significant presence in Tuscany. The number of Credito Artigiano employees as at 31 December 2007 was 965, increasing from 874 as at the end of During the year the Bank approved the outlines for the Industrial Plan which, consistent with the Credito Valtellinese Group Strategic Plan, include growth strategies for the next four years based on two main development paths: - internal line growth, through the opening of new branches and the aim of consolidating the Bank s presence in its original provinces particularly Rome and gradual expansion of the distribution network to new operating environments; - external line growth, through the purchase of 12 branches in Pavia province to be sold by Intesa Sanpaolo, with the aim of rapidly becoming the reference bank for Pavia area households and SMEs. To achieve these objectives with adequate capitalisation, Credito Artigiano has launched an equity building operation approved by the extraordinary shareholders meeting on 20 December CREDITO SICILIANO. In the period in question, this subsidiary achieved a strong performance, increasing its Gross Banking Product (+10.2% compared to 31 December 2006) and profitability, which reached levels similar to the Creval Group average. In detail, income before tax from continuing operations increased by EUR 18 million to EUR 24 million, up 30.9%. Five years after the launch of the bank, net income close to zero at the end of 2002, Credito Siciliano s first year of business the consistent amount of EUR 9.7 million was recorded (+23.6% compared to 2006). 56

57 HIGHLIGHTS FOR CREDITO SICILIANO (in thousands of EUR) % INCOME (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 23,918 18, % NET INCOME 9,679 7, % TOTAL DEPOSITS 3,971,624 3,763, % LOANS TO CUSTOMERS 2,204,198 1,838, % GROSS BANKING PRODUCT 6,175,822 5,602, % EMPLOYEES % BRANCHES With the aim of further optimising commercial operations results by rationalisation of the territorial network, in 2007 the Pozzallo (Ragusa) and Canicattì (Agrigento) branches opened, whilst the Resuttano (Caltanissetta) and Gagliano Castelferrato (Enna) branches were closed. The Bank s operating network as at 31 December 2007 included 136 branches spread throughout the Sicilian provinces. The Bank s workforce numbers 806 (-4.7%). BANCA DELL ARTIGIANATO E DELL INDUSTRIA. BAI closed 2007 with positive results, essentially as forecast in the Veneto Project, approved in 2004 and defining strong development objectives for the Bank in the Veneto market and consolidation of its presence in the Brescia area. In 2007, the Gross Banking Product increased by 45.9%, closing 2007 at EUR 1,394 million. Considerable changes were recorded in total deposits (+53.5%) and loans to customers (+38.5%). Net income before tax from continuing operations totalled EUR 3 million (+95.1%), whilst net income was EUR 0.3 million, increasing by 97.7%. HIGHLIGHTS FOR BAI (in thousands of EUR) % INCOME (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 2,544 1, % NET INCOME % TOTAL DEPOSITS 725, , % LOANS TO CUSTOMERS 668, , % GROSS BANKING PRODUCT 1,393, , % EMPLOYEES % BRANCHES % During the period, the Bank opened 3 new branches: Padua, Cittadella (Pordenone) and Lonigo (Vicenza) which brought the total number of branches to 24, 11 of which are in Brescia province and 13 in Veneto. Two years after the launch of the above-mentioned Veneto Project, in 2007 the BAI Board of Directors performed extensive verification of the results achieved in comparison with forecasts formulated in the Industrial Plan. The subsidiary s Board of Directors acknowledged the intense commercial and operations development of the Bank with the launch of 16 new branches since the Plan was approved yet keeping risk levels within inherent, controlled limits. Full and essential use was made of production methodologies and systems provided by the Group s specialised companies. An important factor was the effort behind the cultural and operational integration of the acquired human resources, often from other banks and new to the logistics and operating methods of the Creval Group. On conclusion of the verification, the mission and growth profile of the Bank was reconfirmed in full, geared towards developing the Group s presence in the Veneto region and maintaining its efficiency in Brescia province. 57

58 Creval Group branches by region, with related branch shares of the market as at 31/12/

59 BANK PROVINCE NO. BRANCHES BRANCH SHARE Credito Valtellinese Sondrio % Como % Lecco % Bergamo % Varese % Verbano Cusio Ossola 1 1.2% Total branches 112 Credito Artigiano Milan 55 Monza and Brianza % Novara 1 0.5% Pavia 3 0.9% Florence 8 1.2% Prato 2 1.4% Pistoia 1 0.5% Lucca 1 0.4% Rome % Total branches 117 Banca dell'artigianato e dell'industria Vicenza 7 1.1% Verona 4 0.6% Padua 2 0.3% Brescia % Total branches 24 Credito Siciliano Agrigento 3 1.8% Caltanissetta 8 8.2% Catania % Enna 2 3.0% Messina % Palermo % Ragusa 9 7.4% Siracusa 6 4.8% Trapani % Total branches 136 TOTAL GROUP BRANCHES % Branches and branch shares by bank and province as at 31/12/2007 MEDIOCREVAL. The Company was affected by significant organisational changes related to implementation of the Group s reorganisation of the credit business to focus Mediocreval s mission on the allocation and management of medium/long-term loans and to certain proposals for organisational change approved by the Parent Company Board of Directors. In detail, during the period the dispute management departments were transferred to Finanziaria San Giacomo, in line with Supervisory Authority requirements, located within the Group Credit Division of the Parent Company. In addition, the legal duties previously performed by Mediocreval were centralised into Deltas, in which the Group s Legal Division was therefore established. A similar unification involved the Credit Risk Management Department, merged into the Group s Risk Management Division. A complete illustration of these organisational changes and underlying implementation logistics is included in the chapter on corporate center operations, to which reference should be made for further details. 59

60 Mediocreval s current organisation is therefore completely targeted to the allocation and management of medium/long-term credit at central level for the entire Group, to the corporate and specialised finance services segment and to handling servicing operations in the leasing sector for all the retail banks. From a management performance point of view, in 2007 Mediocreval allocated credit of over EUR 217 million 12, recording total loans to customers of EUR 322 million as at the end of 2007, a strong increase compared to the EUR 125 million as at 31 December The business model adopted in the special credit sector involving a high level of cooperation with the other retail banks, which maintain commercial customer relations and involve Mediocreval as the specialised operator for specific financing led to the generation of an adequate degree of profitability with net income of EUR 1 million (+13.2% compared to the 2006 figure). HIGHLIGHTS FOR MEDIOCREVAL (in thousands of EUR) % INCOME (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 2,874 2, % NET INCOME 1,182 1, % LOANS TO CUSTOMERS 321, , % EMPLOYEES % In order to fortify equity to support the Bank s credit business, 2007 saw the implementation of the second and last tranche of the share capital increase approved by the Bank s extraordinary shareholders meeting in December 2005, for a total of EUR 22,032,000, of which EUR 11,016,000 as share capital and 11,016,000 as premium. At the end of the offer period (7 December 2007) all 3,672,000 of the new shares with a par value of EUR 6 each had been subscribed. Mediocreval s share capital therefore increased from EUR 44,064,000 to EUR 55,080,000, divided into 18,360,000 shares with a par value of EUR 3 each. BANCAPERTA AND THE GROUP S FINANCIAL CENTRE. With regard to retail banking, a vital role is played by Bancaperta, the financial centre responsible for financial and insurance market developments, operations in the property finance sector, management of payment systems, e-money systems and Internet banking. In addition, Bancaperta supervises the management of processes and functional operations with regard to customer investment services, coordinates Group developments in the foreign segment, provides specialist support and consulting to the territorial network, oversees the bancassurance segment and manages insurance coverage of internal risk. In 2007 the company achieved a net income from banking activities of EUR 16 million, an increase of 3.6% compared to Net income totalled EUR 12 million, up 25.3% on the previous year. Financial assets held for trading mainly short-term floating rate or fixed rate bonds, centrally managed by Bancaperta totalled EUR 1,249 million compared with EUR 1,070 million at the end of HIGHLIGHTS FOR BANCAPERTA (in thousands of EUR) % INCOME (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 18,612 15, % NET INCOME 11,986 9, % TOTAL DEPOSITS 1,947,837 2,131, % FINANCIAL ASSETS HELD FOR TRADING 1,249,405 1,069, % EMPLOYEES % With regard to projects and operations covered by Bancaperta, it should be emphasised that in the period in question, payment and e-money systems were characterised by intense efforts in preparation for the 1 January 2008 entry into force of the Single Euro Payments Area (SEPA), launched in 2002 as European banking industry initiative when the European Payments Council (EPC) was founded and defining new standards, rules and procedures for payments in Euro. This initiative strongly backed by the Eurosystem (European Central Bank and national central banks in the Eurozone) and the European Commission aims to eliminate differences on smaller amounts in the European payment services markets. As of 1 January 2002 payments could be made in Euro as the single currency in Eurozone countries, but payments by means 12 Mortgages, unsecured loans and pool financing. 60

61 other than cash between EU member states remained complicated and expensive because each country tended to maintain its own standards. The SEPA aims to transform single retail payment systems into a single European system involving 31 countries the 15 Euro-based member states, the 12 countries that use a currency other than the Euro but which make payments in Euro, together with Iceland, Norway, Switzerland and Liechtenstein in which all transactions are considered domestic, no longer distinguishing between national and cross-border payments. As of 2008 all operators can make and receive payments in Euro either within or beyond the borders of a given country on just one account, a set of harmonised payment tools, under the same basic terms and with the same rights and obligations. Countries introducing the SEPA In the above-mentioned framework, as of 28 January 2008 Group customers can make use of the new SEPA bank transfer service, a payment instrument allowing payments in Euro to accounts located in the SEPA area. This allows non-urgent payments in Euro, with no limit to the amount, with a pre-established clearance of 3 days. Specifically, European operators are accessed via the Seceti ACH (Automated Clearing House), which holds an authoritative position in the European payments market as discussed in more detail in the chapter on strategic investment management. Given this change of scenario, the national banking coordinates are replaced with European coordinates (the IBAN, International Bank Account Number) which uniquely identifies the account of any customer at any bank. Customers were notified of this new operating method through a specific information campaign and special support operations (Electronic Archive Alignment). Lastly, it should be mentioned that since 2012 the maximum completion time for European bank transfers will be further reduced by 1 day, in line with provisions of the Directive on payment services (2007/64/EC issued by the European Parliament and Council on 13 November 2007). 61

62 IN DETAIL SEPA International ATM smart card On 1 February 2008 the Group s retail banks launched the issue of the first batch of international ATM smart cards. Customers included in phase one of the replacement notified in advance are the holders of international ATM cards with a magnetic strip who have not yet subscribed to one of the Linea Armonia account packages. The new card features: - a microchip to guarantee a higher degree of security, reducing the risk of cloning; - new graphics, on the front bearing the: name and surname of the holder, card ID number and expiry date (5 years); - set limits (without distinction between withdrawals and POS use) of EUR 1,500 or EUR 3,000. With regard to payment cards, a gradual launch of SEPA-compliant products is planned, characterised by the stronger security offered by microchip technology and ease-ofuse. More specifically, with a view to ongoing development of payment instruments available to customers and to further SEPA innovations, action has been planned to gradually replace national and international ATM cards held by the customers. It is expected that full migration from the old cards will be completed by At system level, savings deriving from introduction of the SEPA are forecast to be around EUR 20 billion in six years. These benefits will be achieved mainly through the banking system, which has reviewed and will continue to review its own operating systems and processes to bring them fully in line with the new measures. In this context, the Creval Group has made significant investments to make production processes more efficient, to improve levels of service and to reduce transfer charges for customers. During the year, Bancaperta also began preliminary activities for implementation of the European Central Bank s new gross settlement system, TARGET2 (Trans-Automated Real-time Gross Settlement Express Transfer) guidelines for which were approved in October 2002 by the ECB s Executive Council due to be launched in May The new system meets the banking sector s needs for advanced, harmonised services, specifically to manage cash flows, European Union and Eurosystem requirements, the search for higher levels of efficiency by means of advanced technology and new situations in terms of business continuity. TARGET2 is characterised by a considerable technical centralisation, achieved through a single platform shared by participating central banks, yet allows individual central banks to maintain relations with their respective national banking communities. With regard to both SEPA and TARGET2, Bancaperta is a direct member, also acting on behalf of the other banks in the Group. With reference to the Foreign Development Plan one of the key factors of the Creval Group s Strategic Plan to update the range of services to customers operating in international markets, it should be emphasised that during the year a new, dedicated organisational department the Foreign Business Unit was established as part of Bancaperta with the aim of coordinating management of the strategic model for Group foreign services, relations with important external departments on matters of foreign trade and support to the territorial networks on this topic. The new department also takes care of personnel training in foreign business and the dissemination of foreign business thinking within Creval. Consistent with the above profile, the new organisational setup of the Group s foreign business was redefined. The Sales Department Manager was designated as reference contact in terms of organisation, acting as foreign contact for the Bank and, as such, coordinates operations in the various territorial areas. With reference to insurance, in implementation of ISVAP Regulation no. 5 of 16 October 2006, in the first few months of the period Bancaperta planned and coordinated adaptation as required for insurance intermediation operations in the light of new regulatory measures, in particular arranging entry of the Group s retail banks in the new Electronic Register of Insurance and Reinsurance Intermediaries in operation since 1 February 2007 and contributing in collaboration with associated company Global Assicurazioni S.p.A. to the redefinition of contract documentation and the structuring of training on the new regulations for all personnel responsible for life and non-life insurance product distribution. 62

63 PROJECT FOR THE INTEGRATION OF BRANCHES ACQUIRED FROM INTESA SANPAOLO CREDITO PIEMONTESE. With regard to internal growth, the Creval Group's current Strategic Plan envisages bringing the number of territorial banks in Italy to five through use of the Creval Banking licence. The new territorial bank will be responsible for developing the Group s presence in areas that will not be covered by the parent company Credito Valtellinese. The Strategic Plan therefore programmes the launch of a new bank to supervise and coordinate operational growth of the group in new areas of expansion, particularly Piemonte, a region similar in terms of economy and production to provinces in which the Creval Group currently operates. Given these strategic objectives, the Creval Group participated in the Intesa Sanpaolo (ISP) Group s sale of 198 branches, organised in accordance with the Antitrust Authority for competition and the market (AGCM) resolution of 20 December 2006 which authorised the merger between Banca Intesa S.p.A. and Sanpaolo IMI S.p.A. subject to the implementation of certain antitrust measures. In order to significantly increase the award options for a quota of the branches for sale by ISP, the Parent Company Board of Directors decided that the Bank should participate in a consortium composed of Banca Carige, Veneto Banca and Banca Popolare di Bari. On conclusion of the procedure, ISP accepted the consortium offer and on 5 October 2007 the preliminary agreement was formalised for transfer of the branches, signed by Credito Valtellinese in reference to the purchase of 35 branches in Piemonte (23) - of which 10 in Torino, 9 in Torino province and 4 in Alessandria for the new Piemonte region retail bank, and 12 in Pavia under the responsibility of Credito Artigiano. The transaction was closed on 21 February and took effect from 25 February From an analysis of the equity values of the branches acquired by the Group, there is a strong incidence of indirect deposits on the total, the result of ISP s commercial business focused on the distribution of life insurance and asset management products in more recent years. In terms of indirect funding, the savings managed represent less than half of the total, whereas the incidence of asset management and insurance deposits, as already stated, is highly significant. From an assets point of view, medium/long-term loans mainly home mortgages represent over 80% of the total. In this sector there are no doubtful loans, whereas the past due and/or overdue exposures and substandard loans are of limited extent. The acquired branches cover a customer base of over 60,000 in the Family, Affluent and Small Business segments. The total workforce numbers over 200. HIGHLIGHTS FOR INTESA SANPAOLO BRANCHES as at 30/06/2007 (in millions of EUR) PAVIA PIEMONTE TOTAL TOTAL DEPOSITS 860 1,430 2,290 CUSTOMER LOANS INCOME (LOSS) BEFORE TAX CUSTOMERS 20,000 46,000 66,000 EMPLOYEES The provisional purchase price of EUR million for the company branch, already paid to the counterparty, will be adjusted if necessary after the signing of the final agreement completed by Credito Artigiano and Credito Piemontese on 21 February 2008 in accordance with contractual provisions if there should prove to be a considerable difference between the total deposits estimated by ISP at the end of 2007 and actual total deposits as at the date of the agreement. The transfer price coincides with goodwill for the company branches, equal to 16.2% of estimated deposits, essentially in line with the values for comparable transactions branch transfers completed recently on the Italian banking market. The transaction concerned complies fully with the logistics of the Strategic Plan in that its aim is the launch and success of a new bank in the Piemonte banking market, with strong roots and a customer target based mainly on families, SME, trades, authorities and non-profit making organisations, in line with Creval Group profile and guiding principles, and development of a strong competitive position of Credito Artigiano in the Pavia area 63

64 The operation as a whole, particularly the Piemonte development project, rests on the following success factors: - Profiling of lending business as traditional retail banking according to the Local Bank model, based on the development of deposits and loans and with the aim of increasing operating income. - Focus on and attention to the customer, particularly the corporate segment, by the provision of specialist financial and lending services, by the use of efficient organisational models in the Loans sector and the credit risk management techniques developed by the Group. - Involvement of network personnel in the Group's growth objectives so as to create a maximum level of sharing and motivation in the commercial structure with a view to achieving development as planned. CONCENTRATION ON RETAIL BANKING FOCUS ON THE CORPORATE SEGMENT INVOLVEMENT OF ACQUIRED PERSONNEL LOYAL QUALIFIED PERSONNEL LOYAL RETAIL CUSTOMERS SUPPORT FROM SPECIALISED CREVAL GROUP STRUCTURES Success factors for the project for integration of branches acquired from Intesa Sanpaolo For the implementation of the defined project lines and for financial support of developments, Credito Piemontese - the new name of Creval Banking approved by the Extraordinary Shareholders' Meeting of 20 December 2007 and registered in the Torino Companies Register on 16 January 2008 launched the share capital increase against payment from EUR 15,533,520 to EUR 326,203,920 through allocation of 62,134,080 shares with a par value of EUR 5, with effective date 1 January 2008, offered on option to shareholders at par value in a ratio of 20 new shares for each former share held. The transaction to strengthen capital approved by the extraordinary shareholders meeting of 20 December 2007 ended on 22 February 2008 with the full subscription of all shares offered. The Parent Company participated in the share capital increase for a total of EUR 310 million. The shareholders meeting also approved a number of functional amendments to the articles of association, including the change of name to Credito Piemontese S.p.A. and transfer of the registered office to Torino. 64

65 During 2008 and in future periods, Credito Piemontese activities will target the development of the Creval Group s presence in the Piemonte banking market, extending the commercial network to all provinces in the region, focusing on a preferred customer base of small to medium-sized enterprises, trades, households and non-profit making organisations in the catchment area through strategic growth that places the human element customers and human resources at the centre of its business, in line with the tradition and values that have always distinguished Creval operations. Over the next two years, subject to authorisation from the relevant Supervisory Authorities, new branches will be opened in the major towns and cities of the Piemonte region, so as to extend the new bank s presence to the entire region, with the intention of creating a local bank in the short-term that is well-established in the territory and operates according to company philosophy and banking methods that have led to the Group's success on the market. CRESET SERVIZI TERRITORIALI. The period just ended marked the completion of the first year of business of the Company, dedicated mainly to the delicate and complex start-up phases. The Company was appointed the task of Group-level supervision of the local tax market settlement, assessment and collection of sums for the Local Authorities and treasury and cash management services for public and private companies. As part of the local tax services, concentrated in the provinces of Como and Lecco, as of the end of 2007 Creset manages ICI collection on behalf of 141 municipal authorities with amounts routed of approximately EUR 145 million and collection of TARSU for 165 municipal authorities, for a total collections figure of EUR 73 million. In the treasury and cash management segment, Creset activities in 2007 allowed the Group's retail banks to expand and consolidate their shares of the market in new and recent geographic areas of business. This action involved the reconfirmation of services provided to 47 Authorities including the assignment of treasury services for the Sondrio Municipal Authority for the period and the acquisition of 48 new management agreements, recording a total of 486 Authorities managed at the end of the period (+34). BAI 4 Credito Valtellinese 189 Credito iliano 222 Credito Artigiano 71 Breakdown of treasury and cash management services by bank as at 31/12/

66 other Entities 12% Former municipal-owned companies 4% Territorial Enrities 33% Schools 46% Retirement Homes, Nurseries 5% Breakdown of treasury and cash management services by authority type as at 31/12/2007 Creset closed 2007 with balance sheet assets of EUR 82.4 million (+29%) and net losses of approximately EUR 150,000. APERTA FIDUCIARIA 2007 saw the continued profitable development of Aperta Fiduciaria authorised to provide static fiduciary services by the acquisition of new customers and by providing specialist consulting to the Group s commercial network. The existing fiduciary mandates at the end of the year totalled 132, a net increase of 38 mandates. The total fiduciary deposits managed reached a total of EUR million (+12.40% compared to the end of 2006). The 2007 financial statements closed with net income of around EUR 10,000, compared to approximately EUR 61,000 in the previous period. The territorial development project In observance of the new Bank of Italy instructions which specifically envisage that projects for the opening of new branches are organised with time horizons normally of no more than two years, and after thorough analysis of the market and economic-equity impact by the Group departments and individual retail banks, the Group s territorial development project was drafted, defined on the basis of consistency and continuity with commercial expansion programmes recently adopted for Creval internal line growth policies. In greater detail, the project approved by the Parent Company Board of Directors in July and later authorised by the Supervisory Authority involves the opening of 52 new branches 17 Credito Valtellinese, 21 Credito Artigiano, 12 Banca dell Artigianato e dell Industria and 2 Credito Piemontese, whilst a further reorganisation and streamlining of the network is planned for Credito Siciliano and forms part of the strategies outlined in the current Strategic Plan for the Group, which establishes development of the commercial network primarily in northern and central areas of Italy over the next four years, with around 100 branches to be opened gradually in areas adjacent to those already covered. The founding principle of the Project consists in the proven approach of the Group to rapidly and effectively transfer its organisational models and specific operating methods - focused on the needs of the geographic reference area, on the streamlining of organisational and decision-making processes, and on the capacity to respond quickly to the financial needs of customers - in the new branch locations, often marked by a high level of competition and strong concentration on the credit market, with the aim of reaching break-even point on the investments in no more than months. Changes in the reference regulatory framework for commercial operations During the period, the regulatory framework for retail banking was subject to important changes, especially with regard to the financial services sector with the introduction of MiFID provisions to Italian law, obviously with an impact also on the Asset Management sector, discussed later in this report and the home mortgages segment, with the issue of further provisions on liberalisation and the reduction of costs to the customer. 66

67 MIFID DIRECTIVE AND FINANCIAL SERVICES The Group s operations were strongly pervaded throughout 2007 by the special MiFID (Markets in Financial Instruments Directive) Project, coordinated by the relevant departments of Deltas and Bancaperta on behalf of the group, also active in the Committees and working parties promoted by ABI, to analyse, define and develop internal adaptation as necessary. The new Italian financial instrument market regulations issued in enactment of MiFID entered into force on 2 November 2007 and imposed numerous changes upon the bank and investment firm operating methods for the provision of financial services. It should be emphasised that the MiFID transposition process in Italy, also in consideration of its late enactment at both primary level (Legislative Decree 164/2007, published on 8 October) and secondary level, along with the overlap with rules dictated by Legislative Decree 262/2005, has completely reformed the Italian regulatory framework. The new discipline, transposed through enactment regulations the CONSOB Regulations on intermediaries and markets, joint CONSOB-Bank of Italy Regulation and the Bank of Italy Regulation on minimum capital requirements and cross-border investment firm (SIM) operations, deposit and sub-deposit methods for cash and financial instruments of customers has radically modified the intermediaries provision of services and investment operations by: - abolishing the option for member states to uphold the requirement to concentrate financial instrument trading on regulated markets; - introducing the option to operate in different trading venues; - reinforcing the concept of best execution of an order; - envisaging pre- and post-trading transparency mechanisms to allow competition between the various trading venue options for orders on financial instruments; - based on the Consolidated Law on Finance (Legislative Decree 58/1998) and enactment regulations, introducing and governing investment consulting services, totally new to Italy, which become reserved operations in addition to the existing placement services, order receipt and transmission, own account trading and the execution of orders on financial instruments. Overall, the regulations in question have therefore redesigned investor protection, introducing new and more stringent codes of conduct, as well as dictating an analytical discipline of inducements and conflict of interest. As part of the MiFID Project, with reference to operating and commercial options introduced by the new Directive and the numerous organisational requirements envisaged, it was necessary to substantially change the handling of customer orders, both by Bancaperta and with regard to commercial network operations. Specifically, with reference to intermediation services provided by Bancaperta, an important change in the order execution and transmission strategies was assessed and put into practice at the initial implementation stage, requiring that the Group s banks trade only branded bonds on their own account (as direct counterparty), i.e. those issued by the banks themselves or by other members of the Credito Valtellinese Group, and not admitted for trading on regulated markets or multilateral trading facilities. For all other financial instruments for trading, intermediation instead concentrated once again on the receipt and transmission of orders. On the basis of stringent criteria taken from the new Directive, this decision led to the selection of an external trader to which orders on all other financial instruments are transmitted and which, in compliance with the directive, has the task of execution or transmission - using smart order routing (SOR) - to the trading venue periodically identified as that ensuring the best execution for the customer. This stage, launched in the second half of the period, will be completed in In parallel, organisational solutions for customer rating and assessment of the adequacy and appropriateness of services and products offered to protect the various investor classes (retail, institutional or professional investors) were identified and implemented. In this respect, other than organisational assessment and the technical commitment to IT development by the Group departments concerned, the study and decision-making support, drafting of documentation and contracts performed by the relevant company divisions had a substantial impact. Lastly, it should be mentioned that the commercial impact of the new obligations in terms of inducement along with the commitment required from the Group s territorial networks to adapt all customer contracts and profiling will be particularly significant and will continue throughout the first half of 2008, given the transitional period deadline established by the new regulatory framework (30 June 2008). 67

68 THE BERSANI-BIS DECREE AND MORTGAGE SECTOR OPERATIONS. During the period, the regulatory framework for the home mortgages segment was subject to important innovations. Italian Administrative Order no. 7/2007 the Bersani bis Decree, converted to Law no. 40/2007 in force as of 3 April 2007 in fact contains provisions of great impact on the mortgages sector, the following aspects in particular: - prohibition of penalty clauses for early discharge of mortgages on property; - mortgage portability assumption; - simplification of home mortgage cancellation procedures. The Decree first of all sanctions the ineffectiveness of any agreement, even after stipulation of the agreement, which envisages mortgagee liability for penalty clauses in the event of early discharge. Mortgages stipulated by companies remain exempt from the field of application of the regulations. With regard to this provision, the relevant departments performed a general review of all existing contractual models to eliminate any compensation envisaged in the event of full or partial early discharge of the mortgage. With regard to existing mortgages as at the date of entry into force of the Decree, on the other hand, further to the agreement signed by ABI and the Consumer Associations, the maximum level of penalties for early discharge were established. Based on the above-mentioned agreement, the new provisions were included in the Group s operations and, in addition, printed notices to customers were distributed by all branches. The Decree also covers provisions on mortgage portability 13, intended as an option for a bank to replace the bank originally designated as guarantor in guarantee arrangements linked to a mortgage agreement. In this regulatory framework, ABI later defined an interbank procedure contributing to a better implementation of mortgage portability operations, including maximum reduction criteria in relation to timing, obligations to be fulfilled and related costs. Specifically, ABI proposed a procedure that envisages considerable simplification for the customer, by including all contracts, documents and obligations related to the portability transaction into a single document. This indication was positively assessed and adopted by Credito Valtellinese Group banks in reference to transactions in which the bank is either the original or the assuming bank. In order to facilitate this option, the best methods to allow portability transactions through the stipulation of a "single document" were defined, and costs related to management of the entire procedure were eliminated. Lastly, it should be mentioned that the Decree envisages that a mortgage taken out in guarantee of obligations deriving from a separate mortgage agreement is automatically discharged as of the date of discharge of the guaranteed obligation. Alongside this automation, the Bank is expected to fulfil certain formal obligations to which the Group immediately adapted particularly the issue of a receipt to the debtor confirming discharge of the obligation and online transmission to the custodian of mortgage cancellation notices. Commercial operations profile During the period, commercial operations were characterised by the creation and launch of new products and services to strengthen customer loyalty, constantly based on principles of simplicity and transparency. Special attention was paid to analysis of the demand and recent market changes, identifying customer needs so as to package innovative financial services, characterised by a strong focus on the real needs of customers in the lending, investment and transfer sectors. 13 Specifically, the Decree establishes that: - the doubtful collection of the mortgage or agreement of a term in favour of the debtor shall not preclude exercise by the debtor of the right of assumption pursuant to art of the Civil Code; - in the case of assumption requested by the debtor, the substitute lender shall assume the accessory, personal and real guarantees of the assumed loan; - any agreement that inhibits the debtor from exercise of the right of assumption, or which renders such exercise difficult, shall be deemed null and void; - the assumption of the mortgage shall be without prejudice to any tax benefits. 68

69 IN DETAIL PRODUCT AND SERVICE INNOVATION Loan products launched in Mutuo Lavori in Corso specifically targets businesses intending to finance construction, expansion or restructuring projects for industrial properties through a gradual allocation of capital linked to the progress of planned construction works on the property referred to in the loan. - Progetto Casa is a variation that targets building firms and real estate companies for the construction of residential property complexes. A special feature is the company s option, at the end of the period agreed for the gradual allocation of capital, to request that the loan be broken down into shares to be registered in the name of the buyers of the completed property units. The product therefore allows the end buyer of the home, if purchased on a mortgage, to take advantage of important privileges, including the option of not having to take out a new mortgage. - Mutuo Formula 3 offers extensive redemption flexibility to businesses. Over its 3-year duration, in fact, the customer pays only interest instalments, whilst the capital is repaid on expiry or in freely decided amounts within the same 3-year period. The capacity for product and process innovation that distinguishes Group operations was also confirmed recently by AIFIN (Italian Association for Financial Innovation), naming Creval as the most innovative intermediary. The Creval Group, in fact, took first place in the "Premio Cerchio d'oro per l'innovazione Finanziaria" award - organised by AIFIN with Azienda Banca - dedicated to innovation in the financial sector and with the aim of promoting projects capable of anticipating market trends, contributing significant new elements to banking. 25 financial institutions participated in the edition, presenting a total of 49 projects. Other than first place overall, Creval was also judged the winner in the Marketing category for its Creval Insieme project, an open community of around 1,000 colleagues of the Group and their families that perform voluntary work for local associations in their respective areas. Creval Insieme was awarded for its capacity to make new and complex contributions available to socially-active collaborators in favour of their associations. In the Organisation & Operations Section the IDEA procedure also took first prize, designed and implemented to systematically collect and record suggestions and ideas from all personnel in the Group on matters of management process improvement, product innovation and customer services. In this context, the Creval philosophy is centred on the conviction that customer relations play a central role in defining the company organisation. In line with the Creval Group's tradition and vocation as a "local bank", corporate management is geared towards maintaining positive relations with its customers, aiming particular for a rapid response of retail bank operations to certain key principles, summarised as follows: - customers are fully informed of the cost of Group services, in line with legal provisions and voluntary initiatives launched by the banking system (PattiChiari) in which Creval has participated for some time; - the importance of an accurate and rapid response to the customer, particularly in relation to lending services, also when an application for credit has not been accepted; - special attention and sensitivity to a customer s economic or personal difficulties; - constant disclosure of the true consistency of available lines of credit, for this purpose promoting the internet banking channels which allow a complete, IN DETAIL PRODUCT AND SERVICE INNOVATION 24-hour view of all the customer s relations with Expansion of the current and deposit account range for young people the Bank. - Risparmio Junior is a registered savings deposit account for children from 0 to 11 years of age. Only the parents may open the account, in the name of the child, and execute transactions. This offers an excellent rate of return on capital, without operating costs and with no stamp duty costs payable by the customer. - Risparmio Teen is a registered savings deposit account for teenagers from 12 to 17 years of age. Account transactions can be executed by either the parents or the child, within strict amount limits as indicated in the agreement. On signing the agreement, the parent also confirms acceptance of liability for any transactions. This offers an excellent rate of return on capital, without operating costs and with no stamp duty costs payable by the customer. - Conto Armonia Young is a packaged current account, also available online, offered with particularly advantageous terms to young people between the ages of 18 and 27. The monthly fee of EUR 2 is waived for Credito Valtellinese, Credito Artigiano and Credito Siciliano shareholders, or for customers with at least EUR 75,000 in funds, policies and asset management. In the framework of the above profiles, the operations of the Inspection Service responsible for handling customer complaints, initiating the best means of verification and providing a fast response help to preserve relations with the customer. In handling a complaint and especially in their commercial operations, the Group s retail banks aim as far as possible to 69

70 provide a solid contribution to increasing the financial education of its customers. Careful evaluation of each complaint and the attention paid to examining the reasons underlying the complaint have allowed for the timely identification of the appropriate corrective measures, with the close cooperation of all Group structures, and the decision of how to best direct the initiatives of departments responsible for operations in the retail market. In this context, it would appear to be significant that the total complaints received during the period reduced as compared to the previous year (-24%) and that the total forms an extremely low percentage compared to the Group's total customer base (0.1%). Total Total Bank Credito Valtellinese Credito Artigiano Credito Siciliano Banca dell Artigianato e dell Industria 8 3 Bancaperta 2 2 Total CV Group complaints 2006 and 2007 With a view to greater focus on customer complaints, in 2007 the role previously attributed to the Ombudsman-Giurì Bancario managed by ABI was transferred to the new figure of "Conciliatore Bancario" (Banking Mediator), of which the Group became a member. This organisation manages various means of settling disputes: through the Ombudsman-Giurì Bancario (general and special divisions), Conciliation and Arbitration. IN DETAIL PRODUCT AND SERVICE INNOVATION Supplementary pension products As from 27 March 2008 and in relation to Employee Termination Indemnity reform described in a special section of the report the Creval Group launched two new supplementary pension products on the market, the Previgen Global and Previgen Valore open-end pension funds. Specifically: - Previgen Global is a defined contribution pension fund for collective subscription. The fund is targeted to all companies wishing to offer retirement benefits to their employees, maximising tax privileges. Subscribers may be employees covered by contracts, agreements or company regulations permitting collective subscription. - Previgen Valore is instead an open-end defined contribution pension fund targeted mainly to individual subscribers. This option is for all earners of income, even if not covered by a mandatory pension scheme, and for persons dependent on others for tax purposes. At this point it is also important to emphasise that, in assessing the organisational setup and internal audit systems, the Group s Management Bodies make appropriate use of tools to improve the management of customer relations and guarantee increasing levels of customer satisfaction. For this purpose, it is planned to launch new initiatives to guarantee the systematic monitoring of customer satisfaction - in the same manner as that applied to other commercial performance indicators and a continued decrease in the total number of dissatisfied customers. In order to reach the profit and commercial targets an efficient, shared process for defining the annual budget proved fundamental, along with related operational plans for the various customer segments. The budget in effect the definition of a complex incentive system for Group branches to meet economic, equity and business development objectives steers and supports retail bank sales in logistics terms of profit generation, creation of value and customer satisfaction. Other sales channels: online banking operations, POS and ATM services The Group s commitment to the development of simple and efficient online banking services was confirmed in the growing number of users and orders arranged online, which remains high even ten years after the introduction of the Banc@aperta line, which involves an increasingly numerous and loyal share of the customer base. 70

71 As at 31 December 2007 there were 106,717 active users customers who have completed at least one transaction in the prior six months equal to 15.6% of the total customer base compared with a total number of 170,566 registered users. The total value of transactions performed online increased by 28% over 2006 (the number of transactions up by 43%). In this context, the figure for online securities trading is significant, recording a total value of over EUR 1.2 billion. KPMG Advisory s traditional report on e-retail Finance, now in its fifteenth edition, regarding the first half of 2007 and concerning 64 intermediaries including banks, Groups and investment firms, reported that their sample showed an increase in the e-banking operations index of 33%, in line with figures for the first half of The market share of the Group in relation to orders completed for retail customers was 2.8% at national level (8th place in the sector), compared to a branch share of 1.2%. In 2007 action continued to develop the interbank corporate banking service ( CrevalCBI ), set up in collaboration with CIM Italia S.p.A., a member of the ICBPI Group. Work to prepare and implement the new services (document management and e-billing), due to be released in the first few months of 2008, was intense. The use of corporate banking applications by the Group s customers is in constant expansion, with a total number of contracts of over 10,500 (+1.3%) and operations involving more than 5.3 million orders (+59%) at the end of The POS service available to customers saw a continued increase in the number of installations and operations: 15,030 terminals were active as at the end of the year an increase of 4.5% - and the number of transactions was over 18 million (+6%) for a total value in excess of EUR 1,381 million (+8%). Lastly, the number of ATMs installed as at the end of 2007 was 463, compared with 439 as at 31 December 2006, recording a significant increase in operations and use of all available services. DISTRIBUTION CHANNELS % CHANGE Number of ATMs % Number of Internet users (active) 106,717 95, % Number of POS 15,030 14, % Interbank Corporate Banking contracts 10,559 10, % Alternative products and distribution channels ASSET MANAGEMENT After analysing the retail banking sector s contribution to consolidated results, the following paragraphs concentrate on the asset management segment which, in line with the reporting model adopted by the Creval Group, includes the asset management product mix for both retail customers and, through the Group s banking network, for institutional investors. This sector includes the production activities of Aperta SGR the group s asset management product factory and the retail banks distribution to customers. During the period, asset management generated net interest and other banking income of EUR 29.9 million (+8.2%), despite the unfavourable economic situation in the global financial market, and achieved income before tax from continuing operations of EUR 26.0 million (+7.9%). At the end of the period, the assets under management (AUM) totalled EUR 4,565.0 million, up 0.8% on the EUR 4,528.2 million of Net AUM profits the ratio between income before tax from continuing operations and AUM therefore remained at a high level (0.6% compared to 0.5% in 2006). 71

72 Business segments Figures in millions of EUR Asset management % change INCOME STATEMENT DATA Net interest and other banking income % Income (loss) before tax from continuing operations % BALANCE SHEET DATA Assets under management (AUM) 4, , % - collective asset management % - separate asset management 4, , % ORGANISATIONAL DATA Personnel % 72

73 Aperta SGR activities Aperta SGR was incorporated in 2004 in the wake of developments and consolidation of Credito Valtellinese Group activities in the managed savings sector, particularly asset management, which began in 1984 with the aim of proposing valid alternatives to traditional securities custody and investment consulting services to customers. Over the years, activities were therefore developed and expanded in line with the growing complexity of financial markets and the need for sophisticated products and competent, reliable professional figures to handle investment management. Consistent with customer needs, the management team developed and constantly updated asset management activities, achieving significant results. Starting from the mid-90 s, alongside the direct management lines in IN DETAIL Asset management products The Group s asset management range The current range of Asset Management products, managed by Aperta SGR under the name Personal Fund Plus, is composed of 20 different lines of asset management divided into four separate categories: Shares, Bonds, Balanced and Reteaperta. The shares range is composed of 5 lines, differentiated by the type of instrument used one line of direct instruments and 4 UCITS and by reference market Italian, European-American, Global and International. The minimum investment in these lines is EUR 15,000 if in UCITS and EUR 100,000 if in direct instruments. The bonds range comprises 6 lines 4 invested in direct instruments and two in UCITS. These lines are differentiated by reference market and according to customer objectives. The direct lines are: Euro Bond, Short-term Italian Euro, Foreign Bond and Floating Rate Euro Bond. The UCITS lines are composed of the Euro Bond and Global Bond. The minimum investment in these bond lines is EUR 15,000 if invested in UCITS and EUR 25,000 if invested in direct instruments. The balanced line range is composed of four lines invested in UCITS, differentiated in relation to the share component. The minimum investment for these lines is EUR 15,000. The reteaperta range is represented by 5 balanced lines invested mainly in direct instruments, but leaving the option open to the manager to purchase UCITS. The minimum investment for these lines is EUR 500,000. All lines are invested in shares and bonds, according to a consolidated investment model. The lines invested in UCITS envisage a selection from management companies of high standing. To complete the range of asset management products, the Group has a UCITS placement agreement with leading national and international companies including Arca SGR, Aletti Gestielle SGR, Anima SGR, American Express and Julius Baer, offering customers over 120 mutual funds and SICAV segments and therefore guaranteeing the option of diversifying customer investments by type, market reference and propensity for risk. stocks and bonds (GPM), portfolio management for funds (GPF) was created, with the aim of matching the risks assumed to expected returns through increasingly extensive diversification. With specific reference to activities launched in 2007, the Company signed an important agreement with American Express Bank regarding management of a sub-fund of the EPIC FUND sicav, a specialist on the Italian stock market. The subfund was distributed from June onwards, through the American Express Funds sicav, on the Italian, European and Asian markets, therefore granting Aperta SGR access to foreign markets. This was the first agreement of its kind signed by American Express Bank with an Italian company. Aperta SGR was also involved in a number of organisational changes which, through the creation of an Institutional Customer Services division, will accelerate the strategic development process of non-captive activities for institutional customers beyond the scope of the Group closed with a net income for the period of over EUR 700,000. Asset management product development During 2007 the Credito Valtellinese Group and Duemme Hedge SGR a speculative asset management company of the Banca Esperia Group, sector leader in Italy signed a partnership agreement for placement of the CREVAL Hedge, a hedge multi-strategy fund of funds managed by Duemme Hedge SGR and distributed by Creval since February The main aim of the CREVAL Hedge, a low-volatility hedge fund of funds, is to preserve capital with a medium/long-term performance consistent with that of international bond markets in situations of lower volatility. 73

74 The Group s asset market volumes and market shares As at the end of December 2007, the assets managed by Aperta SGR totalled approximately EUR 4,565 million, compared with the EUR 4,528 million at the end of 2006 (+0.8%), a positive result in a year that saw a strongly negative closure for the Italian asset management sector. Figures in millions of EUR Asset management [equity, funds and private] 4,205 4,271 Collective management [open-ended Sicav and American Express] Institutional client management: CV Group Pension Fund TOTAL ASSETS UNDER MANAGEMENT 4,565 4,528 Based on the data shown, at the end of 2007 the Creval Group held a 0.47% share of the asset management market Source: Assogestioni, Mappa del Risparmio Gestito, December

75 CORPORATE CENTER The corporate center sector comprises all the central support divisions for the entire Group and for third parties. Included in the scope of this sector are revenues generated from the owned securities portfolio and income from investments in associates and companies under joint control. The sector also covers operations of the complementary companies (Deltas, Bankadati and Stelline) and part of those of the Group s specialised financial company (Finanziaria San Giacomo). The availability in common of financial services and services instrumental to traditional banking activities among Group companies, and also third party associates, allows the simultaneous achievement of two important objectives: - accomplishment of significant scale economies through the wider scale of company business, with reference to IT system, property, administrative and back office unit costs; - achievement of scope economies, meaning average unit cost savings generated by sharing activities among the different services provided. With expansion of the range of products and services offered and in the composition of the banking Group by including companies in the scope that are specialised in certain banking processes or in the provision of specific products a cost saving is achieved that is of benefit to all Group companies. The economies achieved by centralising key processes that form the service value chain allows a gradual reduction in the cost/income ratio, with a view to pursuing the Strategic Plan objective of persistent reduction of the indicator by over 10 percentage points in the four-year period. In this sense, though there is not always a direct impact on the Group s commercial operations, the corporate center divisions play an absolute central role in that they collaborate in maintaining service effectiveness levels and convenient management terms in line with the defined plan. Within this sector, an important role is played by the asset allocation strategies of the various operations and investment management segments, which on the one hand allow maximisation of financial performance in relation to capital absorption, and on the other hand help to expand the "Creval Network" - with the aim of sharing production platforms and product factories with third parties - taking into account capital requirement restrictions. As already mentioned in the first part of the report, this exercise saw a succession of numerous events with a destabilising effect on the financial system, first of all triggered by the US subprime, or Alt-A, mortgage crisis, the risks from which were transferred to the market by originators, converged into structured ABS and CDO-type products (the OTD - Originate To Distribute" model). In the framework of absolute prudence and risk control policies adopted by the corporate centre for financial asset management, it should be noted that the Creval Group has no exposure or commitment. In a situation of market turbulence, therefore, the risk profile control that has always characterised Creval Group operations in the financial sector confirmed its worth. Furthermore, at the start of the financial crisis, stock market exposure was gradually reduced in favour of the bond sector, with investments mainly in government securities. As a result, no losses linked to the drastic decline of the leading world stock markets were recorded. Overall in 2007, Corporate Center activities generated net interest and other banking income of EUR 47.8 million (+55.8%), corresponding to 7.3% of the Group s net interest and other banking income. Operating expenses of EUR 66.9 million were recorded. The result for the segment was EUR -9.1 million, compared to the million of At the end of the period, amounts due from banks in this sector totalled EUR million (-13.6%), whilst amounts due to banks were EUR million (-12.3%), giving a net inter-bank position of EUR million which confirms a Group liquidity profile unaffected by the financial market crisis and under constant control by Finance and Risk Management Divisions. Investments in securities and in associates and companies under joint control details of which are given in the first part of this report totalled EUR 1,556.5 million (+3.5%). The corporate center has a staff of 493, corresponding to 14.2% of the total Group workforce. 75

76 Business segments Figures in millions of EUR INCOME STATEMENT DATA Corporate center % change % Net interest and other banking income % Income (loss) before tax from continuing operations % BALANCE SHEET DATA Owned securities and investments in associates and companies 1, , % under joint control Due to banks % ORGANISATIONAL DATA Personnel % 76

77 Complementary and specialised finance companies providing banking business support GOVERNANCE AND CORPORATE CENTER ACTIVITIES. In 2007 and consistent with its mission as specialised company for coordination and corporate center activities, Deltas provided support to the Parent Company in the definition, governance and control of the Group's business plan and played a guiding and coordinating role in administrative and management production processes. In this context the company provides a series of centralised services, also contributing to enhancing the Group s overall competitiveness. As already mentioned, the Group s Strategic Plan outlines growth strategies for the purpose of creating sustainable medium-term value for all stakeholders. For the period in question the plan envisages that further, stronger efforts be applied to the development process that has gradually led to the Group's position as leader in the national banking sector. The work of Deltas fits neatly into this scenario, which for the next four years plans a significant expansion of the Group s distribution network through both internal and external lines. Specifically, Deltas provides support to the Parent Company in defining strategic lines and management control geared to achieving the set objectives of the Plan. The second line of business of this company, as already indicated above, regards corporate center tasks. During the period Deltas therefore provided specialist management services in certain phases of the production processes for a number of Group companies. Deltas provides a wide range of high-content services offered, particularly in reference to the following macro areas: legal, accounting, financial statements and reporting, company secretariats, financial instrument administration and accounting, and personnel administration. IT SYSTEM MANAGEMENT In 2007 Bankadati Servizi Informatici played a key role in IT management and development, providing strategic innovation and growth leverage to the Group. With a view to achieving greater scale and scope economies by closer interrelation of systems, data and applications, in the first few months of 2007 the planned merger into Bankadati of Crypto, a company 100% owned by the Group and specialised in application software maintenance and development, was completed. As a result of the merger information on which was already given in last year's report - there is now a single Creval Group link for ICT management and development. By this integration measure, Bankadati has therefore taken on the role of sole centralised monitor on matters of development, maintenance and management of the IT systems, along with related operations support services and consistent with the technology development needs of the Group and other banks to which, as part of strategic and industrial partnerships, Creval allows access to its own operating systems and models. The Company has also extended its services to production companies not included in the scope of consolidation of the Group, further enhancing the high level of know-how and competence of its collaborators and the considerable investments made in prior periods. In execution of the Strategic Plan, specifically the organisational and characteristics review of the Group s IT-area governance, Bankadati launched the study and analysis phase for development of the branch application sub-system, strategic to optimisation of the commercial network s process for multichannel customer relations and for implementation of the planned partnerships with other banking groups. REAL ESTATE ASSET MANAGEMENT. The mission attributed to Stelline Servizi Immobiliare S.p.A. is to manage the Group s real estate assets. The company conducts studies and research in the real estate and urban planning sector, develops architectural projects, technical installations and interior decoration and fits out branches for the banks, also providing turnkey solutions, while continuously searching for innovative solutions in technical, functional and image terms. Stelline is also in charge of security, maintenance, management and administration of the real estate holdings, and ensures the continuous, adequate functionality of the Group real estate with a view to containing management costs. In addition, Stelline also provides increasingly important technical support to lending activities, financial leasing in the real estate sector and the protection of claims. As part of the Strategic Plan, Stelline s operations was further focused on implementing several strategic projects to improve the management efficiency of the Group, by defining new branch models featuring lower operating expenses per workstation and rationalising office space in the central divisions. Stelline also supports development of the group by internal lines, through the planned opening of 95 new branches in the next four years. 77

78 MANAGEMENT OF IMPAIRED LOANS. The acquisition, management and disinvestment of impaired loans is the responsibility of Finanziaria San Giacomo, a financial intermediary registered since 14 April 2006 in the general register of financial sector intermediaries pursuant to art. 106 of the Consolidated Law on Banking. In the period in question, the Company addressed the operational implementation of certain tasks to complete the rationalisation project for the Group's credit business - launched in September including, amongst other things, the establishment of Finanziaria as the specialised centre for the administration, management and collection of impaired loans, through the direct management of nonperforming loans acquired without recourse originating from Group banks and management on assignment of loans still owned by those banks. The project envisaged the operational launch of Finanziaria, providing the Company with an organisational structure - in accounting system, data processing, internal audit and personnel terms suited to duties and tasks performed in strict observance of supervisory authority regulations. In this respect, in 2007 the proposal to adopt an independent organisational structure was approved, characterised by a strong specific business profile and streamlining of management and decision-making processes, and became operative on 1 September 2007 with the transfer in of former Mediocreval personnel. With reference to the company s business development, it should be noted that in November the transfer pursuant to art. 58 of the Consolidated Law on Banking of Credito Valtellinese, Credito Artigiano and Credito Siciliano impaired loans to Finanziaria San Giacomo was completed. Loans classed as non-performing as at 31 December 2006 around 3,000 positions - were transferred for a total of approximately EUR 37 million. Strategic management of investments The strategic management of investments aims to expand the Creval Network so as to increase the critical mass of the Group, also by sharing operating platforms and banking and financial service production phases with third parties. This activity will allow a long-term increase in profitability for the Group through dividends and profits generated by the investee companies, gradually reducing the cost of products offered to customers as adequate economies of scale are achieved. Istituto Centrale delle Banche Popolari Italiane The Parent Company has a 22.5% interest in ICBPI share capital, with a strong Credito Valtellinese imprint offered by the fact that Giovanni De Censi is ICBPI s Chairman. This equity investment is strictly functional to the use of services in a scale economy logic with reduced costs of services for customers particularly in the finance, payment systems and IT areas through the parent company Istituto Centrale Banche Popolari Italiane specialised in payment, administrative and financial services and its subsidiaries: - Seceti S.p.A., among the interbank company leaders for payment system outsourcing services; - Key Client Cards & Solutions S.p.A., operating in the international payment card sector; - CIM Italia S.p.A., reference specialist in e-money, POS management, web banking and e-commerce; - Oasi S.p.A., leader in the distribution of welfare, tax and social security management applications. Specifically, it should be emphasised that in 2007 the payment and e-money systems sector was characterised by the implementation of projects ready for the 1 January 2008 entry into force of the Single Euro Payment Area (SEPA). In this framework, the Institute recently signed an important strategic agreement with the German-Dutch company Equens for the joint development of payment system activities, also in view of the launch of the SEPA. The ICBPI Group and Equens Group will jointly manage EUR 8.7 billion in payments and EUR 3 billion in POS and ATM transactions, with a 12% share of the European market. The alliance with ICBPI is a fundamental element of the Creval Network, allowing the constant expansion of the commercial product range and rendering the network more competitive in price and quality terms. During 2007, the Institute also approved a wide-ranging detailed project to reorganise the ICBPI Group, focusing on the following principles: - organisation of the operating model according to logical business areas and competence centres, particularly for the core business of e-money and payments; - elimination of company overlaps and duplications, and the improvement of operating process monitoring; - setup of each line of business as single market interfaces; - strengthening of the management and coordination role of the Parent Company ICBPI; - centralisation of certain complementary and non-strategic activities into ad hoc SPVs. 78

79 Implementation of the new operating and corporate model - expected by the end of represents a key requisite to achieving the strategic and economic objectives of the ICBPI Group Industrial Plan and to its configuration as a Group open to strategic alliances at European level. Banca di Cividale The industrial cooperation project with the Banca Popolare di Cividale Group, launched in 2004 with the acquisition of 22.22% of share capital of Banca di Cividale S.p.A. the operations centre for the Friuli-based group with a network of over 50 branches and enhanced in 2005 by an increase in the investment to 25%, was further consolidated in the period by the Cividale Group s adoption of Creval Group IT system and technology structures on 1 October, also in reference to specific agreements to provide back-office financial services, back-office transfers and human resources management These activities required significant involvement of Bankadati divisions and resources in relation to the application component and from a technological point of view. The precision demonstrated in keeping to schedule meant that the start-up deadline was met, allowing launch of the service of 1 October The start-up phase was followed by fine-tuning, analysis and enhancement to gradually improve the levels of service provided. In line with the commitments taken on within the Veneto Project, the Parent Company Banca Popolare di Cividale supported the growth project for Banca dell Artigianato e dell Industria in which it holds 9.86% - in northwest Veneto. A significant event for our Group, as it heralds potential opportunities which are currently being assessed, is the consolidation of investments of the Friuli-based associate in banks in the East European markets. Banca della Ciociaria In implementation of agreements signed on 31 October 2006 and after due authorisation was obtained from the competent authorities, March 2007 saw completion of the purchase by Credito Valtellinese of 1,677,427 Banca della Ciociaria S.p.A. shares, corresponding to approximately 27.9% of share capital, for the total price of EUR 20.6 million. The Creval investment in Banca della Ciociaria share capital therefore increased to around 37.9%. The transaction forms part of a strategic cooperation project between the two banking groups which aims to increase the Creval Group s presence in central Italy and strengthen the market role of Banca della Ciociaria in the geographical areas it serves by the development of commercial and operational synergies. From a governance point of view, the company s ordinary shareholders meeting of 15 October 2007 renewed its control bodies, after which the Board of Directors appointed Prof. Marcello Condemi as its Chairman. During 2007 an agreement was signed between Bankadati and Banca della Ciociaria for the provision of a Group IT system as from This agreement, which constitutes a further reinforcement of the partnership, will allow the Bank to adopt Group operational and organisational models with the aim of full implementation of the Industrial Plan. Banca Tercas On 19 November 2007, Credito Valtellinese acquired 3.656% of Banca Tercas share capital, for a total investment of EUR 24,403,800. In addition, an option was signed involving 1.334% of share capital of the Abruzzo-based bank, for exercise in the period April-May 2008 so as to reach a shareholding of 4.99%. These transactions are included in the framework of a strategic partnership project between Credito Valtellinese and Banca Tercas. In fact, on 12 November 2007, the Parent Company, Fondazione Cassa di Risparmio della provincia di Teramo and Banca Tercas - with a network of around 100 branches in the Abruzzo, Emilia Romagna, Lazio, Marche and Molise regions and a total workforce of 830 and Cassa di Risparmio della provincia di Teramo S.p.A. signed Shareholders Agreements and a Framework Agreement covering operational, management and governance aspects with the intention of launching a wide-ranging strategic cooperation project. The Shareholders Agreements and Framework Agreement which followed the letters of intent signed on 17 April 2007 outline a series of steps toward common growth, based on sharing means of production and the development of a joint market and product policies. Specifically, these envisage: - mutual consulting in favour of pursuing synergies in all areas of common interest and to facilitate the convergence of key decisions to aid business coordination development; - inclusion of specific members of Credito Valtellinese in the control bodies of Banca Tercas. 79

80 The validity of the Shareholders Agreements and Framework Agreement is subject to Creval s entry into the ownership structure of Banca Tercas with 20% of the share capital. The maximum payment envisaged for the entire block of shares corresponding to 20% of share capital is EUR million. Global Insurance and Global Assistance In November 2007 Credito Valtellinese and Ri-Fin S.r.L. signed an agreement to strengthen Creval s presence in the insurance market through the development of existing partnerships, centred on the joint interest in Global Assicurazioni a multifirm insurance agency, which since 1999 has operated in insurance intermediation using an innovative business model, appointed to supervise the Creval Group s bancassurance sector, including the management of insurance group partner relations (e.g. Generali, Axa, Allianz and Aviva) and in Global Assistance an insurance company specialised in non-life business. The main objectives of this agreement are to: - significantly expand the life and non-life insurance product range for the Creval Group s retail and corporate customers; - provide further input to Global Assicurazioni and Global Assistance activities through entry into new market segments and the joint commitment to consistently increase volumes traded, revenues and profitability of the two companies; - maximise Creval results in premiums collected and profitability terms in the bancassurance segment by exploiting the potential offered by the Creval Network (Group banks and associated companies) and know-how acquired from Global Assicurazioni and Global Assistance. The terms of the signed agreement execution of which is suspensively conditioned to obtaining authorisation from the relevant Supervisory Authorities envisages the purchase by Bancaperta of 24,000 Global Assicurazioni shares representing 20% of the share capital from Ri-Fin at the price of EUR 22,000,000. On conclusion of the transaction, the Creval Group will hold 60% and Ri-Fin 40% of Global Assicurazioni share capital. The agreements also envisage that Ri-Fin has the right to sell its remaining investment to the Creval Group equal to 40% of Global Assicurazioni share capital at fair value (based on the market price). This option may be exercised by Ri-Fin as of the data of approval of the 2010 financial statements. In 2007, Global Assicurazioni achieved net income of EUR 4.9 million (-5.4% compared to 2006), whereas the value of production was EUR 20.9 million (-1.2%). The portfolio managed by the company totalled EUR 1.3 billion, in line with the 2006 figure. Global Assistance achieved a net income of EUR 0.7 million, a 16% increase over 2006, with total premiums issued for EUR 4.7 million (+1.9%). Activities of associated company Aperta Gestioni The Swiss associated company Aperta Gestioni Patrimoniali SA fiduciary, asset management and private banking company ended 2007 with an increase in total deposits from EUR 328 to 338 million. The year ended with significant growth of the period result, closing at EUR 1.43 million, up 16.4%. In response to the growing and varied requirements of customers in the Lugano and Chiasso markets, managers and consultants of Aperta Gestioni Patrimoniali S.A. have succeeded in providing an increasingly wide range of services. Bancaperta holds 48% of the company s share capital, with Hoderas Holding S.A. and Sarasin Colombo Gestioni Patrimoniali S.A. as holders of the remainder. 80

81 Assets managed in millions of EUR APERTA GESTIONI 31/12/ /12/ /12/2005 Total assets 6,050 5,548 4,679 Total revenues 4,386 3,787 2,297 Profit (Loss) 1,427 1, Shareholder s Equity 4,265 3,985 3,544 Figures in thousands of EUR 81

82 Financial sector activities Operations in the financial sector, covered by Bancaperta, on the one hand relate to the banking book involving liquidity and interest rate risk management in cash pooling under assignment from all the Group s banks and on the other hand to the trading book. During the period, transfer of the trading book to Bancaperta was completed, formerly handled by individual Group banks. Bancaperta therefore took over full centralised responsibility for Creval financial assets. In 2007, with regard to financial market performance, restructuring of the trading book began. The assets invested in UCITS units were decreased considerably in favour of direct exposures, divided by asset type, in order to minimise market risk. The Group portfolio is now mainly composed of government securities, bank bonds, shares and, to a more limited extent, hedge fund units. Banking book activities, regarding the Group s liquidity and interest rate risk management, are based on ALM application analysis which during the year allowed specific periodic reports to be submitted to the Group s corporate governance bodies on the static ALM, repricing risk, liquidity risk and sensitivity measurements. In parallel, specific reports were prepared to illustrate monthly movements in balance sheet aggregates and represent imbalances forecast for the coming quarters. This reporting system, conceived with a view to dynamic ALM, was structured to take into account planning forecasts and funding policies formulated at budgeting stage. Equity policy The Creval Group s equity policy is a fundamental tier in corporate center activities in that it allows support for development plans under balanced economic and financial conditions, in full observance of regulatory restrictions, the principles of sound and prudent management and objectives to create economic value for shareholders. Specifically, the capital allocation strategies and policies both aim to: - finance the expansion of risk-weighted assets and real estate investments complementary to the opening of around a hundred new branches as envisaged in the Strategic Plan; - hold an adequate level of free capital to ensure financial flexibility and equity resources necessary to finance the development of existing partnerships with other banks and to acquire additional controlling and non-controlling quotas in banks or intermediaries operating in areas or market segments not currently covered by the Group; - maintain an adequate degree of capitalisation of assumed risks, also from a regulatory point of view, with a total capital ratio of over 10%. This also with a view to the full introduction of the New Basel II Accord on Capital on 1 January 2008; - maintain a constant balance in the financial structure so as to ensure an increasing level of return to shareholders. In fact, the capitalisation policy is strictly linked to the internal audit system and levels of risk assumed, to be discussed in the next paragraph. As already mentioned, the Group s equity allows the level of assumed risk to be observed in traditional banking activities, taking into account the principles of the New Accord on Capital transposed to Italian law and current Supervisory Authority provisions at the end of As we know, the new prudential regulatory structure is based on three pillars. The first introduces capital requirements to cover risks typical of banking and financial activities (credit, counterparty, market and operational risks). For this purpose, alternative calculation methodologies are envisaged for capital requirements, characterised by various levels of complexity in the measurement of risk and in organisational and control requirements. The second requires that banks adopt a capital adequacy strategy and control process, both current and prospective, leaving the Supervisory Authority with the task of verifying reliability and consistency of the related results and, where necessary, adopting appropriate corrective measures. The third introduces public disclosure obligations regarding capital adequacy, risk exposure and general characteristics of the related management and control systems. Given the framework outlined above and with a view to the strategic control and risk management involved, as part of its strategic planning process the Parent Company defines the adequate total capital in current and prospective terms necessary to face all risks deriving from banking activities and growth projects. In assessing and defining the adequate total capital, all risks to which the Group is currently or could be exposed are taken into considered and analysed in full, also in the light of expansion strategies. 82

83 Included in this context are the project tasks launched towards the end of 2007, for the purpose of the Group's complete adaptation to "second pillar" provisions (ICAAP - Internal Capital Adequacy Assessment Process) - in force from with particular regard to capital adequacy definition process. As part of this project which also includes the preparation of documents for submission to the relevant control bodies during 2008 and to the Supervisory Authority pursuant to current regulations - internal capital adequacy will be more precisely defined and formalised, using stricter and more analytical measurement tools where necessary, the breakdown of tasks being as follows: - identification of risks subject to assessment; - measurement/assessment of individual risks and the related internal capital; - measurement of total internal capital; - calculation of total capital and reconciliation with regulatory capital. It is therefore envisaged that the project launched will allow for greater effectiveness in Group equity management, with optimal allocation of capital among the business areas and an improvement in net profitability levels compared with economic equity. Included among the strategic lines described above is the strategic task of equity reinforcement approved by the extraordinary shareholders' meeting of the Parent Company on 10 February 2007, in stages as illustrated in the separate report on operations. In this report it is important to emphasise how the total subscription of ordinary shares optioned to Parent Company shareholders has allowed a considerable reinforcement of the consolidated equity profile shareholders equity increasing by approximately EUR 535 million, of financing the growth projects mentioned in the first part of the report and of covering all risk factors relevant to the bank's operations. A close link is therefore required between the growth rates of risk-weighted assets and those of consolidated equity, which in the period increased by an average 18.7%, with a significant leap this year. Evolution of consolidated shareholders equity CAGR CONSOLIDATED SHAREHOLDERS' EQUITY : 18.7% in millions of EUR Financial statements according to IAS/IFRS standards The Group s Internal Audit system Internal Audit plays a central role in the management of the Group and constant attention is dedicated to this in order to adapt to regulatory changes, to the changing market context and to the introduction of new areas of business. The simultaneous pursuit of Group competitiveness, its medium/long-term stability and the principles of sound and prudent management call for the implementation of a concrete, effective Internal Audit System. In this respect, the Internal Audit System - in accordance with the Supervisory provisions applicable to banks and banking groups - comprises a set of rules, procedures and organisational structures that aim to ensure respect of corporate strategies and achievement of the following goals: - effectiveness and efficiency of corporate processes; - safeguarding of the asset value and protection from losses; - reliability and integrity of accounting and management information; - compliance of transactions with the law, with supervisory regulations and with internal policies, plans, regulations and procedures. 83

84 The Parent Company, as part of the central management activities it provides for the banking group, constantly performs: - monitoring of the strategic development of the various business areas, with particular focus on the risks assumed by the various subsidiaries; - management control, aimed at ensuring maintenance of a balance between the technical/operational profiles of profitability, capitalisation and liquidity of the individual companies and of the Group as a whole; - operational control aimed at evaluation of the various risk profiles of individual subsidiaries, manly with regard to the area of risk management. Components of the Group s Internal Audit system STRATEGIC DEVELOPMENT MONITORING GROUP INTERNAL AUDIT MANAGEMENT CONTROL OPERATIONAL CONTROL Considering the control duties weighing upon the Parent Company, extensive powers have been assigned to Credito Valtellinese General Management regarding the preparation of measures necessary to ensure the establishment and maintenance of an efficient and effective Internal Audit System for the Bank and for the Group. Lastly, with regard to organisational tasks arranged during the period, the following are of particular note: - the unification with effect from 1 January 2008 of the Group s risk management departments into the Deltas Risk Management Division, responsible for monitoring credit risk, market risk and operational risk; - the establishment of a compliance division in Deltas and appointment of the related manager, in order to create a single centralised unit for compliance risk monitoring; - localisation of the Group Credit Division with the Parent Company, with the role of defining more standardised, consistent credit policies at Group level and of monitoring the quality level of consolidated assets. MONITORING OF BANKING RISK The clear identification of risks to which the Bank is 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. Careful risk management, based on criteria of prudence and implemented within a specific organisational framework, aims to limit the volatility of expected results. In line with its focus on retail banking, the Group is mainly exposed to credit risk. In 2006, the 2006/48/EC Directive was given final approval. This directive introduced the new, definitive prudent requirements of the Basel Committee ( Basel 2 ). Article 152 of this directive allowed banks and banking groups to continue applying the previous prudent requirements, at the latest until the end of The Parent Company and other Banks in the Group resolved to exercise this right. Therefore, for 2007, they are exempt from regulations regarding the internal assessment of total capital adequacy requirements ( second pillar ) and disclosures to the public (the third pillar ) and regulations regarding operational risk. From 2008, the Group will determine capital requirements to meet credit and market risk by means of the standard method and operational risk by the basic method. The procedural and organisational tasks necessary to generate supervisory signals according to these approaches have therefore been implemented. 84

85 Projects with the aim of introducing more sophisticated risk management methodologies as envisaged by the regulations have shown considerable progress, as indicated below. In parallel, as established under the second pillar and requiring definition of the ICAAP (Internal Capital Adequacy Assessment Process), the tasks necessary to define the processes and tools to calculate internal capital adequate to cover all operational risks to which the company is exposed have, as mentioned previously, been launched. The Group will prepare the first simplified ICAAP statement as at 30 June 2008 by 31 October From an organisational point of view, it should be mentioned that during 2007 and the Group s risk management units were converged into the Deltas Risk Management Division, responsible for monitoring credit, financial, market and operational risk, becoming operative as from 1 January Credit risk Organisation of the credit process requires loan proposals to be formulated by bodies within the territorial network, where the related decision-making procedure can be completed. Applications for larger credit lines are automatically forwarded to central structures (Loans Department, Credit Committee, Executive Committee and Board of Directors), which decide on the relative cases. The Board of Directors of the Bank, the only body authorised to grant powers in terms of credit disbursement, is regularly informed during its meetings on the exercise of delegated powers and performance of the most significant loans. The administrative body of the Parent Company also extends its analysis to significant loans of the entire Group. In relation to changes regarding Mediocreval's mission, the Group Credit Department - previously located within the subsidiary - was transferred to the Credito Valtellinese internal organisation with effect from 1 January This department is responsible for reinforcing the Group s credit policies and monitoring the quality of consolidated assets, defining the policies and criteria necessary for credit risk assessment and management. The Group Credit Committee established as part of the Parent Company expresses its mandatory and non-binding opinion on credit line practices decided by the Boards of Directors of the Group banks. For the credit segment, this Committee supervises all assets of individual banks, exercising control and providing guidelines to optimise the assumption of credit risk. The Credit Performance Management Service was established as part of the Credit Department of individual Banks with the task of monitoring the segment in overall terms and in reference to single positions, particularly those flagged as anomalous. At the same time, inspection tasks formerly attributed to the Credit Division s Risk Control Department was assigned to the Inspection Service. The Credit Performance Management Service, with these line duties removed, can now more effectively support the commercial network in managing irregular positions, whilst the Inspection Service no longer involved in credit management tasks now combines operational risk and credit risk inspections, therefore optimising internal audit activities. The two services, in close and constant liaison, monitor action taken on guidelines issued by the Group s Auditing Department and Credit Department, whose collaboration helps coordinate the various operations units and balance the development and function of the Group s Internal Audit System. Without prejudice to the terms indicated with regard to decisions adopted at Group level on the calculation of capital requirements, during the period the new company rating model became operative. Corporate customers, defined as counterparties of any legal nature that produce and/or market goods and services, are divided into two segments: - corporate, including companies with a turnover of over EUR 5 million or credit lines of over EUR 250,000. This segment is composed of a limited number of counterparties which nevertheless count for a significant share of loans; - small business, including companies with a turnover of up to EUR 5 million and credit lines of up to EUR 250,000. This segment is composed of a high number of counterparties with credit lines of a limited amount. The rating model derives from systems centred on the automatic component and includes objective quality elements, excluding justified overrides attributed by the analysts. The model is structured according to a modular or partial approach format and includes five modules: quantitative analysis of balance sheet indicators; company-banking Group relations performance, the position of the company on the banking system; macro-economic assessments for the company business segment and company qualitative analysis. Each module works independently from the others and produces a partial assessment score. Based on the 85

86 score obtained in the various corporate assessment areas, a rating class is assigned. 9 rating classes are envisaged for performing counterparties and one class for counterparties in default. Assignment of the rating is linked to the credit allocation process and is activated at the time of allocation and review of credit lines. The ratings are reviewed automatically on a monthly basis. Given that backtesting activities performed on the model have shown a good correspondence between the credit rating classes and the historic default frequency, the model is considered suitable for use in managing the various credit process stages. As mentioned above, the Risk Management Department is responsible for: - the development and management of the internal rating model for the Group s credit customers; - for reporting to the retail banks (Credito Valtellinese, Credito Artigiano, Credito Siciliano, Credito Piemontese, Banca dell Artigianato e dell Industria) and Mediocreval on individual credit risk positions; - for reporting to the Parent Company on the consolidated credit risk position. The Creval Group internal rating model Company Data Internal Performance Fin. Statements Analysis RATING External Performance Global Analysis Qualitative Analysis Default Probability The appropriate monitoring of credit risk using the above methodologies and tools has led to a gradual reduction of impaired assets in relation to total loans. In particular, as at the end of 2007, the ratio between non-performing and total loans to customers was 1.4%, decreasing further over the 1.6% of the previous year and decidedly lower than the banking system average. Similarly, the ratio between total impaired loans the sum of non-performing, watch-list, restructured, past due and/or overdue exposures and loans to customers was 2.9%, compared to the 3.4% for the end of

87 Market risk As mentioned in the introduction to this chapter, the Group s investment policy is based on the criteria of containing market risk, with reference to all of its components: interest rate risk, price risk, and exchange rate risk. No positions involving commodities risk are normally adopted. Risk-hedging tools and techniques are used in the management of the portfolio. The investment and trading activity is carried out in compliance with the guidelines established by the relative governance levels of the Group, and is implemented as part of an extensive system of assigned management powers and according to detailed internal regulations on, among other things, modification of the set stocks, type of negotiable assets, the investment market, type of issuer, maturity of the securities and rating of the securities. For the daily trading activities, there are maximum daily loss limits and overall open position limits. The financial assets held for trading portfolio is composed mainly of: - bonds; - shares; - harmonised UCITS units; - trading derivatives. The bond component of the portfolio consists mainly of floating rate securities. The fixed-rate portion (BOT with varying expiries) has a limited duration. The bonds held are mainly issued by the Republic of Italy or by banks with ratings higher than investment grade. The UCITS units held by the Banks are also prevalently bond-based. The direct equity investments, residual in size, mainly involve shares listed in the Italian stock exchange and with high degree of liquidity. The financial instruments present in the portfolio are almost exclusively in euro. Measurement of the market risks in a portfolio is based on the daily estimate of parametric Value at Risk (VAR), determined with a confidence interval of 99% and a period of 10 days. The VaR measures the maximum risk that the portfolio may undergo based on volatility and historic correlations of the individual risk factors (interest rate, share prices and exchange rates). Monthly VaR reports are submitted to the Boards of Directors of the Group Banks for evaluation of the consistency of the risk profile with the particular management objectives. The control of limits assigned in terms of value at risk is now a consolidated part of Group operations: the procedure that monitors the financial sector automatically reports cases where said limits are exceeded, allowing for the appropriate corrective action to be taken. During the period, the average consolidated VaR was EUR 1.3 million, equal to 0.1% of the financial assets value. This data confirms the low risk level of the securities portfolio Group VaR Jan 31-Jan 1-Mar 30-Mar 3-May 1-Jun 29-Jun 30-Jul 29-Aug 27-Sep 26-Oct 27-Nov 28-Dec Consolidated VaR performance 2007 VaR 87

88 Interest rate risk The financial statements of financial intermediaries are typically composed mainly of financial assets and liabilities, the value of which are also interest rate sensitive. Consistent with the Group s retail mission, with a prevalent assumption of credit risk given its specific customer segments, the interest rate risk assumed deriving from typical banking activities (funding and lending) remains within certain limits. Risk management aims to minimise the impact of unfavourable variations in the rates curve on the value of the banks, as well as on the cash flows generated by balance sheet items. Limiting exposure to interest rate risk is pursued primarily by indexing asset and liability items to money market parameters (usually Euribor) and the tendential equalisation of asset and liability durations to very low levels. Interest rate risk measurement of the banking book is based on the economic value approach, defined as the difference between the current asset value and current liability value. The measurement is based on preestablished changes in the rates structure applied to balance sheet items at the reference date (static ALM). The reaction to changes in interest rates is measured by sensitivity indicators (modified duration). Based on the modified duration of items assessed, the impact of instant parallel translation to the rate structure is calculated. The changes are then normalised in proportion to regulatory capital. During the second half of 2007, activities continued to improve and integrate the ALM system, which provides repricing risk, maturity risk and sensitivity risk measurements calculated on the monthly financial position as at the date of analysis. These measurements reported monthly to the ALCO (Asset and Liability Committee), General Management, Board of Directors and Boards of Statutory Auditors of the Group's Banks - allow monitoring of the repricing risk between indexed asset and liability items and their impact on the economic equity value. Liquidity risk The liquidity risk management profile envisages integration between the cash flow matching approach (which attempts to align expected incoming and outgoing cash flows for each time interval) and the liquid assets approach (which maintains balance of a given quota of instruments readily transferable into cash). The Bank s objective consists in financing the assets under the best possible conditions in ordinary operating circumstances and in being able to meet its commitments under conditions of cash flow crisis. This objective is achieved by: - Centralising liquidity risk management with Bancaperta so as to reduce recourse to financing by parties external to the Group and to render market access more efficient; - Appropriate diversification of funding sources, in terms of both technical and collection formats and with regard to the counterparties. From an operational point of view, liquidity risk management consists in two processes: - Short-term liquidity risk management which aims to ensure that the Bank is always able to meet its commitments on time. This objective is pursued by an appropriate balance between incoming and outgoing cash flows. In addition, the maintaining of assets readily transferable into cash responds to the need to meet unexpected commitments; - Structural liquidity risk relates more to asset financing which, in the final analysis, implies assessment of the overall business strategy (growth objectives and their time horizon; policy on loans and deposits by destination, source, duration, technical format and cost). Liquidity risk reports are submitted on a monthly basis to the ALCO committee, General Management, the Boards of Directors and Boards of Statutory Auditors of the Group's Banks. With regard to both interest risk and liquidity risk, in-depth analysis was performed to obtain an optimum measurement of on demand item risk, with the aim of identifying the best methodologies to estimate their actual financial duration and the stickiness of their related rates. Likewise, activity continued on implementation of the dynamic ALM model for a more accurate and systematic incorporation of strategic and planning objectives in the measurement of interest rate and liquidity risk. Operational risk Operational risk, a particularly wide-ranging class, is not typical of banking or corporate activities. The origin of such risk may be internal or external and their area of manifestation may also extend beyond the scope of the company. The definition adopted by the Group, in line with supervisory authority guidelines, identifies operational risk as the risk of suffering losses due to the inadequacy or malfunction of procedures, human resources and 88

89 internal systems, or from external events. Amongst others, losses classified as such derive from fraud, human error, operations stoppages, system crashes, contractual default and natural disasters. Operational risk includes legal risk, but not strategic risk or reputational risk. The containment of risk also aims to protect the Group s reputation and brand. Operational risk management activities aim to meet the following guidelines: - To increase overall operational efficiency; - To prevent the occurrence or reduce the probability of events that could potentially generate operating losses by means of appropriate regulatory, organisational, procedural or training measures; - To mitigate the expected impact of such events; - To transfer any risk not expected to be retained by means of contractual insurance instruments. As already mentioned, in terms of prudent supervision, the Group has resolved to use the Basic Indicator Approach (BIA), starting from 2008, to determine the minimum capital requirement with respect to operational risk. Under the operational profile, in addition, a project aimed at the development of advanced methods for the measurement and management of operational risk has been implemented. For further information on these methods, reference should be made to Part E (Information on risks and hedging policies) of the notes to the financial statements. Non-compliance risk and establishment of the Compliance Department In accordance with Bank of Italy instructions issued in 2007, the Credito Valtellinese Group has centralised its compliance department with Deltas, with the aim of creating a single compliance monitoring and control department and to enhance the distinctive competence required for such matters. In this context, and as specified in Supervisory Instructions, the risk of non-compliance with regulations is the risk of incurring legal or administrative penalties, significant financial loss or damage to reputation as a consequence of violation of imperative legislation (laws or regulations) or self-regulation (e.g. articles of association, codes of conduct, codes of self-discipline). In this respect, the Credito Valtellinese Board of Directors resolved on 13 November 2007 to appoint a Compliance Officer as head of the Compliance Department, based in the Compliance and General Affairs Division. This appointment became fully operative from 2 January 2008, the date of entry into force of a series of departmental changes in the organisation. The organisational decision adopted to ensure the correct performance of compliance activities envisages that as part of his duties, the head of Deltas Compliance and General Affairs makes use of line support staff, collaborators located in other organisational units and external consultants under contract. The result is therefore a network model that allows the Compliance Officer same-time access to hierarchical, departmental and contractual leverage in accordance with the defined guidelines. From an action perimeter point of view, the most important legal provisions that the Compliance Department is expected to observe regard intermediation, the management of conflict of interest, transparency to customers and consumer protection measures. The organisation described above has been communicated to all members of the Group, each of which has by special board of directors resolution has appointed a Compliance Department liaison officer, normally a member of General Management, to provide interface and support to the Compliance Officer. This solution was further implemented by the Parent Company Board of Directors at their meeting of 15 January 2008 with approval of the Credito Valtellinese Banking Group Compliance Model which focuses on essential elements of Creval Group policy on compliance later adopted by the boards of directors of all other banks and companies in the group. ANTI-MONEY LAUNDERING During 2007 action continued on the implementation of procedures with the aim of constant, accurate observance of obligations imposed by anti-money laundering law, also in line with indications and recommendations provided by the Ufficio Italiano Cambi after its inspection of the Parent Company during the year, details of which are provided in the separate report on operations. The training programme on this topic continued during the period, aimed at sensitising all employees to the importance of a sound working knowledge of the law on prevention and combating of money laundering and terrorism financing phenomena. In addition to classroom training for Branch Managers, all employees were given access to a self-learning course for compulsory completion by the end of December

90 It should also be mentioned at this point that on 29 December 2007 Italian Legislative Decree 231/2007 entered into force, in enactment of Directive 2005/60/EC on prevention of the use of the financial system for the money-laundering of proceeds of crime and for terrorism financing, and Directive 2006/70/EC containing the implementation measures. The decree envisages a number of new operations, specifically: - a new configuration of the relevant authorities, with suppression of the Ufficio Italiano Cambi and transfer or related competence to the UIF (Financial Information Unit) of the Bank of Italy; - stricter limits on the use of cash and securities payable to the bearer, and on the circulation of bank drafts without the "not transferable" clause; - intensification of adequate customer identification obligations and the introduction of an approach based strongly on the assessment and management of money-laundering and terrorism financing risk; - new thresholds for entries to the Single Electronic Archive; - requirement for special procedural precautions in the event of relations with "politically exposed" parties (heads of state and government, parliamentarians, members of the court, ambassadors and related parties) from EU and non-eu countries. These new aspects, duly communicated to the Group s commercial network, will be subject to transposition of the new version of the internal Consolidated Anti-money Laundering Manual due for issue in the first half of In addition, all tasks required for the full adaptation of company procedures to the new legal provisions were launched. MARKET ABUSE AND PRIVILEGED INFORMATION It should be specified that the law on market abuse places obligations on financial intermediaries to report to Consob on any transactions involving financial instruments listed on regulated markets which could reasonably be considered a violation of market abuse regulations (insider trading and market manipulation). In this respect, 2007 saw the issue of the Credito Valtellinese Banking Group internal regulations on market abuse pursuant to Legislative Decree 58/98 (Consolidated Law on Finance), approved by the Boards of Directors of the Group s banks concerned. This document structurally defines the rules and operating methods adopted by the Group to ensure the internal observance of regulations on the reporting of suspect transactions. As part of the new regulations, the establishment of a Market Abuse Committee was also defined with the role of analysing transactions considered suspect in terms of market abuse, and of expressing non-binding opinion on the subsistence of justified suspicion requiring the issue of a report to Consob. It should also be mentioned that article 4 of the Self-Regulatory Code for Listed Companies recommends the adoption of internal management procedures and external disclosure of documents and information regarding such Companies, with particular reference to Privileged Information, defined by the Consolidated Law on Finance and in CONSOB's Issuers Regulations. In observance of such legislation, at Group level the Credito Valtellinese Banking Group internal procedure on: Privileged Information; register of persons with access to Privileged Information; communications on Internal Dealing was prepared to: - guarantee maximum confidentiality of the information in question; - reduce the risk of abuse of privileged information offences pursuant to art. 184, and market manipulation offences pursuant to art. 185, of the Consolidated Law on Finance; - guarantee application of legal and regulatory provisions on the treatment and disclosure to the market of privileged information and keeping of the register of persons with access to such information. ITALIAN LAW 262 ON THE PROTECTION OF SAVINGS Among the objectives of the Law on Savings (Italian Law 262/2005 and Legislative Decree 303/2006) is the improvement of quality and transparency of corporate reporting, which requires financial market operators to increase the efficiency of their internal audit systems. These regulatory measures redesign the financial reporting process so as to highlight supervisory mechanisms and administrative system traceability, reinforce controls and the transparency of records, and to improve both corporate transparency and the reliability and credibility of information disclosed to the market. 90

91 The new measures proposed by the Law on Savings centres on the preparation of adequate administrative and accounting procedures for financial statements purposes. The expression administrative and accounting procedures refers to: - the processes for collecting, processing and disclosing information of an economic and financial nature; - IT systems for the gathering and processing of accounting data; - the assessment of assets and liabilities; - in general, all activities capable of positively or negatively influencing the accuracy of data and therefore the preparation of financial statements and other financial documents and reports. The same law introduced art. 154-bis of the Consolidated Law on Finance which states that: o the articles of association of issuers must include the professional requirements and method of appointment of an Executive responsible for the preparation of corporate accounting documents, subject to approval by the controlling body; o corporate documents and reports disclosed to the market and related accounting information, including interim statements of the company are accompanied by a written declaration of the executive responsible for the preparation of corporate accounting documents to confirm their correspondence with accounting documents, books and records; o the executive responsible for preparing corporate accounting documents must implement adequate administrative and accounting procedures for preparation of the annual financial statements and, where applicable, the consolidated financial statements and all other disclosures of a financial nature; o the Board of Directors ensures that said executive has adequate powers and means to exercise his duties and supervises the actual observance of administrative and accounting procedures; o the delegated administrative bodies and the executive responsible for the preparation of corporate accounting documents provide a special report for the annual, abbreviated half-year and, where applicable, the consolidated financial statements to confirm: o the adequacy and effective application of procedures indicated pursuant to subsection 3 in the period of reference of the documents o that the documents were prepared in compliance with applicable international accounting standards approved by the European Community; o o o o the correspondence of results with accounting books and records; the suitability of the documents to provide a truthful and accurate view of the equity, economic and financial position of the issuer and the group of companies included in the scope of consolidation; that the report on operations, separate financial statements and, where applicable, the consolidated financial statements include a reliable analysis of the performance and result of operations, and the position of the issuer and companies included in the scope of consolidation, together with a description of the main risks and uncertainties to which they are exposed; that the interim report on operations for the abbreviated half-year financial statements contains a reliable analysis of information pursuant to art. 154-ter, subsection 4 of the Consolidated Law on Finance. The declaration provided is based on the model established by CONSOB regulation. In accordance with the newly-introduced aspects, listed companies are therefore required to establish an Executive responsible for preparation of corporate accounting documents and to identify processes for the collection and generation of equity, economic and financial disclosures, formalising adequate administrative and accounting procedures so as to provide the executives concerned with the tools necessary to assess and periodically confirm the adequacy and effectiveness of operations. On 21 April 2007, the Credito Valtellinese Extraordinary Shareholders Meeting approved amendments to the articles of association in adaptation to the Law on Savings, and on 12 June 2007 the Credito Valtellinese Board of Directors appointed Vice General Manager Enzo Rocca as the Executive responsible for preparation of corporate accounting documents. In May 2007 a specific project was launched at Group level to further improve the quality and transparency of corporate disclosures and to increase efficiency of the internal audit system. The project, launched by the Accounting Documents Executive, involved various departments responsible for activities and controls necessary in the preparation of financial reports (Internal Audit, Organisation, Risk Management, Administration, etc.). 91

92 The reference model identified by the Credito Valtellinese Group to verify the adequacy and effective application of administrative and accounting procedures is based on guidelines established in the "Internal Control - Integrated Framework". The Internal Control Integrated Framework (forming an integral part of the COSO framework ), issued by the Committee of Sponsoring Organizations of the Treadway Commission, is a standard reference methodology for analysis of the internal control system on Financial Reporting widely adopted at international level. The Framework defines the internal control system as a process, performed by top management, management and all company resources, designed to provide a reasonable guarantee of reaching objectives in the following categories: financial reporting reliability, compliance with current laws and regulations, efficacy and efficiency of operating mechanisms. It outlines the Internal Control System as a set of five main components: control environment: the nucleus of every business is its human resources (their individual qualities, including integrity, ethics and skills) and the environment in which they work; risk assessment: the company must be aware of the risks it faces. It must set objectives that are integrated with sales, production, funding and other activities in order that the organisation may operate consistently, establishing risk identification, analysis and management mechanisms; control tasks: the control policies and procedures must be established and implemented in order to contribute to guaranteeing that action identified as necessary by management (to ensure that control objects mitigate risk) is actually performed; information and reporting: information and reporting systems allow resources to obtain and exchange information necessary to address, manage and control the operating mechanisms; monitoring: the entire process must be monitored, and amended as soon as the need arises; in this manner, the control system is able to react dynamically, changing as soon as circumstances require. With regard to general rules governing technology and application developments, the control tasks performed by the EDP Auditing Department, part of the Group s internal audit system, were considered valid. In addition, the "Design, development and maintenance of application software and corporate IT systems was certified as meeting the UNI EN ISO 9001:2000 standard. Upgrading to the COBIT (Control Objective for IT and Related Technologies) standard is in progress. COBIT defines four domains or macro-processes typical of IT-oriented organisations, for each process describing the potential risks, control objectives to be achieved and the related control and safety factors and measures to be considered: Organisation and Planning: includes strategies and identifies the means by which Information Technology can contribute to achieving corporate objectives. System Acquisition, Development and Maintenance: to achieve strategic objectives, the technical solutions must be identified, developed, implemented, maintained and integrated into corporate processes. Distribution and Support of IT Services: the required coverage of IT services must be verified in terms of provision of service, security management and business continuity, user support, data management and operating system management. Monitoring and Auditing: the IT processes must be monitored and subject to periodic review in terms of quality and capacity to reach control objectives. To conclude, the model defined and adopted at analysis stage by the Credito Valtellinese Group allows for a reasonable level of certainty in the reliability of accounting and financial reports. As the COSO Framework points out, no internal control system, even if well-designed and functional, can 100% exclude the existence of malfunction or breach of security that could have an impact on financial reports. 92

93 PRIVACY LAW 2007 saw further development of the project to define an overall Group policy on privacy, with particular regard to aspects concerning instructions to data treatment managers, information provided to recruitment candidates, employees and collaborators of Group companies, video surveillance and the use of biometric data. In addition, in the light of an ad hoc measure issued by the Antitrust Authority on the treatment of customer data, the text provided to customers was reviewed, also in reference to information provided to bank customers on the national introduction of the use of IBAN codes and in relation to the transfer of funds via SWIFT. During the period, standard action was also concluded to fully update the Group s system security policy (DPS). ADMINISTRATIVE LIABILITY OF LEGAL PERSONS During the period, the consolidated text of the "Organisation, Management and Control Model pursuant to Legislative Decree 231/01" for Creval Group companies was issued, combining the operating regulations and code of ethics adopted by Group companies, based on the specific activities performed, to prevent offences pursuant to Italian Legislative Decree 231/2001. OTHER RISKS The risk types outlined in previous paragraphs are the main risks to which the Group s operations are exposed. Furthermore, the second pillar of prudential regulations introduced by the new Basel Accord envisages that in assessing capital adequacy banks should consider all the risks to which they are exposed. In this respect, the Group commenced tasks necessary to recognise further risks which, on first analysis, are attributable to strategic risk and reputational risk. This initiative will allow further refinement of the level of efficiency in risk management activities of the internal control system, and will be instrumental to preparation of the ICAAP statement, required under the second pillar, to be submitted to the Supervisory Authority on an annual basis. 93

94 HUMAN RESOURCES MANAGEMENT AND NEW LEGISLATION Foreword In the current scenario, the Group s ability to attract excellent human resources is a determining factor in maintaining competitiveness. During the year, and continuing from previous years, the Group pursued a human resources policy centred on professional career paths. In full compliance with the principles of the current Strategic Plan, the priorities for human resources management are as follows: - improvement in the quality of new recruits; - ability to integrate resources coming from other banks; - keeping the turnover rate below the sector average; - clearer definition of career paths and professional development; - adjustment of branch operations to new trends in the banking business; - adopting structures to ensure increased flexibility of personnel within the country. In order to achieve these objectives, in 2007 specific initiatives were launched to fine-tune the personnel management and development systems. Organisational model for human resources management As a means of maintaining close contact with its catchment areas, the Group s Organisational Model envisages that human resources management is distributed between the Deltas and Human Resources Departments established as part of the banking network. The task of defining work methods, specialist consulting and common support on human resources matters are centralised with Deltas. Direct human resources management and development, on the other hand, is performed by the individual companies. The central departments guarantee constant implementation and updating of work methods, including the integrated human resources IT system, available for use by all central and peripheral business units of the Group, the database storing and updating personal, organisational, pay-related and training-related data. This database also stores and allows online consultation of information on performance appraisals, potential and professional skills. The human resources bonus and incentive system As part of the human resources management policy a detailed incentive plan was defined and implemented for the sales network focused on quantitative equity and economic data, integrated into the less specific bonus system comprising the series of fixed and variable payments to reward global professionalism and performance achieved by the collaborator in terms of quality and quantity. The bonus system is a process which, according to an organisational workflow arranged in a series of steps, is launched by an economic proposal from the line manager and subsequently involves other players in the process up to the (joint or individual) decision-making body. Deltas operations provide support at the assessment stage of the bonus system by producing reports on the historic pay policies of the Group, compared with appropriate system benchmarks. Recruitment policy The recruitment policy begins with the definition of annual workforce needs formulated by each Company, the definition of which in terms of number and professional skills required forms part of the Group's budgeting for human resources and related costs. The new recruitment options, prepared with the help of departments responsible for the planning and control of operating expenses, are numerically defined in the annual budget. Once the number and skills of human resources to be recruited has been established, recruitment procedures are defined and implemented on a "geographic" basis. In line with the Credito Valtellinese Group's strong localization principles, the selection and recruitment of professional figures for inclusion in a company's workforce begins first of all in the local area in which the company operates, for this purpose making use of a special job application function on the Group s Internet web site and with the help of external companies. In 2007, 308 new human resources were recruited, compared with 237 in 2006 (+30%). 94

95 Number of candidates 11,500 12,369 15,385 Number of interviews 1,329 1,300 1,850 Number of recruits Number of candidates, interviews and recruitments in the period Group workforce As at the end of December the company workforce included in the Group's scope of consolidation comprised 3, collaborators, compared with 3,344 at the end of This increase was based on 308 recruitments and 160 dismissals and resignations. In terms of work categories, the Group's workforce is divided into: - 57 top managers; - 1,113 middle managers; - 2,322 other professional capacities. Top Managers 2% Middle Managers 32% Other professional capacities 66% Workforce by contract category as at 31/12/ Group workforce trend 15 Including 13 collaborators outsourced to companies/authorities not members of the Group. 95

96 3,204 workers were employed on permanent contracts (equal to 91.8% of the total), and 245 on temporary contracts (8.2%). Part-time contracts, regarding 203 employees, involve 5.8% of the total workforce of the Group. Temporary workforce 8% Permanent workforce 92% Permanent and temporary workforce as at 31/12/2007 Part-time 6% Full-time 94% Full and part-time workforce as at 31/12/2007 Training With regard to professional training, during the year, the lines identified in the Training Plan were implemented which consistent with the Strategic Plan, identified training needs through interviews with personnel in the central and peripheral structures and defined the guidelines for development of training paths in line with the strategic objective of maintaining levels of human resource excellence. In 2007, 17,375 days training were provided (+63% on the previous year) of which 11,367 in the classroom, 6,008 as distance learning (virtual classrooms and self-learning courses) corresponding to an average 5 days per employee. 88% of staff participated in training programmes in 2007, compared to 85% in

97 Renewal of the national pay agreement On 8 December 2007 the national pay agreement that expired on 31 December 2005 was renewed for middle managers and professional employees in the banking, financial and complementary sectors. The renewal did not modify any particular areas of the previous 2005 agreement, but for the trade unions clarified certain applicative and interpretational models of the current provisions, opening up new negotiation and comparison options and placing companies in constant dialogue with social representatives. The new pay agreement entered into force on 1 January 2008, unless otherwise dictated by individual regulations, and both the economic and regulatory sections will expire on 31 December The salient points relate to trade union relations, active employment policies and pay. On the first of these topics, the agreement envisages stronger trade union relations at decentralised level, at the same time increasing group negotiation options. Significant changes were also made towards the transfer of trade union relations to banking group level, in observance of principles denying overlapping and duplication in offices of the group. It was also confirmed that contractual assignment is mainly targeted towards achieving the following objectives: - to avoid a division of the human and professional wealth of employees; - to encourage steady occupation; - to encourage the need for flexibility. In this respect, the companies assess the maximum options available for in-service establishment of employees recruited on non-permanent contractual terms. With regard to pay aspects, the two-year period envisages the payment of a lump sum of 4.9% of salary, which also takes into account a 1.7% inflation rate for 2008, 1.5% for 2009 and 1.5% for It should be specified that, with regard to the Group position, amounts provisioned in prior periods have allowed adequate cover of the increased costs deriving from the agreement. An agreement was also reached for top managers in the banking, financial and complementary sectors, which reconfirmed the previous agreement. In particular, the agreement remarked upon the strategic value of professionalism in the category, in consideration of market globalisation, business restructuring and combination processes, unceasing developments in technology and the innovation of banking products and services. Both the economic and legislative sections of the agreement expire on 31 December For 2006 and 2007 an inflation recovery and past productivity bonus is to be paid in the form of a lump sum of around 4.90%. The overall pay increase (as at 1 December 2010), including the aforementioned 4.90% lump sum, related tabling of inflation rates expected for 2008/2009/2010 and the incidence of Long Term Care will be approximately 11%. Amounts provisioned by the Group for top management in prior years also proved to be adequate. 97

98 New legislation on Employee Termination Indemnities As of 1 January 2007 all employees, except for domestic and public administration staff, may opt for their matured employee termination indemnities i.e. matured as from 1 January 2007 to be allocated to complementary pension plans or, for companies with less than 50 employees, to the Fund for the distribution of employee termination indemnities to private sector employees" (the "Treasury Fund") managed by INPS. Employee termination indemnities already provisioned by the company remain untouched by the new measures and continue to be managed by the employer under the current regulations. Opting-in to the transfer of employee termination indemnities to a complementary pension plan is irrevocable, whereas opting-out of the transfer to a complementary pension plan can be revoked. In this respect it should be specified that the complementary pension plans are benefit plans aimed at the distribution of a pension in addition to the State pension. These plans are authorised and subject to supervision of a public authority, the Italian pension funds supervisory commission (COVIP). Complementary pension plans include: Contractual pension funds, open-ended pension funds, individual pension plans and pension funds established prior to November With regard to subscription figures for Group employees, out of 1,056 employees 32% of the total - called upon to express their preference for allocation of employee termination indemnities, 758 opted for 100% or partial allocation of maturing employment termination indemnities to the Group Pension Fund (i.e. over 70% of those queried). 98

99 QUALITY AND SOCIAL RESPONSIBILITY Quality policy and certification In 1995, Credito Valtellinese, in the conviction that quality represents a critical success factor in the banking sector, obtained its first quality certification, based on the provisions of the ISO 9001 international standard, for its loan application, granting and management process. The Parent Company was the first financial intermediary in Italy to obtain the certification for an operational process. There are three main reasons behind the Group s adoption of a Quality strategy: - the pursuit of satisfaction of customers and all stakeholders; - the need to adopt sure, official regulations that cannot be modified at company discretion; - the option to access quality and social responsibility certification along the same path as that followed by numerous business customers. In line with Group strategies, the other banks and companies later obtained their own certification, fully adopting the business model based on quality of service to the customer, in accordance with long-term objective and systematic application of processes. For the first time in 2007, Aperta SGR obtained certification based on the ISO 9001 standard, confirming compliance with its own specific operational procedures. During the year, all certification was renewed for the services provided by the 10 banks and companies of the Group already certified to ISO standard, and Bancaperta obtained certification for its e-commerce QWEB Mark services. On central offices and a sample of 46 branches located throughout the territory, CISQCERT assessors confirmed that the conditions for obtaining certification continued to be met. The certification authority also issued, for the first time, Corporate UNI EN ISO 9001:2000 Certification of the Credito Valtellinese Group to clarify and enhance the integration and coherence of the quality system and certification processes among the various Group companies. At the end of 2007, the certification position was as follows: - Credito Valtellinese, Credito Artigiano, Credito Siciliano and Banca dell Artigianato e dell Industria: planning and provision of services in the credit, transfers, investments, treasury and cash management services for public and private companies; - Bancaperta: provision of web-based banking services to its own customers and to customers of the Group s banks. Cash flow management and the provision of investment services and activities to its own customers and to customers of the Group's banks. Management of the entire Group s private banking, bancassurance and foreign services; - Aperta SGR: asset management services; - Bankadati Servizi Informatici: planning, development and maintenance of software applications and management of corporate IT systems; - Stelline Servizi Immobiliari: planning and coordination of the real estate construction and management; - Deltas CFP (Professional Training Centre): planning and provision of ongoing training courses in the banking field; - Creset Servizi Territoriali: local tax management services; - Fondazione Gruppo Credito Valtellinese: social responsibility system. PattiChiari A consortium of 167 Italian banks covering a total of over 26,000 branches in Italy (83% of the entire Italian banking system) launched by the Italian Banking Association in September 2003 the aim of PattiChiari is to spread the awareness of banking products and services by creating realistic tools for the savings, credit and services areas with a view to increasing the quality of bank-customer relations in a clear, transparent, comparable manner centred on a corporate social responsibility approach. The Group became a convinced, determined member of the consortium, sharing its ideals and as of 2004 obtaining certification for all PattiChiari protocols except for "comparative financial investments" (an initiative suspended by the PattiChiari Consortium following the entry into force of the MiFID Directive). As the remaining services do not form part of its core business, Bancaperta requested and obtained certification for its "basic banking, cheque availability, average response times, general assessment criteria and account switching services. Lastly, with regard to the entire PattiChiari project it should be mentioned that on 19 December the ABI Executive Committee resolved to completely restructure the initiative as part of a strategic plan of action in 99

100 the banking sector to improve relations with retail customers, with significant changes to be implemented in This action aims to: - redefine governance of the banking sector plan of action through the PattiChiari vehicle, called upon to guarantee an explicit consulting and sharing role with stakeholders and which approves a credible verification role through independent, neutral bodies; - define a quality code to provide an overall collection of information tools, procedural tools and quality standards for customer relations. Fondazione Gruppo Credito Valtellinese and the Social Report The strong need felt to compete in the promotion of the geographic areas served, in line with corporate social responsibility principles, is expressed significantly in the Fondazione Gruppo Credito Valtellinese, non-profit making centre of competence of the Group. The Foundation is committed to completing a large number of qualified initiatives in the social and charity field, professional career guidance and training, cultural, artistic and educational activities, research and conferences. The Foundation s annual financial statements receive funding from a part of profits of the Group s Banks. The annual ordinary shareholders' meeting decides on the amount to be allocated to social and charity activities headed by the Foundation. IN DETAIL SODALITAS SOCIAL AWARD: SPECIAL MENTION FOR THE FOUNDATION The Sodalitas Social Award, 2007 seeing its fifth edition, confirms the importance of corporate social responsibility in the Italian production sector: 225 companies applied for the award, submitting a total of 271 projects (28% more than in the previous edition). Fondazione Gruppo Credito Valtellinese, awarded in June 2007, received a special mention and a citation in the Community partnership programme category (76 participants). With regard to initiatives contributing to the improvement of quality of life in the community, and encouraging social cohesion through partnerships with civil organisations and/or public administrations, the Fondazione received a special mention for the Cometa and Argo educational programme, justified as: having developed a school education path to guide secondary school students towards study and employment options that are more consistent with the inclination, potential and interests of the young, taking into account local employment market limits. Established in March 1998 as a Foundation operating in the Valtellinese area, since 2002 the Fondazione Gruppo Credito Valtellinese has become an organisation active throughout Italy. The Foundation's activities aim to promote and sustain cultural, moral, scientific, social and economic progress, mainly in the geographic areas and communities covered by the Credito Valtellinese Group banks, through three specific sectors: social solidarity, career guidance and training, art and culture. For this purpose the Articles of Association state that contributions to operations provided by Group Companies are used mainly to support initiatives in the areas in which the Companies operate, taking into account their traditions and tendencies. A full statement of the Foundation's activities is provided in the Social Report, drafted by Creval since the first bank in Italy to do so - and presenting its thirteenth edition in 2007, to which reference should be made for a complete account of topics linked to relations with stakeholders and corporate social responsibility. 100

101 RATINGS OF THE CREVAL GROUP COMPANIES For the first time in 2002, Credito Valtellinese received a Moody's rating. The Baa1 rating confirmed the Group's competitive capacity and a level of capitalisation appropriate for the nature of risks associated with its business activities. During 2007, the agency uprated its outlook from stable to positive on the following long-term and shortterm ratings assigned to Credito Valtellinese and Bancaperta: - Long-term deposits: Baa1; - Senior Unsecured debt: Baa1; - Subordinate debt: Baa2; - Junior Subordinate: Baa2; - Short-term deposits: Prime-2. The "C-" rating for financial solidity was confirmed with a stable" outlook. In their justification (available in the original version in the "Investor Relations" of the Group's web site) Moody's remarks on the improvement in the overall financial profile of the Parent Company with particular reference to profitability and efficiency parameters and the solid, prudent strategy adopted. Credito Valtellinese was considered adequately capitalised given the share capital increase in 2007, also with regard to planned acquisitions and corporate growth. In May the Parent Company received the following Fitch ratings: - Issuer Default (long term) A-, with stable outlook; - Short term F2; - Individual C; - Support 3. The positive rating is based on the Group s local ties, which show solid interest margins in support of profitability. Credit concentration appears to be well spread both at individual business level and industrial sector level, and remains within acceptable risk limits. In August, to confirm the Parent Company s ratings, the agency assigned the following ratings for the first time to Bancaperta: - Issuer Default (long term) A-, with stable outlook; - Short term F2; - Support 1. Fitch emphasises Bancaperta s role in the treasury, funding and trading services for the entire Group and its close integration with Credito Valtellinese in terms of strategy and risk management. 101

102 STOCK MARKET PERFORMANCE OF LISTED SECURITIES AND FINANCIAL INDICATORS STOCK MARKET PERFORMANCE Credito Valtellinese shares. In 2007, Credito Valtellinese shares constantly outperformed the Comit Bancari benchmark index. The cash flow crisis in international financial markets which peaked at year-end also penalised the share, with respect to the reference benchmark, in the latter part of the year. However, a strong increase in traded volumes of Credito Valtellinese was recorded in reference to both 2007 overall and the daily average, compared to 2006 figures. Over the year, the share recorded a minimum of EUR 8.63 on 22 November, whereas the peak price of EUR was reached on 18 May. The average price was EUR The average daily volume traded on the market was over 340 thousand shares. The share closed the year with a backward slide of 15.2%, compared to the 14.7% reduction recorded by the Comit Bancari index. Credito Valtellinese share performance , , , , ,5 - gen-00 feb-07 mar-07 apr-07 mag-07 giu-07 lug-07 ago-07 set-07 ott-07 nov-07 dic-07 8 Volumes Prices Credito Artigiano shares. Over 2007, Credito Artigiano shares recorded an increase in market trading volumes compared with the previous year. In the first half of 2007 the average listed price for the Credito Artigiano share was EUR 3.915, with a minimum of EUR recorded on 5 March and a maximum of EUR on 21 May. For 2007 as a whole, the share recorded a minimum of EUR 3.51 on 19 December, whereas the maximum of EUR was reached on 19 July. The average price over the twelve months was EUR 3.93, with average daily trading volumes of just under 105 thousand shares. 102

103 Credito Artigiano share performance , ,6 4, , ,8 3, , ,2 - gen-00 feb-07 mar-07 apr-07 mag-07 giu-07 lug-07 ago-07 set-07 ott-07 nov-07 dic-07 3 Volumes Prices Credito Valtellinese and Credito Artigiano share performance compared with Mibtel and Comit Bancari gen-07 feb-07 mar-07 apr-07 mag-07 giu-07 lug-07 ago-07 set-07 ott-07 nov-07 dic-07 Credito Valtellinese Credito Artigiano Mibtel Comit Bancari 103

104 FINANCIAL INDICATORS LISTED BANKS OF THE GROUP 16 Price to book value The price/book value expressed as a shareholders' equity multiplier - indicates the market value of the entire share capital of a listed company and indirectly, therefore, the total assets of that company. Even taking into account external factors that could influence listed price performance, the index to a certain extent represents the appreciation of some investors in the future profit potential and equity solidity of the company. The table below illustrates development over the last five years of the price/book value calculated on annual average prices of the Parent Company and Credito Artigiano. CREDITO VALTELLINESE 2003 (*) 2004 (*) average price book value per share price/book value per share CREDITO ARTIGIANO 2003 (*) 2004 (*) average price book value per share price/book value per share (*) Shareholders equity was not recalculated, in accordance with IAS/IFRS international accounting standards The payout ratio The pay out ratio measures the percentage ratio the amount distributed as dividends and the profit produced. During the year, this ratio for the Parent Company and the subsidiary Credito Artigiano reached high values, demonstrating the dividend policy focused on maximising the level of wealth produced and distributed to partners and shareholders. (in thousands of EUR) CREDITO VALTELLINESE 2003 (*) 2004 (*) 2005 (*) net profit 32,066 36,483 41,830 48,121 63,603 amount of dividends 21,831 26,404 31,387 36,389 54,600 pay out ratio 68% 72% 75% 76% 86% CREDITO ARTIGIANO 2003 (*) 2004 (*) 2005 (*) net profit 15,154 15,457 18,274 28,478 34,886 amount of dividends 13,155 13,413 14,921 23,282 30,330 pay out ratio 87% 87% 82% 82% 87% (*) Net profit was not recalculated, in accordance with IAS/IFRS international accounting standards. Dividend yield The progress of the dividend yield an indicator of returns in terms of the dividend on shares valued at the annual average price as a ratio of the dividend in relation to the corresponding financial period for Credito Valtellinese and its subsidiary Credito Artigiano recorded an appreciable return on investment. CREDITO VALTELLINESE Unit dividend average price dividend yield 5.7% 5.0% 3.7% 3.3% 3.26% CREDITO ARTIGIANO Unit dividend average price dividend yield 3.40% 3.62% 3.73% 4.61% 5.42% 16 Alternative performance indicators. 104

105 Consolidated earnings per share The table below reports the performance of the consolidated earnings per share (EPS), calculated as the ratio between consolidated net profit subtracting quotas destined for the welfare and benefits funds of the Parent Company and the other Group Banks, calculated on the related percentage control and the average weighted number of shares of Credito Valtellinese outstanding during the year. In 2007 the consolidated earnings per share was EUR 0.63 compared to EUR 0.76 in CREDITO VALTELLINESE Attributable consolidated profit 53,973 66,078 82,463 Weighted average of Parent Company shares 74,723,668 87,226,387 Basic consolidated earnings per share ,347,

106 HIGHLIGHTS FOR THE SUBSIDIARIES AND MAIN ASSOCIATED COMPANIES Credito Artigiano S.p.A. BALANCE SHEET DATA 31/12/ /12/2006 % change (in thousands of EUR) Loans to customers 5,012,320 4,246, % Direct deposits from customers 5,565,648 4,651, % Indirect deposits from customers 4,654,533 4,599, % Shareholders equity 463, , % INCOME STATEMENT DATA % change (in thousands of EUR) Operating income 227, , % Operating costs -120, , % Net income from banking activities 106,765 89, % Net income for the period 41,915 34, % Credito Siciliano S.p.A. BALANCE SHEET DATA 31/12/ /12/2006 % change (in thousands of EUR) Loans to customers 2,204,198 1,838, % Direct deposits from customers 2,460,394 2,231, % Indirect deposits from customers 1,511,229 1,532, % Shareholders equity 198, , % INCOME STATEMENT DATA % change (in thousands of EUR) Operating income 156, , % Operating costs -110, , % Net income from banking activities 45,638 31, % Net income for the period 9,679 7, % Banca dell'artigianato e dell'industria S.p.A. BALANCE SHEET DATA 31/12/ /12/2006 % change (in thousands of EUR) Loans to customers 668, , % Direct deposits from customers 589, , % Indirect deposits from customers 136, , % Shareholders equity 78,420 78, % INCOME STATEMENT DATA % change (in thousands of EUR) Operating income 24,025 19, % Operating costs -17,216-13, % Net income from banking activities 6,810 5, % Net income for the period % 106

107 Credito Piemontese S.p.A. KEY DATA % change (in thousands of EUR) Shareholders equity 18,469 18, % Operating income % Operating costs % Net income from banking activities % Net income for the period % Mediocreval S.p.A. BALANCE SHEET DATA 31/12/ /12/2006 % change (in thousands of EUR) Loans to customers 321, , % Direct deposits from customers 194, , % Shareholders equity 96,732 73, % INCOME STATEMENT DATA % change (in thousands of EUR) Operating income 16,158 17, % Operating costs -11,700-12, % Net income from banking activities 4,458 4, % Net income for the period 1,182 1, % Finanziaria San Giacomo S.p.A. KEY DATA 31/12/ /12/2006 % change (in thousands of EUR) Loans 124, , % Shareholders equity 3,203 3, % Net income from banking activities % Net income for the period % Bancaperta S.p.A. BALANCE SHEET DATA 31/12/ /12/2006 % change (in thousands of EUR) Loans to customers 8,890 14, % Direct deposits from customers 946, , % Indirect deposits from customers 1,001,177 1,530, % Shareholders equity 124, , % INCOME STATEMENT DATA % change (in thousands of EUR) Operating income 41,178 44, % Operating costs -24,925-28, % Net income from banking activities 16,253 15, % Net income for the period 11,986 9, % 107

108 Aperta SGR S.p.A. KEY DATA 31/12/ /12/2006 % change (in thousands of EUR) Loans 5,826 5, % Shareholders equity 5,747 5, % Net fee and commission income 4,394 4, % Net income from banking activities 1,483 1, % Net income for the period % Aperta Fiduciaria S.p.A. KEY DATA 31/12/ /12/2006 % change (in thousands of EUR) Non current assets % Current assets % Current liabilities % Shareholders equity % Net income for the period % Creset S.p.A. KEY DATA 31/12/ /12/2006 % change (in thousands of EUR) Loans to customers 65,988 57, % Due to customers 77,501 58, % Shareholders equity 2,578 2, % Net income for the period % Deltas S.p.A. KEY DATA 31/12/ /12/2006 % change (in thousands of EUR) Non current assets % Current assets 7,380 6, % Non current liabilities % Current liabilities 6,444 5, % Shareholders equity 1,412 1, % Net income for the period % Bankadati SI S.p.A. KEY DATA 31/12/ /12/2006 % change (in thousands of EUR) Non current assets 10,596 11, % Current assets 5,970 4, % Non current liabilities 3,209 2, % Current liabilities 8,108 7, % Shareholders equity 5,250 4, % Net income for the period % 108

109 Stelline S.p.A. KEY DATA 31/12/ /12/2006 % change (in thousands of EUR) Non current assets 4,326 5, % Current assets 21,505 22, % Non current liabilities 3,970 4, % Current liabilities 8,360 9, % Shareholders equity 13,502 13, % Net income for the period % 109

110 AUDIT The consolidated financial statements were audited by the independent auditing firm Reconta Ernst & Young S.p.A. SIGNIFICANT EVENTS OCCURRING AFTER THE CLOSE OF THE FINANCIAL YEAR On 21 February 2008 the agreement was finalised for the acquisition of 35 Intesa Sanpaolo branches for a sum provisionally calculated as EUR 395 million, based on estimated direct and indirect deposits as at 31 December The final price will be calculated on the actual total deposits as at the date of transfer of the branches. With regard to the exercise of option rights, the Credito Artigiano share capital increase against payment resolved by the extraordinary shareholders' meeting of 20 December 2007, was completed on 7 March To date, Credito Valtellinese has already subscribed its own respective quota of the share capital increase, by payment of approximately EUR 196 million. With regard to the commitment to full subscription of the share capital increase also in relation to any shares unoptioned on closure of the stock market offering, pursuant to art. 2441, subsection 3 of the Italian Civil Code, on 20 March 2008, the final payment made by Credito Valtellinese could reach a total of around EUR 228 million. BUSINESS FORECAST In an economic context there are signs of increasing uncertainty regarding the economic situation and financial market performance. Despite this, the Board of Directors has reason to believe that Group results for the period will show further progress in terms of both balance sheet aggregates and performance of the main profit indicators, in line with Strategic Plan objectives. 110

111 CLOSING REMARKS Dear Shareholders, we conclude this report by emphasising that the positive results it describes were possible as a result of the fundamental contribution of all Collaborators who, in their respective roles and levels of responsibility, have demonstrated a strong and dedicated commitment to the Group's commercial and support activities. The Board of Directors therefore particularly applauds the Collaborators and the entire management in expressing its appreciation for their profitable and vital collaboration, the true force behind our companies. Our heartfelt thanks go first and foremost t you, our Shareholders, for the constant faith demonstrated also at the time of the Parent Company share capital increase. Your support in reaching key objectives which, in the year in question, led to the growth of the Group is a fundamental stimulating factor for continued development and for facing new challenges and, of course, important gratification for the work undertaken to date. A special thank you goes to our Customers, whose growing number confirms the effectiveness of the action taken. It is to our Customers that our research departments dedicate the proposal of products and services that increasingly respond to a wide variety of real needs. We also thank the Chairman, Directors, Statutory Auditors and members of General Management that each day and with top level professionalism and constant dedication strive towards the ideal management of the Group s Banks and Companies, often in complex circumstances. We again express our gratitude to the Bank s Board of Statutory Auditors and the Independent Auditing Firm Reconta Ernst & Young S.p.A. for their scrupulous and assiduous control of the regular keeping of corporate administrative, management and accounting operations, and for the skill demonstrated in performing their respective duties. We would like to remind shareholders of the work of the Credito Valtellinese Group Foundation which in this last year has more than ever proved its worth in contributing to the cultural and social spheres in the Bank s reference territory. We also wish to express our gratitude and admiration for the Supervisory Authority and market organisations: the Bank of Italy for the attention they have continued to demonstrate to us throughout the year, to CONSOB, to the Antitrust Authority for competition and the market and to Borsa Italiana for their vital collaboration, always marked by the transparency and fairness that distinguish their market operations. Lastly, we would like to acknowledge the skilful support and amiable approachability always demonstrated to us by the Italian Banking Association (ABI) and the Italian National Association of Cooperative Banks. The Board of Directors Sondrio, 18 March

112 Guide to consultation The purpose of the consolidated financial statements is to illustrate the equity and financial position, economic result, changes in shareholders equity and cash flows of the Credito Valtellinese Group as at 31 December Their content is governed by Bank of Italy Circular no. 262 of 22 December 2005, issued pursuant to art. 5, Italian Legislative Decree no. 87 of 27 January 1992 and taking into account the amendments introduced by art. 9 of Legislative Decree no. 38 of 28 February 2005 Exercise of options pursuant to art. 5, EC Regulation no. 1606/2002 on international accounting standards". Also included is information required under the international accounting standards, even where not specified in the aforementioned provisions. 112

113 CONSOLIDATED FINANCIAL STATEMENTS 113

114 CONSOLIDATED BALANCE SHEET ASSETS 31/12/ /12/ Cash and cash equivalents 158, , Financial assets held for trading 1,284,560 1,287, Financial assets available for sale 70,288 49, Financial assets held to maturity Due from banks 760, , Loans to customers 13,754,333 11,445, Investments in associates and companies subject to joint control 201, , Property, plant and equipment 393, , Intangible assets 106, ,815 of which: - goodwill 101, , Tax assets 113, ,619 a) current 59,667 70,110 b) pre-paid 54,116 45, Other assets 384, ,767 Total assets 17,228,262 14,901,453 LIABILITIES AND SHAREHOLDERS' EQUITY 31/12/ /12/ Due to banks 848, , Due to customers 9,858,921 9,096, Securities issued 3,849,735 2,977, Financial liabilities held for trading 8,150 6, Tax liabilities: 122,298 88,421 a) current 115,288 84,159 b) deferred 7,010 4, Other liabilities 626, , Employee termination indemnities 53,169 55, Provisions for risks and charges: 67,692 64,697 a) post employment benefits 32,738 33,600 b) other provisions 34,954 31, Valuation reserves 73, , Equity instruments Reserves 118,084 93, Share premium reserve 738, , Share capital 562, , Treasury shares (-) -1, Minority interests (+/-) 216, , Net income (loss) for the period (+/-) 85,773 68,614 Total liabilities and shareholders equity 17,228,262 14,901,

115 CONSOLIDATED INCOME STATEMENT ITEMS Interest income and similar income 842, , Interest expense and similar expense (396,046) (254,070) 30. Interest margin 445, , Fee and commission income 211, , Fee and commission expense (18,998) (17,816) 60. Net fee and commission income 192, , Dividend and similar income 1,653 1, Profits (losses) on trading activities 10,213 22, Fair value adjustments in hedge accounting Profit/loss from disposal or repurchase of: 564 3,430 a) loans - (93) b) financial assets available for sale 8 3,288 d) financial liabilities Net interest and other banking income 651, , Net losses/recoveries on impairment of: (75,125) (58,078) a) loans (75,038) (58,107) d) other financial activities (87) Net income from banking activities 575, , Administrative expenses: (406,409) (381,451) a) personnel expenses (236,063) (222,990) b) other administrative expenses (170,346) (158,461) 190. Net provisions for risks and charges (6,465) (8,657) 200. Net adjustments to/recoveries on property, plant and equipment (19,363) (20,715) 210. Net adjustments to/recoveries on intangible assets (4,090) (4,521) 220. Other operating expenses/income 46,342 44, Operating expenses (389,985) (370,347) 240. Profit (loss on investments in associates and companies subject to joint control 13,329 13, Goodwill impairment (1,199) Profit (loss) on disposal of investments Income (loss) before tax from continuing operations 198, , Taxes on income from continuing operations (96,259) (69,940) 300. Income (loss) after tax from continuing operations 102,114 80, Income (loss) after tax from discontinued operations - 1, Net income (loss) for the period 102,114 81, Minority interests (16,341) (12,513) 340. Net income (loss) for the period pertaining to the parent company 85,773 68, Earnings per share(euro) Diluted earnings per share (euro)

116 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY Group Equity Closing balance as at 31/12/ group Closing balance as at 31/12/ minority interests Change to opening balances Share capital: a) ordinary shares 272,914 82, ,914 82,331 53, , ,061 81,347 b) other shares Share premium reserve 323,023 50, ,023 50, , , ,631 45,922 Reserves: a) profits 92,995 32,918 92,995 32,918 17, ,131 14, ,779 48,192 b) other , Valuation reserves: a) available for sale 8, , , , b) cash flow hedging c) other (*) 115,312 25, ,312 25,461-53, ,782 25,080 Equity instruments Treasury shares ,990-8,567-1,338 Net income (loss) for the period 68,614 12,513 68,614 12,513-18,418-1,083-61,626 85,773 16,341 85,773 16,341 Shareholder s Equity 881, , , , ,626 9,607 8, , , ,773 16,341 1,576, ,934 (*) The amount refers to valuation reserves for property, plant and equipment. Opening Opening balance as at balance as at 01/01/ /01/ minority group interests Allocation of prior year income Group reserves Reserves - minority interests Dividends and other allocations Change in reserves - group Change in reserves - minority interests Issue of new shares Issue of new minority interest shares Changes for the period Transactions on shareholders' equity Purchase of treasury shares Allocation of extraordinary dividends Change in equity instruments Derivatives on treasury shares Stock options Shareholders' Net income (loss) Shareholders' equity as at Net income (loss) as at 31/12/2007 equity as at 31/12/ as at 31/12/ minority 31/12/ minority group interests group interests Closing balance as at 31/12/ group Closing balance as at 31/12/ minority interests Change to opening balances Opening balance as at 01/01/ group Opening balance as at 01/01/ minority interests Allocation of prior year income Group reserves Reserves - minority interests Dividends and other allocations Change in reserves - group Change in reserves - minority interests Changes for the period Transactions on shareholders' equity Group Equity interests Share capital: a) ordinary shares 235,405 82, ,405 82,601-4,200 37,509 3, ,914 82,331 b) other shares - Share premium reserve 273,358 49, ,358 49,213-2,087 49,665 3, ,023 50,390 Reserves: a) profits 74,763 28,324 74,763 28,324 13,062 10,546 5,170-5,952 92,995 32,918 b) other Valuation reserves: a) available for sale 1, , , , b) cash flow hedging - - c) other (*) 114,385 27, ,385 27, , ,312 25,461 Equity instruments 1,230 1, Treasury shares 4,459-5, Net income (loss) for the period 55,530 10,546 55,530 10,546-13,989-10,546-41,541 68,614 12,513 68,614 12,513 Shareholder s Equity 756, , , ,672-41,541 12,821-13,848 91,633 7,194-5, ,614 12, , ,531 Issue of new shares Issue of new minority interest shares Purchase of treasury shares Allocation of extraordinary dividends Change in equity instruments Derivatives on treasury shares Stock options Net income (loss) Shareholders' Net income (loss) as at 31/12/2006 equity as at as at 31/12/ minority 31/12/ group group Shareholders' equity as at 31/12/ minority interests (*) The amount refers to valuation reserves for property, plant and equipment. 116

117 CONSOLIDATED CASH FLOW STATEMENT Direct method A. OPERATING ACTIVITIES 1. Management 252, ,893 - interest income received (+) 863, ,611 - interest expense paid (-) -403, ,553 - dividend and similar income (+) 1,611 1,180 - net commissions (+/-) 192, ,164 - personnel expenses (-) -237, ,994 - other costs (-) -131, ,996 - other revenues (+) 68,147 70,790 - taxes (-) -100, ,352 - costs/revenues after tax from discontinued operations (+/-) - 1, Cash flow generated/utilised by financial assets -2,371,685-1,890,361 - financial assets held for trading -7, ,994 - financial assets available for sale -25,070-11,135 - loans to customers -2,376,466-1,516,715 - due from banks: repayable on demand -40,145 18,074 - due from banks: other 141, ,713 - other assets -64,773 37, Cash flow generated/utilised by financial liabilities 1,596,738 1,779,434 - due to banks: repayable on demand 74,528-24,278 - due to banks: other -177, ,439 - due to customers 757,417 1,179,078 - securities issued 859, ,440 - financial liabilities held for trading 8,835-6,776 - other liabilities 73, ,531 Cash flow generated/utilised by operating activities -522,162 37,966 B. INVESTMENT ACTIVITIES 1. Cash flow generated by ,394 - sale of investments in associates and companies subject to joint control - 1,553 - dividends from investments in associates and companies subject to joint control sale of property, plant and equipment , Cash flow utilised by -42,759-86,454 - purchase of investments in associates and companies subject to joint control -20,504-12,771 - purchase of property, plant and equipment -18,246-67,622 - purchase of intangible assets -4,009-6,061 Cash flow generated/utilised by investment activities -42,025-72,060 C. FUNDING ACTIVITIES - issue/purchase of treasury shares 650,320 86,413 - issue/purchase of equity instruments dividend distribution and other -61,626-41,541 Cash flow generated/utilised by funding activities 588,694 44,350 NET CASH FLOW GENERATED/UTILISED DURING THE PERIOD 24,507 10,

118 RECONCILIATION Balance sheet items Cash and cash equivalents at the beginning of the period 133, ,624 Net cash flows generated/absorbed during the period 24,507 10,256 Cash and cash equivalents at the end of the period 158, ,880 Key: (+) generated (-) utilised 118

119 Guide to consultation The purpose of the notes to the financial statements is to highlight all complementary information required for a better understanding and greater reliability of the financial statements. They form an integral part of the statements, and are to be read as a whole along with the balance sheet, income statement, the statement of changes in shareholders equity and the cash flow statement. The content of the notes to the financial statements is governed by Bank of Italy Circular no. 262 of 22 December 2005, issued pursuant to art. 5, Italian Legislative Decree no. 87 of 27 January 1992 and taking into account the amendments introduced by art. 9 of Legislative Decree no. 38 of 28 February 2005 Exercise of options pursuant to art. 5, EC Regulation no. 1606/2002 on international accounting standards". Also included is information required by CONSOB and under international accounting standards, even where not specified in the aforementioned provisions. 119

120 CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS 120

121 PART A ACCOUNTING POLICIES A.1 - GENERAL INFORMATION SECTION 1 - STATEMENT OF COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS Pursuant to art. 4 of Legislative Decree no. 38 of 28 February 2005, the consolidated financial statements of the Credito Valtellinese Group have been drawn up according to IAS/lFRS accounting standards issued by the International Accounting Standards Board (IASB) and approved by the European Union, which the bank was required to comply with by 31 December 2007, including the related interpretations of the lnternational Financial Reporting Interpretations Committee (lfric), as set forth by EC Regulation no of 19 July The individual financial statements as at 31 December 2007 have been prepared in compliance with the instructions issued by the Bank of Italy within the scope of its regulatory function over the technical structure of financial statements of banks and financial institutions as provided by Legislative Decree 38/05: "Instructions for the preparation of the separate and consolidated financial statements of banks and financial companies which are parent companies of banking groups" (Provision of 22 December circular no. 262). SECTION 2 - BASIS OF PREPARATION The financial statements consist of the Balance Sheet, the Income Statement, the Statement of Changes in Shareholders' equity, the Cash Flow Statement and these Notes to the financial statements and are accompanied by the Directors Report on Operations. The amounts reported in the Financial Statements, the Notes to the financial statements and the Directors' Report, are in thousands of euro, unless indicated otherwise. The financial statements and the notes to the financial statements show, in addition to the amounts for the reporting period, also the comparatives as at 31 December In the Balance Sheet and Income Statement, drafted according to the regulations of the Bank of Italy, any items equal to zero for the year under review and for the previous year have not been included. In the Income Statement and in Part C of the Notes to the financial statements dealing with the Income statement, costs are reported in round brackets, while revenues are not. The Statement of Changes in Shareholders Equity presents the breakdown and changes occurred in the shareholders equity during the year under review and the previous one. The Cash Flow Statement has been prepared according to the direct method, in which the main cash collection and disbursement items are displayed. The cash flows for the year are divided into operating, investment and funding activities. The Notes to the financial statements do not include the sections pertaining to items equal to zero in the year under review and in the previous one. Moreover, the tables presented in Part B Information on the Balance Sheet and in Part C Information on the Income Statement refer exclusively to the banking group, as companies included in the categories insurance companies" or other companies included in the scope of consolidation are excluded from the scope of consolidation. On 25 February 2008 the Bank of Italy sent the Banks a clarification regarding the accounting methods applicable to Build Leases (so-called leasing in costruendo ). More specifically, as regards build leases, two types of contracts have been identified which differ in the transfer of risks associated with site management and the execution of the asset to be leased. As far as the preparation of the financial statements is concerned, in the first case (Build-Operate-Transfer or BOT where risks are transferred) the lessors report the transactions concerning assets under construction and those to be leased which are found under receivables. In the second case (Build-Own-Operate or BOO where risks are not transferred), the lessors show the assets under construction and those to be leased under Assets used in the business. Thus, build leases have been included in the financial statements according to this interpretation. As a result, comparatives (financial statements as at 31 December 2006) were restated in accordance with paragraph 38 of IAS 1 without affecting net profit and shareholders equity. 121

122 SECTION 3 CONSOLIDATION AREA AND METHODS Section 3 Consolidation area and methods The consolidated accounts include Credito Valtellinese and the companies directly or indirectly controlled by it. Investments in companies subject to exclusive control are those in respect of which the Bank has the power of governing the financial and operating policies of the entities with a view of gaining economic benefits from their activities. Investments in companies subject to joint control are those in respect of which the Bank, together with other parties subject to the terms of an agreement, has the power of governing the financial and operating policies of the entities with a view to gaining economic benefits from their activities. Such control exists only when the decisions require unanimous consent of the parties that hold the joint control. The book value of the investments in subsidiaries, whose accounts are consolidated on a line-by-line basis, is offset against the corresponding share in the shareholders equity. The differences arising from this transaction, after recording the subsidiary s assets and liabilities, are stated under Intangible assets Goodwill; if negative, they are directly recognised in the income statement. Minority interests are assigned the corresponding shares of equity and net profit. Dividends booked to the parent company s financial statements and concerning investments in companies included in the area of consolidation or valued at equity have been cancelled. Taxes associated with consolidation adjustments have been accounted for, when applicable. The investments in companies subject to joint control were valuated at equity. Changes to the shareholders equity due to profits or losses of subsidiaries are booked on the basis of the equity ratios under item Profit from investments in associates and companies subject to joint control. Other changes are booked to reserves. Business combinations carried out in the financial year are accounted for according to IFRS 3. In particular, the difference between the cost of the business combination and the share of the fair value of excess assets over liabilities: - if positive (cost of the investment higher than the corresponding share of the fair value of the net balance of purchased assets and liabilities) is recognised in the consolidated balance sheet under Intangible assets Goodwill ; - if negative (cost of the investment lower than the corresponding share of the fair value of the net balance of purchased assets and liabilities) is recognised directly in the income statement. In the event of acquisitions of jointly-controlled companies: - the excess book value over the share of equity pertaining to the Group, arisen upon acquisition, is recorded as a consolidated balance sheet asset under the item Investments in associates and companies subject to joint control ; - the lower book value than the share of equity pertaining to the Group is booked directly in the income statement. 122

123 1. Investments in companies subject to exclusive and joint control (consolidated on a proportional basis) Company name Registered office Type of relationship (1) Share capital Type of investment % voting rights (2) (amounts (in thousands of EUR) Participating company % held A. Companies A.1 Consolidated on a line-by-line basis 1. Credito Valtellinese Soc. Coop. Sondrio 1 562, Credito Artigiano S.p.A. Milan 1 142,396 A Credito Siciliano S.p.A. Palermo 1 95,826 A A Bancaperta S.p.A. Sondrio 1 84,240 A A A Mediocreval S.p.A. Sondrio 1 55,078 A A A Banca dell'artigianato e dell'industria S.p.A. Brescia 1 69,542 A A Bankadati Servizi Informatici S.p.A. Sondrio 1 2,500 A A Stelline Servizi Immobiliari S.p.A. Sondrio 1 12,500 A A Deltas S.p.A. Sondrio A A Creset S.p.A. Lecco 1 2,600 A Aperta Fiduciaria S.r.l. Milan 1 50 A Aperta SGR S.p.A. Milan 1 4,966 A Credito Piemontese S.p.A. Turin 1 15,534 A Finanziaria San Giacomo S.p.A. Sondrio 1 3,000 A Key (1) = majority of voting rights in the ordinary shareholders' meeting; 2 = dominant influence in the ordinary shareholders' meeting; 3 = agreements with other shareholders; 4 = other forms of control; 5 = sole direction pursuant to art.26, paragraph 1, of "Legislative Decree 87/92"; 6 = sole direction pursuant to art.26, paragraph 2, of "Legislative Decree 87/92"; 7 = joint control (2) Voting rights held in the ordinary shareholders' meeting, only if different from the ownership percentage, divided into actual and potential: 1 = actual 2 = potential 123

124 2. Other information Associated companies are those under significant influence, i.e. the Parent Company has the power of participating in the determination of financial and operating policies, but has no control or joint control over those policies. Said investments were valued at equity. In applying the equity method to the investment in Istituto Centrale delle Banche Popolari Italiane, the consolidated results of the latter were taken into account. The investment in Serv.Int.Sicilia S.r.l. (30%) held through Credito Siciliano S.p.A., and the investments in Sondrio Città Centro S.r.l. (30%) and Progetti Industriali Valtellina S.r.l. (49%) held through Stelline Servizi Immobiliari S.p.A. were recorded at cost as they were not considered to be material. SECTION 4 - EVENTS AFTER THE BALANCE SHEET DATE On 21 February 2008 a contract was completed for the acquisition of 35 branches from Intesa Sanpaolo, for a temporary consideration of EUR 395 million on the basis of the total estimated (direct and indirect) deposits at 31 December The final consideration will be determined on the basis of the actual amount of total deposits at the date the branches were disposed. As regards the exercise of the option rights, the share capital increase, against payment, of Credito Artigiano resolved upon by the Extraordinary Shareholders Meeting of 20 December 2007 was completed in March To date Credito Valtellinese has already subscribed its quota of the share capital by paying in approximately EUR 196 million. As regards the commitment undertaken to fully subscribe the share capital increase relating to the share options that had not been exercised by the end of the Stock Exchange Offer pursuant to Art. 2441, third paragraph of the Civil Code, which will be completed on 20 March, the maximum final payment by Credito Valtellinese may amount to approximately EUR 228 million. SECTION 5 - OTHER ASPECTS These financial statements are subject to audit by the independent auditing firm Reconta Ernst & Young. Group companies decided to opt for "national tax consolidation". The decision to opt for the national tax consolidation, regulated by articles 117 and subsequent of the Income Tax Consolidation Act, allows the Parent Bank to consolidate the income of group companies, resulting in a single tax liability for the Parent Bank. A.2 MAIN AGGREGATES This section provides information on the accounting principles adopted for drawing up the Annual Report. Recognition, classification, measurement and derecognition criteria are illustrated for each individual item, including, if relevant, the recognition criteria for the income items. 1. Financial assets held for trading The item includes: - debt and equity instruments purchased primarily in order to obtain profit in the short term; - derivative contracts other than those designated as effective hedging instruments, when their fair value is positive. Debt and equity instruments are recognised in the financial statements at their settlement date, whilst derivative financial instruments at the trading date. Upon initial recognition they are recorded at fair value, usually represented by the transaction price, without considering the transaction costs directly attributable to the instrument; subsequently they are booked at fair value. Any gains and losses associated to the above, including those arising from trading, any cashed interest and dividends and changes in fair value due to market rate fluctuations, changes in share prices and other market variables, are recognised in the income statement. Financial assets or parts thereof are derecognised when the contractual rights to the cash flows expire or are transferred without retaining the risks and rewards associated with them. 124

125 2. Financial assets available for sale This item comprises non-derivative financial assets with fixed or determinable payments and fixed maturity, that an entity has the positive intention and ability to hold to maturity. They are initially recognized at settlement date, and measured at fair value inclusive of transaction costs directly attributable to the acquisition. After initial recognition, any change in fair value is booked to the shareholders equity until such assets are derecognised, when they are booked to the income statement. If the fair value of equity instruments cannot be determined reliably, they are carried at cost. At every balance sheet date, these financial assets are assessed for evidence of impairment. Evidence of impairment originates from one or more events occurring after the initial recognition of the asset, which have an impact on the estimated future cash flows of the financial asset (or group of financial assets) that can be reliably estimated. In case a financial assets available for sale is impaired, the whole loss, including the portion previously booked to shareholders equity, is recycled to the income statement. Any recoveries, which are allowed only if the circumstances giving rise to the impairment no longer exist, are booked to the income statement, in case of loans or debt instruments, and to shareholders equity, in case of equity instruments. The amount of the recovery cannot, in any case, exceed the amortised cost that the financial instrument would have had if no adjustments had been made in the past. Interest is entered in the Income Statement and calculated according to the effective interest rate method. Dividends on equity instruments are booked in the Income Statement when payment is due. Financial assets or parts thereof are derecognised when the contractual rights to the cash flows expire or are transferred without retaining the risks and rewards associated with them. 3. Financial assets held to maturity This item comprises non-derivative financial assets with fixed or determinable payments and with a fixed expiry date and which the Bank intends and is able to hold to maturity. They are initially recognized at settlement date, and measured at fair value including transaction costs directly attributable to the acquisition. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method. If the fair value of equity instruments cannot be determined reliably, they are carried at cost. At every balance sheet date, these financial assets are assessed for objective evidence of impairment. Evidence of impairment originates from one or more events occurring after initial recognition of the asset, which have an impact on the estimated future cash flows of the financial assets (or group of financial assets) that can be reliably estimated. The loss is measured as the difference between the book value and the present value of the future estimated cash flows discounted using the effective interest originally applied to the loan. Any recoveries are allowed only if the circumstances that had caused the impairment no longer exist. The recovery is booked to the income statement and, in any case, cannot exceed the amortised cost that the instrument would have had if no previous adjustments had been booked. Financial assets or parts thereof are derecognised when the contractual rights to the cash flows expire or are transferred without retaining the risks and rewards associated with them. 4. Loans These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans are initially recognized at the disbursement date, and debt securities are recognized at their settlement date. Upon initial recognition, they are recorded at the consideration paid or the subscription price, normally equal to their fair value including any directly attributable transaction costs. Subsequently they are measured at amortised cost using the effective interest method. The effective interest rate is the rate that equates the present value of cash flows expected throughout the life of the instrument (up to the maturity or expected maturity or shorter period if appropriate) to the net carrying amount of the asset. The rate used for the calculation of the interest allows the latter to be systematically allocated over the life of the instrument. The expected flows have been calculated considering all contract terms of the instrument and including all fees and basis points paid or received by and between the contracting parties, transaction costs and any other premium or discount that is measurable and considered an integral part of the effective interest rate of the transaction. If it is not possible to obtain a reliable estimate of the expected cash flows or of the expected life of the instrument, the contract cash flows determined according to the terms set for the 125

126 instrument have been used instead. The amortised cost has not been calculated for short-term transactions the effect of which is considered immaterial. At every balance sheet date, these financial assets are tested for impairment. Evidence of impairment originates from one or more events occurring after the initial recognition of the asset, which have an impact on the estimated future cash flows of the financial asset (or group of financial assets) that can be reliably estimated. Instruments which, based on the regulations of the Bank of Italy, were designated as doubtful, substandard, restructured or past due/over-limit for over 180 days have been assessed on an individual basis, whilst performing loans on a portfolio basis. Loans are classified, in accordance with the criteria set by the Bank of Italy, as follows: a) doubtful loans: loans in a state of insolvency due to the impossibility by the client to fulfil his debt obligations, to non-compliance with a previously agreed repayment plan, to bankruptcy proceedings or to the presence of prejudicial encumbrances; b) substandard loans: these are loans to subjects that experience temporary financial hardships which are expected to be overcome within a reasonable period of time; c) restructured loans: this category comprises loans whose contractual terms have changed giving rise to a loss for the bank, due to the deterioration of the original economic-financial conditions of the debtor. d) loans past due: exposures past due and/or overdue by more than for 180 days, other than those classified as doubtful, substandard or restructured. In the assessment carried out on an individual basis, the loss is measured as the difference between the carrying value and the present value of the future estimated cash flows discounted using the effective original interest rate of the loan. The estimated cash flows take account of the guarantees associated with the loans and the probability that they may be settled. In the event that the guarantees are not likely to be enforced, account will be taken of either their current value or their realisable value net of expenses to be incurred to recover the amount due. The individual adjustment relates to expected losses on single non-performing loans. Where the causes that gave rise to previous loss adjustments no longer exist, then such adjustments are reversed and credited to the income statement. Assets that have been individually assessed and for which no impairment losses have been recorded are evaluated on a portfolio basis. The adjustment made on a portfolio basis refers to losses expected on homogeneous groups of performing loans (e.g. loans exposed to same sector, country or inherent risk) and is calculated according to internal statistical models. In order to assess the losses on a portfolio basis, financial assets are grouped based on similar credit risk characteristics which are representative of the ability of the debtor to pay all the amounts due according to the contractual terms. The risk categories identified represent the basis for the calculation of the historical loss experience due to loan impairment. Financial assets or parts thereof are derecognised when the contractual rights to the cash flows expire or are transferred without retaining the risks and rewards associated with them. Loan repurchase agreements These are spot purchases of securities negotiated together with the obligation of forward sale. As all the risks connected with the possession of the securities are borne by the seller, only a loan to the seller is recognized. The spreads between spot and forward prices, including the accrued interest and the share of any issue premium, are recognised on an accrual basis in the income statement items dealing with interest and similar income. Financial leasing Loans to customers for leased assets are initially recognized at the effective date of the corresponding agreements, i.e. upon formal delivery of the asset. Loans to customers for leased assets are stated in the financial statements at amortised cost, that is the initial value of the investment including direct costs initially incurred and any directly attributable commissions, less any capital repayments and adjusted by the amortisation calculated using the effective interest method, i.e. by discounting the future estimated payments at the effective interest rate for the estimated term of the loan. Similar criteria to the above ones are followed for adjustments and adjustment reversals. 126

127 5. Financial assets designated at fair value This item comprises financial assets designated at fair value through profit and loss on the basis of an option set forth by IAS 39 ( fair value option ) for specific cases. The Group did not avail itself of this option. 6. Hedging transactions The Group has no such transactions in place. 7. Investments in associates and companies subject to joint control This item comprises the values of the investments held in associates and companies subject to joint control valued at equity. Investments in companies subject to joint control are those for which the Bank, together with other parties subject to the terms of an agreement, holds the power to control financial and operating policies with a view to gaining economic benefits from their activities; conversely, investments in associated companies are those for which the Bank exercises significant influence, that is has the power to take part in the financial and operating policies but does not control them. Significant influence is presumed when the Bank holds more than 20% of the investee s share capital. Investments in associates and companies subject to joint control are derecognised when the contractual rights to the corresponding cash flows expire or when they are sold transferring substantially all the risks and rewards connected to the assets. 8. Property, plant and equipment Property, plant and equipment purchased on the market are recognised as assets when the main risks and rewards connected with the assets are transferred. These assets are initially recorded at cost, including all directly attributable expenses. Land is recognised separately, even when purchased together with the building, using a component approach. Land and the buildings are separately assessed on the basis of independent appraisals and only in the case of self-contained buildings. Property, plant and equipment are subsequently valued at cost as adjusted by any accumulated depreciation and losses/recoveries of value. The depreciable value of property, plant and equipment, identified as the difference between the purchase cost and the residual value, is systematically charged over the estimated useful use of the assets according to an allocation criteria that reflects the technical-economic duration and the residual use of each asset item. According to that criterion, the life of the different categories of property, plant and equipment is as follows: - for buildings, from 30 to 50 years; - for furniture, furnishings and sundry equipment, from 5 to 8 years; - for office machines, electronic security systems, from 3 to 5 years; - for Motor vehicles, from 4 to 5 years. Land and artistic assets are not subject to depreciation, as the former has an indefinite useful life and the latter normally increase in value over time. At every balance sheet date, the Group verifies if there are indications that property, plant and equipment may have suffered an impairment loss. In the event that there is evidence of impairment, the book value and the recovery value (defined as the greater of fair value and value in use) are compared. Property, plant and equipment are derecognised when they are sold or no future economic benefits are expected from their use or disposal. 9. Intangible assets Assets recognised under intangible assets are non-monetary assets, without physical substance, identifiable and able to generate future economic benefits that can be controlled by the company. Intangible assets purchased externally are recognised as assets at purchase price when the main risks and benefits connected with the asset are transferred. Intangible assets generated internally are entered on the basis of the costs sustained and directly attributable. All intangible assets recorded in the financial statements other than goodwill have a finite useful life and are consequently amortised in consideration of said life. The maximum estimated useful life is 3 years whilst the residual value of the various assets is assumed to be zero. Intangible assets are derecognised when sold or no further economic benefits are expected from them. Goodwill 127

128 Goodwill generated from business combinations represents the differential between the purchase cost, including ancillary charges incurred, and the fair value at the acquisition date of the assets and liabilities of the acquired company. If positive, it is booked at cost as an asset (goodwill) as it represents the amount paid by the acquirer for the future benefits arising from assets which can not be either identified as single components or booked separately. If negative, it is directly recognised in the income statement (excess over cost). Goodwill recorded as an asset must be allocated to the cash-generating units to which it refers. The cashgenerating unit to which goodwill was allocated is tested annually for impairment or every time there is an indication that the unit may have suffered an impairment. Any difference between the book value and the recovery value, that is the greater of the fair value; less any costs to sell, and its value in use, is recognised in the income statement. The fair value has been established based on the best information available so as to reflect the amount that the Bank could obtain, at the balance sheet date, if the asset were sold by and between knowledgeable, willing parties in an arm s length transaction. This value was determined taking account of the result of recent transactions for similar assets carried out within the same industry sector. In calculating the value in use, the future cash flows that are expected to be generated by the asset have been estimated and discounted using the cost of equity (determined considering an average market return, at a risk-free current market rate and the Bank s beta). Software Software is recognised at cost, net of the corresponding accumulated amortisation and of any impairment loss. The costs connected to the acquisition and development of the software are capitalised when control over it is acquired and when future benefits, exceeding the cost, are likely to arise over more years. 10. Non current assets held for sale and discontinued operations Non-current assets are classified as held for sale if their carrying amount will be recovered principally through a sale rather than through continuous use. In order for this to occur, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets and its sale must be highly probable. Once classified as held for sale, the asset is valued at the lower of its carrying amount and fair value less costs to sell. At 31 December 2007 there were no Non current assets held for sale". 11. Current and deferred taxation Current taxes entirely or partially unpaid at the balance sheet date are included in the financial statements under liabilities. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be included in the financial statements as an asset. Deferred taxation is accounted for using the liability method, whereby deferred taxes are recognised by comparing the various carrying amount and tax base of assets and liabilities in the balance sheet. These differences in value, if recoverable in future years, are defined as timing differences and will generate taxable or deductible amounts in the relevant tax year; therefore, they originate, respectively, deferred tax liabilities and deferred tax assets. Deductible timing differences are those that will generate a future reduction in the total taxable amount, for which it is necessary to deferred tax assets. Deferred tax assets must be recorded for all deductible timing differences which are likely to be used against a future taxable amount hence generate a benefit for the company. Taxable timing differences are also those differences that create deferred tax liabilities, as they generate taxable amounts in the years subsequent to the one in which there were recorded in the income statement. All taxable timing differences have been recorded as deferred tax liabilities. 12. Provisions for risks and charges Provisions for risks and charges are recorded when the company has a current obligation (legal or implicit) resulting from a past event, for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, whose amount can be reliably estimated. The amount recorded represents the present value of the reasonable amount that a company would pay in order to extinguish the obligation as at the balance sheet date. If the impact is not significant the amount is not discounted. 128

129 Such provisions are reassessed at every balance sheet date and adjusted in order to reflect the best current estimate. If it is no longer likely that the resources producing economic benefits will be used to meet the obligation, the provision is adjusted and any excess is recorded in the income statement. 13. Outstanding amounts and securities issued Financial instruments issued are classified as liabilities when, according to the substance of the agreement, the Bank has a contractual obligation to deliver cash or another financial asset to another entity. Outstanding amounts due to banks and customers and securities issued represent the funding collected on the inter-bank market and from customers also through the placement of bonds and certificates of deposit. Transactions with banks are booked at the time they are executed, except those relating to remittance of bills and to the placement of securities, which are booked upon settlement. Initially, financial liabilities are designated at fair value, generally equal to the amount collected or the issue price, as increased by any directly attributable transaction costs. Subsequently, they are valued at amortised cost using the effective interest method. The amortised cost has not been calculated for short-term transactions, for which the effect of the calculations is considered immaterial. Financial liabilities or parts thereof are derecognised when extinguished, i.e. when the obligation has been met, cancelled or has expired. They are derecognised also following their repurchase on the market. The derecognition is made on the basis of the fair value of the issued item and of the repurchased item at the purchase date. Profit or loss resulting from the transaction, depending on whether the book value of the repurchased item is higher or lower than the purchase price, is recorded in the income statement. The subsequent replacement of the securities is to be considered as a new issue, recognised at the new placement price. Deposit repurchase agreements These are spot sales of securities negotiated together with the obligation of forward purchase. As the risks associated with the securities underlying the transactions are not transferred, the assets are recorded in the financial statements along with the related liability. The spreads between spot and forward prices, including the accrued interest and the share of any issue premium, are recognised in the income statement on an accrual basis under interest and similar income. 14. Financial liabilities held for trading Trading liabilities are represented by trading derivative financial instruments with a negative fair value. 15. Financial liabilities designated at fair value This item comprises financial assets designated at fair value through profit and loss on the basis of an option set forth by IAS 39 ( fair value option ) for specific cases. The Group did not avail itself of this option. 16. Foreign currency transactions Transactions denominate in foreign currency are converted, at initial recognition, into the reporting currency by applying the exchange rate in force at the transaction date. At each subsequent balance sheet date: - any monetary items are converted at the exchange rate in force at the balance sheet date; - any non-monetary items measured at historical cost are converted at the exchange rate in force at the transaction date; - any non-monetary items measured at fair value are converted at the exchange rate in force at the date when the fair value was determined. A monetary element represents the right to receive, or the obligation to pay, a fixed or determinable amount of money. Conversely, the key characteristic of non-monetary items is the absence of the right to receive, or the obligation to pay, a set amount of money or an amount that can be determined The exchange rate differences relating to monetary items are recorded in the Income Statement as and when they arise; those related to non-monetary items are recorded in shareholders equity or in the Income Statement following the accounting treatment of the profits or losses that include that item. Revenues and expenses in foreign currency are shown at the exchange rate prevailing at the time they are recorded or, if accruing, at the year-end exchange rate. 17. Insurance assets and liabilities The consolidated financial statements do not include any insurance assets and liabilities. 129

130 18. Other information Employee termination indemnities and pensions Employee termination indemnities fall within post-employment benefits which IAS 19 distinguishes in: - defined contribution plans; - defined benefit plans; Defined contribution plans envisage the payment by the company of fixed contributions into a fund. The company has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees' entitlements for the service rendered in the current year and in previous years. The company records the employee s payments into the fund as a liability after deducting any contributions already paid. If at the balance sheet date the contributions paid are higher than those actually due, the excess must be accounted for as an asset to the extent that the advance payment will reduce future payments or give rise to a refund. A defined benefit plan is a post-employment benefit plan according to which the company has the obligation to pay to its employees the benefit agreed. Following the introduction of the 2007 Finance Act, which anticipated to 1 January 2007 the reform of supplementary retirement plans pursuant to Legislative Decree no. 252/05, any employee termination indemnities that have accrued since 1 January 2007 must, at the employee s option according to explicit or tacit acceptance, be allocated to supplementary retirement plans or held within the company, which will ensure that such accrued indemnities are paid into the Treasury Fund managed by INPS. The reform of supplementary retirement plans entailed an adjustment of the accounting treatment of employee termination indemnities, as explained below: i. Any employee termination indemnities accrued up to 31 December 2006 continue to be considered as a defined benefit plan to be assessed by actuaries according to the Projected Unit Credit Method, as provided by IAS 19. The liability associated with the accrued employee termination indemnities is assessed by actuaries without applying the pro-rata of the service rendered, as the service to be assessed has already fully accrued. any actuarial gains and losses arising from the recalculation of the employee termination indemnities at 31 December 2007 are recognised in the income statement; ii. any employee termination indemnities accrued since 1 January 2007 are deemed to be a defined contribution plan, whether the employee opts for supplementary retirement plans or decides to pay such indemnities into the Treasury Fund managed by INPS. The amount of the indemnities is determined based on the contributions due by the employee without using actuarial calculations. Treasury shares Shares issued and repurchased are recorded as a direct reduction of shareholders equity. No profit or loss resulting from the purchase, sale, issue or cancellation of said instruments is recorded in the income statement Any amount paid or received for said instruments is recorded directly under shareholders' equity. A specific reserve is booked, pursuant to art ter of the Italian Civil Code. Determination of the fair value of financial instruments The fair value of financial instruments has been determined based on price quotations on active markets. In this case, the value is represented by the market price (bid, ask or average price depending on the different financial instruments) at period end or, if this price is not available, by the price of the most recent transactions. The fair value of financial instruments not listed on active markets has been determined by reference to the price of recent market transactions, or to the fair value of a financial instrument with similar characteristics or, failing both of these, using mostly discounted cash flow valuation methods. In the latter instance, the cash flows have been discounted using the rates on the market curve to which a spread was applied to take account of the counterparty credit risk. Guarantees and commitments Guarantees given are initially recognized at their fair value, represented by the commission received, and subsequently at the higher of the estimated obligation determined according to IAS 37 and the initially 130

131 booked amount gradually reduced by the portion related to the year. The overall nominal value of guarantees given, net of amounts used, is highlighted in the notes to the financial statements. Commitments are entered in the financial statements on the basis of the best estimate of the obligation determined according to IAS 37. The overall amount of the commitment undertaken by the Bank is highlighted in the notes to the financial statements. Accounting of revenues Revenues resulting from the third-party use of company assets generating interest, commissions and dividends must be recorded when it is probable that the economic benefits associated with the transaction will flow to the company and the amount of the revenue can be measured reliably. Interest and commissions are recorded in the income statement according to the classification of the financial instrument to which they refer. Dividends are recorded when the shareholders become entitled to receive the related payment. Other commissions are recorded on an accrual basis. Use of estimates and assumptions in drawing up the financial statements In drawing up the financial statements, estimates and assumptions were used which may affect the values recorded in the balance sheet, income statement and the notes. More specifically, subjective evaluations by company management were made in the following cases: to quantify the impairment of financial assets, especially loans; to determine the fair value of financial instruments to be used for financial statement information and the use of valuation models to determine fair value of financial instruments that are not quoted in active markets; to assess the reasonableness of the amount of goodwill; to quantify employees' provisions and provisions for risks and charges; the actuarial and financial assumptions used to determine liabilities associated with defined benefit plans for employees; the estimates and assumptions made with regard to the recoverability of deferred tax assets. In order to formulate reasonable estimates and assumptions for the recording of business transactions, subjective assessments are made based on all information and historical experience available. 131

132 PART B INFORMATION ON THE CONSOLIDATED BALANCE SHEET ASSETS SECTION 1 CASH AND CASH EQUIVALENTS ITEM Cash and cash equivalents: breakdown 31/12/ /12/200 6 a) Cash 155, ,156 b) Unrestricted deposits with Central Banks 2,501 2,724 Total 158, ,880 SECTION 2 FINANCIAL ASSETS HELD FOR TRADING ITEM Financial assets held for trading: breakdown by type 31/12/ /12/20 06 Items/Amounts Listed Unlisted Listed Unlisted A. Cash assets 1. Debt securities 126,872 98, ,043 17, Structured securities Other debt securities 126,872 98, ,043 17, Equity securities 2,494-3, Quotas of UCI 7,285 31, , Loans Repurchase agreements Other Impaired assets Assets sold and not cancelled 934,075 75, ,202 - Total A 1,070, ,177 1,071, ,923 B. Derivatives 1. Financial derivatives: 295 7, , trading 295 7, , connected with fair value option other Credit derivatives: trading connected with fair value option other Total B 295 7, ,831 Total (A+B) 1,071, ,539 1,071, ,

133 2.2 - Financial assets held for trading: breakdown by debtor/issuer A. Cash assets 31/12/ Debt securities 225, ,580 a) Governments and Central Banks 104, ,560 b) Other public entities 5,949 7,563 c) Banks 115,527 12,998 d) Other issuers Equity securities 2,494 3,511 a) Banks b) Other issuers: 2,474 3,482 - insurance companies financial businesses non-financial businesses 2,474 3,482 - other Quotas of UCI 38, , Loans - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other Impaired assets - 60 a) Governments and Central Banks - 51 b) Other public entities - - c) Banks - - d) Other Assets sold and not derecognised 1,009, ,202 a) Governments and Central Banks 922, ,202 b) Other public entities - - c) Banks 87,188 - d) Other issuers /12/2006 Total A 1,276,903 1,278,632 B. Derivatives a) Banks 3,670 7,626 b) Customers 3,987 1,215 Total B 7,657 8,841 Total (A+B) 1,284,560 1,287,473 Quotas of UCI held in portfolio are mainly represented by Hedge Fund units. 133

134 2.3 - Financial assets held for trading: trading derivatives Type of derivative/underlying asset A) Listed Derivatives 1) Financial derivatives: Interest Currencies and rate and gold securities Equity Loans Other 31/12/ /12/ with exchange of capital options purchased other derivatives without exchange of capital options purchased other derivatives ) Credit derivatives: - with exchange of capital without exchange of capital Total A B) Unlisted Derivatives 1) Financial derivatives: - with exchange of capital 44 5, ,670 2,032 - options purchased other derivatives 44 5, ,670 2,032 - without exchange of capital 1, ,692 6,799 - options purchased ,057 - other derivatives 1, ,082 4,742 2) Credit derivatives: - with exchange of capital without exchange of capital Total B 1,126 5, ,362 8,831 Total (A+B) 1,412 5, ,657 8,

135 2.4 - Cash financial assets held for trading (other than sold and not cancelled and impaired ): annual changes Change/Underlying asset Debt securities Equity securities 2007 Quotas of UCI Loans Total A. Opening balance 228,626 3, , ,415 B. Increases 8,589,473 60, ,239-8,857,790 B.1 Purchases 8,575,719 58, ,810-8,840,291 B.2 Positive changes in fair value ,176 B.3 Other changes 13,513 1,316 1,494-16,323 C. Decreases -8,592,312-61, , ,011,957 C.1 Sales -8,074,351-59, , ,492,471 C.2 Redemptions -510, ,610 C.3 Negative changes in fair value -5, ,804 C.4 Other changes -1, ,072 D. Closing balance 225,787 2,494 38, ,248 SECTION 4 FINANCIAL ASSETS AVAILABLE FOR SALE ITEM Financial assets available for sale: breakdown by type 31/12/ /12/2 006 Items/Amounts Listed Unlisted Listed Unlisted 1. Debt securities structured securities Other debt securities Equity securities 27,043 42,943 24,181 24, designated at fair value 27,043-24, measured at cost - 42,943-24, Quotas of UCI Loans Impaired assets Assets sold and not cancelled Total 27,043 43,245 24,181 25,

136 4.2 - Financial assets available for sale: breakdown by debtor/issuer Items/Amounts 31/12/ /12/ Debt securities - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other issuers Equity securities 69,986 49,149 a) Banks 25,356 8,511 b) Other issuers: 44,630 40,638 - insurance companies 3,175 3,971 - financial businesses 5,255 5,034 - non-financial businesses 36,172 31,633 - other Quotas of UCI Loans - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other Impaired assets - 1 a) Governments and Central Banks - - b) Other Public Entities - - c) Banks - - d) Other parties Assets sold and not cancelled - - a) Governments and Central Banks - - b) Other Public Entities - - c) Banks - - d) Other parties - - Total 70,288 49,

137 4.5 - Financial assets available for sale (other than sold and not cancelled and impaired ): annual changes Debt securities Equity securities 2007 Quotas of UCI Loans Total A. Opening balance - 49, ,213 B. Increases - 30, ,266 B.1 Purchases - 27, ,394 B.2 Positive changes in fair value - 2, ,862 B.3 Recoveries recorded in the income statement - X recorded in shareholders equity B.4 Transfers from other portfolios B.5 Other changes C. Decreases - -9, ,191 C.1 Sales - -2, ,137 C.2 Redemptions C.3 Negative changes in fair value C.4 Write-downs for impairment recorded in the income statement recorded in shareholders equity C.5 Transfers to other portfolios C.6 Other changes - -7, ,054 D. Closing balance - 69, ,288 Purchases are mainly attributable to the shareholding in Tercas - Cassa di Risparmio della Provincia di Teramo S.p.A.. SECTION 5 FINANCIAL ASSETS HELD TO MATURITY ITEM Financial assets held to maturity: breakdown by type 31/12/ /12/2006 Type of transaction/amounts Book value Fair value Book value Fair value 1. Debt securities structured securities Other debt securities Loans Impaired assets Assets sold and not cancelled Total

138 5.2 - Financial assets held to maturity: breakdown by debtor/issuer Type of transaction/amounts 31/12/ /12/ Debt securities 1 1 a) Governments and Central Banks 1 1 b) Other public entities - - c) Banks - - d) Other issuers Loans - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other parties Impaired assets - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other parties Assets sold and not cancelled - - a) Governments and Central Banks - - b) Other public entities - - c) Banks - - d) Other - - Total Financial assets held to maturity (other than sold and not cancelled and impaired ): annual changes Debt securities Loans Total A. Opening balance 1-1 B. Increases B.1 Purchases of which business combination transactions B.2 Recoveries B.3 Transfers from other portfolios B.4 Other changes C. Decreases C.1 Sales of which business combination transactions C.2 Redemptions C.3 Value adjustments C.4 Transfers to other portfolios C.5 Other changes D. Closing balance

139 SECTION 6 DUE FROM BANKS ITEM Due from banks: breakdown by type 31/12/ /12/2006 Type of transaction/amounts A. Deposits with Central Banks 157, ,807 1 Restricted deposits Compulsory reserve 157, ,807 3 Repurchase agreements Other - - B. - Due from banks 602, ,977 1 Current accounts and unrestricted deposits 84,303 44,436 2 Restricted deposits 10, , Other loans 122, , repurchase agreements 26, , finance leases other 95,144 2, Debt securities 113,917 5, structured securities Other debt securities 113,917 5, Impaired assets Assets sold and not cancelled 271,796 - Total (book value) 760, ,784 Total (fair value) 759, ,496 SECTION 7 LOANS TO CUSTOMERS ITEM Loans to customers: breakdown by type 31/12/ /12/2006 Type of transaction/amounts 1.Current accounts 5,642,380 4,632,556 2 Repurchase agreements - 1,019 3.Mortgages 4,103,631 3,318, Credit cards, pers. loans and salary-backed loans 267, ,608 5 Finance leases 871, , Factoring Other transactions 2,468,058 2,096, Debt securities 1,811 1, structured securities Other debt securities 1,811 1, Impaired assets 398, , Assets sold and not cancelled - - Total (book value) 13,754,333 11,445,785 Total (fair value) 13,910,895 11,567,

140 (*) Item 7 Other transactions refers mainly to syndicated loans (EUR 376,628 thousand), forward cash (EUR 552,987 thousand), loans for advances on bills (EUR 514,648 thousand) and foreign currency loans and advances (EUR 158,419 thousand) Loans to customers: breakdown by debtor/issuer Items/Amounts 31/12/ /12/ Debt securities 1,811 1,808 a) Governments - - b) Other public entities - - c) Other issuers 1,811 1,808 - non-financial businesses 1,811 1,808 - financial businesses insurance companies other Loans to: 13,353,558 11,061,535 a) Governments 22,037 20,455 b) Other public entities 96,362 93,442 d) Other 13,235,159 10,947,638 - non-financial businesses 10,691,585 8,822,952 - financial businesses 380, ,075 - insurance companies other 2,163,432 1,728, Impaired assets 398, ,442 a) Governments - - b) Other Public Entities - - c) Other 398, ,442 - non-financial businesses 287, ,333 - financial businesses 848 1,599 - insurance companies other 110, , Assets sold and not cancelled - - a) Governments - - b) Other Public Entities - - c) Other non-financial businesses financial businesses insurance companies other - - Total 13,754,333 11,445,

141 7.4 - Finance leases 31/12/2007 Financial leases to customers: reconciliation gross investment at the balance sheet date 878,657 Time value accrued 396 Present value of minimum lease payments due at the balance sheet date 878,261 Loan write-down reserve referred to minimum payments 6,657 Unexpired term of gross investment Up to 1 year 150,786 Between 1 year and 5 years 390,463 Beyond 5 years 337,408 Unexpired term of the present value of minimum payments due Up to 1 year 150,644 Between 1 year and 5 years 390,327 Beyond 5 years 337,291 SECTION 10 INVESTMENTS IN ASSOCIATES AND COMPANIES SUBJECT TO JOINT CONTROL - ITEM Investments in companies subject to joint control (valued at equity) and in companies subject to significant influence: further information - - Shareholding relationship Name Registered office Type of Participating Quota B. Companies relationsh ip % voting rights company %. (1) % 1. Rajna Immobiliare S.r.l. Sondrio 1 Credito Valtellinese Global Assicurazioni S.p.A. Milan 1 Bancaperta Banca della Ciociaria S.p.A. Frosinone 1 Credito Valtellinese Global Assistance S.p.A. Milan 2 Credito Valtellinese Istituto Centrale delle Banche Popolari Italiane S.p.A. Milan 2 Credito Valtellinese Aperta Gestioni Patrimoniali S.A. Lugano (Switzerland) 2 Bancaperta Banca di Cividale S.p.A. Cividale del Friuli 2 Credito Valtellinese Serv.Int.Sicilia S.r.l. Palermo 2 Credito Siciliano Sondrio Città Centro S.r.l. Sondrio 2 Stelline S.I Progetti Industriali Valtellina S.r.l. Sondrio 2 Stelline S.I Soc. Coop. del Polo dell'innovazione della Valtellina p.a. Sondrio 2 Credito Valtellinese Key (1) Type of relationship: 1 = joint control 2 = significant influence The % of voting rights is not indicated as it does not correspond to the shareholding percentage Investments in companies subject to joint control and in companies subject to significant influence:accounting information 141

142 Name Total Total Net profit A. Companies valued at equity A.1 subject to joint control: Sharehol ders assets revenues (loss) equity Consolid ated financial statemen ts 1. Rajna Immobiliare S.r.l. 2, Global Assicurazioni S.p.A. 11,293 21,200 4,930 5,087 1, Banca della Ciociaria S.p.A. 343,159 19, ,637 27,464 - A.2 subject to significant influence: 4. Global Assistance S.p.A. 8,254 3, ,486 1, Istituto Centrale delle Banche Popolari Italiane S.p.A. 4,717,51 3 Fair value 130,841 35, ,528 71, Aperta Gestioni Patrimoniali S.A. 10,159 7,422 2,364 7,057 2, Banca di Cividale S.p.A. 2,473, ,543 11, ,242 96, Serv.Int.Sicilia S.r.l Sondrio Città Centro S.r.l. 2, Progetti Industriali Valtellina S.r.l. 3, Soc. Coop. del Polo dell'innovazione della Valtellina The shareholders equity and net income (loss) are taken from the 2007 financial statements approved by the respective Shareholders Meetings, or, if these are not available, from the draft financial statements approved by the respective boards of directors, except for those of Serv. Int. Sicilia S.r.l., of Sondrio Città Centro S.r.l. and of Progetti Industriali Valtellina S.r.l., which are taken from the 2006 financial statements. The financial statement figures of Aperta Gestioni S.A. are expressed in thousands of CHF. The figures of Istituto Centrale Banche Popolari Italiane relate to the consolidated financial statements Investments in associates and companies subject to joint control: annual changes A. Opening balance 166, ,056 B. Increases 40,873 26,021 B.1 Purchases 20,504 12,771 B.2 Recoveries - - B.3 Revaluations 13,329 13,250 B.4 Other changes 7,040 - C. Decreases -6,013-10,247 C.1 Sales - -1,553 C.2 Value adjustments - - C.3 Other changes -6,013-8,694 D. Closing balance 201, ,830 E. Total revaluations 19,442 31,808 F. Total adjustments 10,092 2,809 The purchases of shareholdings include no. 1,677,427 shares of Banca della Ciociaria S.p.A for EUR 20.5 million. 142

143 10.4 Commitments referred to Investments in companies subject to joint control Commitments referred to Investments in companies subject to joint control amount to EUR 51,842 thousand Commitments referred to Investments in companies subject to significant influence Commitments referred to Investments in companies subject to significant influence amount to EUR 161,985 thousand. SECTION 12 PROPERTY, PLANT AND EQUIPMENT ITEM Property, plant and equipment: breakdown of assets measured at cost 31/12/ /12/2006 Asset/Amounts A. Assets used in the business 1.1 Owned 386, ,194 a) land 61,223 59,418 b) buildings 290, ,383 c) furniture 21,335 20,375 d) electronic systems 3,890 3,782 e) other 9,467 9, acquired through a finance lease - - a) land - - b) buildings - - c) furniture - - d) electronic systems - - e) other - - Total A 386, ,194 B. Investment properties 2.1 Owned 6,934 12,092 a) land 1,117 3,037 b) buildings 5,817 9,055 c) furniture acquired through a finance lease - - a) land - - b) buildings - - c) furniture - - Total B 6,934 12,092 Total (A+B) 393, ,

144 12.3 Assets used in the business: annual changes 2007 Land Buildings Furniture Electronic systems Other Total A. Opening balance, gross 59, ,388 69,243 42,780 96,40 5 A.1 Total net value reductions - 57,005 48,868 38,998 87, , ,040 A.2 Opening balance, net 59, ,383 20,375 3,782 9, ,194 B. Increases 1,805 27,859 4,697 1,681 4,499 40,541 B.1 Purchases - 7,436 4,684 1,663 4,463 18,246 B.2 Capitalised improvement expenditure - 15, ,872 B.3 Recoveries B.4 Positive changes in fair value recorded under: a) shareholders equity b) income statement B.5 Positive exchange rate differences B.6 Transfers of investment properties B.7 Other changes 1,805 4, ,423 C. Decreases - -19,801-3,737-1,573-4,268-29,379 C.1 Sales C.2 Depreciation - -10,024-3,598-1,546 C.3 Value adjustments from - 4,061-19,229 impairment recorded under: a) shareholders equity b) income statement C.4 Negative changes in fair value recorded under: a) shareholders equity b) income statement C.5 Negative exchange rate differences C.6 Transfers to: a) property, plant and equipment held for investment b) discontinued operations C.7 Other changes - -9, ,478 D. Closing balance, net 61, ,441 21,335 3,890 9, ,356 D.1 Total net value reductions - 67,029 52,466 40,544 91, ,269 D.2 Closing balance, gross 61, ,470 73,801 44, , ,625 E. Valuation at cost

145 Investment properties: annual changes Land 2007 Buildings A. Opening balance, gross 3,037 10,440 A.1 Total net value reductions - 1,385 A.2 Opening balance, net 3,037 9,055 B. Increases B.1 Purchases B.2 Capitalised improvement expenditure - 1 B.3 Positive changes in fair value - - B.4 Recoveries - - B.5 Positive exchange rate differences - - B.6 Transfers from property used in the business - - B.7 Other changes C. Decreases C.1 Sales C.2 Depreciation ,920-3, C.3 Negative changes in fair value - - C.4 Impairment losses - - C.5 Negative exchange rate differences - - C.6 Transfers to other asset portfolios a) property used in the business - - b) non current assets and discontinued operations - - C.7 Other changes -1,920-3,141 D. Closing balance, net 1,117 5,817 D.1 Total net value reductions - 1,518 D.2 Closing balance, gross 1,117 7,335 E. Valuation at fair value 1,114 6,155 Property, plant and equipment are all valued at cost as adjusted by any accumulated depreciation and losses/recoveries of value. SECTION 13 INTANGIBLE ASSETS ITEM Intangible assets: breakdown by type 31/12/ /12/2006 Asset/Amounts Finite Indefinite Finite Indefinite life life life life A.1 Goodwill X 101,897 X 103,086 A.1.1 pertaining to the group X 101,897 X 103,086 A.1.2 pertaining to third parties X - X - A.2 Other intangible assets 5,032-5,729 - A.2.1 Assets measured at cost: 5,032-5,729 - a) internally generated intangible assets - - 3,679 - b) other assets 5,032-2,050 - A.2.2 Assets designated at fair value: a) internally generated intangible assets b) other assets Total 5, ,897 5, ,

146 13.2 Intangible assets: annual changes 2007 Goodwill Other intangible assets generated internally Other intangible assets other Total Finite Indefin. Finite Indefin. A. Opening balance 138,003 3,679-2, ,718 A.1 Total net value reductions 34, ,917 A.2 Opening balance, net 103,086 3,679-2, ,801 B. Increases ,366-4,019 B.1 Purchases ,366-4,009 B.2 Increases in internal intangible assets X B.3 Recoveries X B.4 Positive changes in fair value - to shareholders equity X to the income statement X B.5 Positive exchange rate differences B.6 Other changes C. Decreases -1,199-2, , ,891 C.1 Sales C.2 Value adjustments - Amortisation X -2, , ,090 - Write-downs + shareholders equity X income statement -1, ,199 C.3 Negative changes in fair value - to shareholders equity X to the income statement C.4 Transfers to non-current assets held for sale C.5 Negative exchange rate differences C.6 Other changes D. Closing balance, net 101,897 1,764-3, ,929 D.1 Total net value adjustments 36,116 2,448-1,642-40,206 E. Closing balance, gross 138,013 4,212-4, ,135 F. Valuation at cost Key - Finite: finite life Indefin.: indefinite life 146

147 SECTION 14 TAX ASSETS AND LIABILITIES ITEM 140 UNDER ASSETS AND ITEM 80 UNDER LIABILITIES 14.1 Deferred tax assets: breakdown 31/12/ /12/2006 IRES Entertaining expenses Provisions for claims by bankruptcy liquidators 7,655 9,107 Loans write-down surplus 27,035 24,836 Non-deductible amortisation 2,090 2,501 Other 15,245 7,235 Total 52,274 43,903 IRAP Entertaining expenses Provisions for claims by bankruptcy liquidators Loans write-down surplus - - Non-deductible amortisation Other Total 1,842 1, Deferred tax liabilities: breakdown 31/12/ /12/2006 IRES Capital gains Goodwill 1,427 1,895 Valuation of trading portfolio shares Valuation of AFS portfolio Employee Termination Indemnity Fund - discounting 1, Other 2, Total 5,619 3,450 IRAP Capital gains Goodwill Valuation of trading portfolio shares 32 - Other 1, Total 1, As regards both IRES and IRAP, the item "Other" includes deferred tax liabilities contained in the consolidated financial statements for timing differences that arise when the value of an investment in subsidiaries, associates and companies subject to joint control differs from the related tax base. In particular, deferred tax liabilities of EUR 1.4 million were recorded (EUR 0.6 million for IRES and EUR 0.8 million for IRAP). 147

148 14.3 Changes in deferred tax assets (as a balancing entry in the income statement) Opening balance 45,123 66, Increases 18,613 28, Prepaid taxes recorded during the year 18,603 28,506 a) relative to previous periods 2 - b) due to changes in accounting criteria - - c) recoveries 81 - d) other 18,520 28, New taxes or increases in tax rates Other increases Decreases -10,950-49, Prepaid taxes cancelled during the year ,858 a) reversals ,413 b) write-downs of unrecoverable amounts b) due to changes in accounting criteria Reduction in tax rates -7, Other decreases -3,230-9, Closing balance 52,786 45, Changes in deferred taxes (as a balancing entry in the income statement) Opening balance 3,788 17, Increases 11,832 2, Deferred taxes recorded during the year 2,899 2,425 a) relative to previous periods - - b) due to changes in accounting criteria - - c) other 2,899 2, New taxes or increases in tax rates 1, Other increases 7, Decreases -8,772-16, Deferred taxes cancelled during the year -4,816-13,839 a) reversals -4,226-13,839 b) due to changes in accounting criteria - - c) other Reduction in tax rates -3, Other decreases , Closing balance 6,848 3,

149 14.5 Changes in deferred tax assets (as a balancing entry to shareholders equity) Opening balance Increases Prepaid taxes recorded during the year a) relative to previous periods - - b) due to changes in accounting criteria - 45 c) other New taxes or increases in tax rates Other increases Decreases Prepaid taxes cancelled during the year - - a) reversals - - b) write-downs of unrecoverable amounts - - b) due to changes in accounting criteria Reduction in tax rates Other decreases Closing balance 1, Changes in deferred taxes (as a balancing entry to shareholders equity) Opening balance Increases Deferred taxes recorded during the year a) relative to previous periods - - b) due to changes in accounting criteria - - c) other New taxes or increases in tax rates Other increases Decreases Deferred taxes cancelled during the year - - a) reversals - - b) due to changes in accounting criteria - - c) other Reduction in tax rates Other decreases Closing balance

150 SECTION 16 OTHER ASSETS ITEM Other assets: breakdown Amounts due from the tax authorities for withholdings on interest paid to customers and other amounts due 31/12/ /12/ ,239 67,626 Cheques drawn on the bank to be settled 56,370 94,079 Counterparts for securities and coupon payments to be received 5,630 18,415 Sundry items to be debited to customers and banks 135,850 32,251 Value date differences on portfolio transactions 1, Real estate inventory 17,944 19,359 Costs and advances pending financial allocation 3,694 2,883 Refurbishment of third-party buildings 16,569 13,709 Accruals other than those capitalised Sundry and residual items 72,415 77,654 Total 384, ,

151 LIABILITIES SECTION 1 DUE TO BANKS ITEM Due to banks: breakdown by type Type of transaction/amounts 31/12/ /12/ Due to central banks Due to banks 848, , Current accounts and unrestricted deposits 110,421 34, Restricted deposits 520, , Loans 160 1, Finance lease other 160 1, Payables for commitments to repurchase own equity instruments Liabilities for assets sold and not cancelled from the balance sheet 217, funding repurchase agreements 217, other Other payables Total 848, ,762 Fair value 848, ,581 SECTION 2 DUE TO CUSTOMERS ITEM Due to customers: breakdown by type Type of transaction/amounts 31/12/ /12/ Current accounts and unrestricted deposits 7,719,822 7,473,556 2 Restricted deposits 20,663 8,183 3 Public funds administered Loans 899, , finance leases other 899, ,004 5 Payables for commitments to repurchase own equity instruments Liabilities for assets sold and not cancelled from the balance sheet 1,123, , funding repurchase agreements 1,123, , other Other payables 95,427 75,982 Total 9,858,921 9,096,396 Fair value 9,857,556 9,036,295 Item 4.2 Loans other refers to deposit repurchase agreements. 151

152 SECTION 3 SECURITIES ISSUED ITEM Securities issued: breakdown by type Type of security/amounts 31/12/ /12/2006 BV FV BV FV A. Listed securities 1,579,216 1,566,784 1,347,061 1,349, Bonds 1,579,216 1,566,784 1,347,061 1,349, structured , , other 1,579,216 1,566,784 1,227,522 1,230, Other securities structured other B. Unlisted securities 2,270,519 2,260,184 1,630,242 1,623,120 1 Bonds 2,111,005 2,100,670 1,438,419 1,431, structured 1, ,643 20, other 2,109,986 2,099,688 1,417,776 1,410, Other securities 159, , , , structured other 159, , , ,826 Total 3,849,735 3,826,968 2,977,303 2,972,489 Key: BV = book value FV = fair value 3.2 Analysis of item 30 "Securities issued" subordinated securities The above bonds include the subordinated bond issues Credito Valtellinese 2003/2013 EMTN, Credito Valtellinese 2005/ 2015 EMTN, Credito Artigiano 2003/2009 TV, Credito Artigiano 2007/2012 subordinato and "Credito Artigiano 2006/2011 subordinato" for a total book value of EUR 499,944 thousand. 152

153 SECTION 4 FINANCIAL LIABILITIES HELD FOR TRADING ITEM Financial liabilities held for trading: breakdown by type Type of security/amounts 31/12/ /12/2006 NV FV FV* NV FV FV* Q NQ Q NQ A. Cash liabilities 1. Due to banks Due to customers Debt securities X X 3.1 Bonds structured X X other bonds X X 3.2 Other securities structured X X other X X Total A B. Derivatives 1. Financial derivatives: X 220 7,930 X X - 6,789 X 1.1 Trading X 220 7,930 X X - 6,789 X 1.2 Connected with fair value option X - - X X - - X 1.3 Other X - - X X - - X 2. Credit derivatives X - - X X - - X 2.1 Trading X - - X X - - X 2.2 Connected with fair value option X - - X X - - X 2.3 Other X - - X X - - X Total B X 220 7,930 X X - 6,789 X Total (A+B) X 220 7,930 X X - 6,789 X Key: FV = fair value FV* = fair value calculated by excluding the variations in value due to changes in the issuer s creditworthiness with respect to the issue date. NV = nominal or notional value Q= quoted NQ= Not quoted 153

154 4.4.- Financial liabilities held for trading: derivatives Types of derivatives/underlying assets Interest rates Currenci es and gold Equity securitie s Loans Other 31/12/ /12/2006 A) Listed Derivatives 1) Financial derivatives: - with exchange of capital options issued other derivatives without exchange of capital options issued other derivatives ) Credit derivatives: - with exchange of capital without exchange of capital Total A B) Unlisted Derivatives 1) Financial derivatives: - with exchange of capital 25 6, ,632 2,919 - options issued other derivatives 25 6, ,632 2,919 - without exchange of capital ,269 3,870 - options issued ,057 - other derivatives ,813 2) Credit derivatives: - with exchange of capital without exchange of capital Total B 828 6, ,901 6,789 Total (A+B) 1,067 6, ,150 6,789 SECTION 8 TAX LIABILITIES ITEM 80 See section 14 under assets. 154

155 SECTION 10 OTHER LIABILITIES ITEM Other liabilities: breakdown 31/12/ /12/2006 Amounts due to the tax authorities for indirect taxes - 2,591 Amounts due to social security and welfare institutions 8,313 8,264 Amounts due to public entities on behalf of third parties 50,011 31,393 Sundry items to be debited to customers and banks 143, ,838 Amounts available to customers 52,314 43,191 Amounts payable to employees 22,078 16,196 Value date differences on portfolio transactions 198, ,052 Items in transit between branches 3,644 4,153 Guarantees given Accruals other than those capitalised 4,086 2,437 Negative value of management contracts - - Payables related to the supply of goods and services 35,136 29,041 Sundry and residual items 107, ,739 Total 626, ,477 SECTION 11 EMPLOYEE TERMINATION INDEMNITIES ITEM Employee termination indemnities: annual changes A. Opening balance 55,218 55,629 B. Increases 11,086 8,883 B.1 Provision for the year 11,010 8,576 B.2 Other increases C. Decreases -13,135-9,294 C.1 Indemnities paid -4,887-3,061 C.2 Other decreases -8,248-6,233 D. Closing balance 53,169 55,218 The employee termination indemnity may be included among the defined benefit plans not directly financed. This amount has been actuarially calculated, for all Group Companies, in accordance with the Projected Unit Credit Method and using the following actuarial hypotheses: - Personnel turnover rate equal to 3%; - Discount rate equal to 4.5%; - Inflation rate equal to 2%. Following the enactment of the new supplementary welfare reform pursuant to legislative Decree no. 252/05 the Employee termination indemnity is reported as specified in the Notes to the financial statements (Part A.2 Main items in the financial statements). This change gave rise to a decrease in the amount of the Indemnity (curtailment), with a contra item being recorded in the income statement, of EUR 536 thousand. 155

156 SECTION 12 PROVISIONS FOR RISKS AND CHARGES ITEM Provisions for risks and charges: breakdown Items/Amounts 31/12/ /12/ Company pension funds 32,738 33, Other provisions for risks and charges 34,954 31, legal disputes 28,429 28, personnel expenses 3, other 3,459 2,700 Total 67,692 64, Provisions for risks and charges: annual changes Items/Amounts Pension funds 2007 Other funds A. Opening balance 33,600 31,097 B. Increases 1,400 11,043 B.1 Provision for the year 1,400 11,043 B.2 Changes over time - - B.3 Variations due to changes in the discount rate - - B.4 Other changes - - C. Decreases -2,262-7,186 C.1 Utilisation in the year -2,262-7,186 C.2 Variations due to changes in the discount rate - - C.3 Other changes - - D. Closing balance 32,738 34, Defined benefit company pension funds Description of pension funds The defined benefit company pension funds, which do not feature autonomous and separate management, consist of a provision for the commitment undertaken by Credito Valtellinese S.c., by Credito Artigiano S.p.A., by Bankadati S.l. S.p.a and by Stelline S.l. S.p.a towards their retired employees, and for what regards Credito Artigiano S.p.A., towards the employees that have opted for the defined benefit annuity option. Since 31 December 2003 there have been no new entries. The amount allocated represents the estimated actuarial debt, which amounted to EUR 43,990 thousand as at 31 December The actuarial calculation is performed at each year end with the collaboration of an actuary. 156

157 Changes in pension funds during the period As at 31 December 2006, the present value of defined benefit liability was equal to EUR 45,167 thousand. During the period under review a total of EUR 2,897 thousand benefits were disbursed, interest expense matured amounted to EUR 1,975 thousand and the actuarial gains calculated amounted to EUR 179 thousand. The outstanding liability as at 31 December 2007, equal to EUR 43,990 thousand, derives from non-directly funded plans for EUR 32,738 thousand, and from a directly funded plan, relative to retired personnel of Credito Artigiano S.p.A., for EUR 11,252 thousand. Attention is drawn to the fact that the defined benefit plan set up for Credito Artigiano S.p.A., in accordance with the provisions of IAS 19 is not highlighted under balance sheet assets, nor is it included in the related tables of the Notes to the financial statements as it is set off against the corresponding plan assets Changes during the year in pension plan assets and other information As at 31 December 2006, the assets allocated directly to the defined benefit pension plan of Credito Artigiano S.p.A. amounted to EUR 11,568 thousand. They have been used during the year to pay pension benefits for a total of EUR 712 thousand. Considering the return on plan management, equal to EUR 233 thousand, and the contribution paid by the company, equal to EUR 163 thousand as at 31 December 2007, the assets amount to EUR 11,252 thousand. The breakdown is as follows: bond and equity securities for EUR 11,193 thousand, and liquidity for EUR 59 thousand Description of the main actuarial hypotheses The current value of the mathematical reserve of the retired employees is equal to the current actuarial value of the pension that they will be paid in the future, considering the possibility of reversion. The value of the assets mathematical reserve is equal to the current actuarial value of the future benefits, net of the product of the current actuarial value of the future benefits and the set contribution percentage. The technical bases used are as follows: - Interest rate 4.5%; - remuneration increase rate 1.5%; - Demographic base IPS Comparatives As at 31 December 2007 the estimated actuarial debt amounts to EUR 43,990 thousand compared to EUR 45,167 thousand in 2006 and EUR 39,412 thousand in As at 31 December 2007 the assets allocated to the directly funded defined-benefit plan amount to EUR 11,252 thousand compared to EUR 11,568 thousand in 2006 and to EUR 10,829 thousand in SECTION 15 - GROUP EQUITY ITEMS 140, 160, 170, 180, 190, 200 AND Group equity: breakdown Items/Amounts 31/12/ /12/ Capital 562, ,914 2 Share premium reserve 738, , Reserves 118,084 93, (Treasury shares) a) Parent Bank -1, b) subsidiaries Valuation reserves 73, , Equity instruments: Net income (loss) for the year pertaining to the group 85,773 68,614 Total 1,576, ,

158 "Share capital" and "Treasury shares": breakdown In April, the conversion of the third and final tranche of the Credito Valtellinese 2.8% convertible bond loan resulted in the issue of 16,087,885 new ordinary shares, with a par value of EUR 3 each, and a consequent increase in share capital of EUR 48,264 thousand. In May, following the share capital increase resolved by the Extraordinary Shareholders Meeting of Credito Valtellinese on 10 February 2007, the nominal value of each share in issue was increased by EUR 0.5 through reserves for EUR 53,530 thousand. In June 53,416,567 new shares of EUR 3.5 nominal value each were issued in connection with the exercise of the option rights at the end of the offer period (21 May 22 June 2007), whilst in July 113,021 new shares were issued in relation to the rights that had remained unexercised. Thus, at the end of the financial year the share capital of Credito Valtellinese. fully subscribed and paid - amounted to EUR 562,061 thousand, and was made up of 160,588,764 shares of EUR 3.5 nominal value each Share capital number of shares of the Parent company: annual changes Items/Types Ordinary Other A. Shares at the beginning of the year - fully paid-up 90,971, not fully paid up - - A.1 Treasury shares (-) -64,646 - A.2 Shares issued: opening balance 90,906,645 - B. Increases 70,380,094 - B.1 New issues 69,617, against payment: 69,617, business combinations conversion of bonds 16,087, exercising of warrants other 53,529, free: on behalf of employees on behalf of directors other - - B.2 Sale of treasury shares 762,621 - B.3 Other changes - - C. Decreases -817,692 - C.1 Cancellation - - C.2 Purchase of treasury shares -817,692 - C.3 Disposals of companies - - C.4 Other changes - - D. Shares issued: closing balance 160,469,047 - D.1 Treasury shares (+) 119,717 - D.2 Shares outstanding at the end of the year 160,588, fully paid-up 160,588, not fully paid-up

159 Profit reserves: other information The item Profit reserves includes the Legal Reserve (allocated pursuant to the laws in force), the Statutory reserve (allocated pursuant to an option provided by the articles of association, which derives its funds from the profits exceeding the legal reserve and dividend distribution), other reserves and the Consolidation reserves (deriving from consolidation effects) Valuation reserves: breakdown Items/Amounts 31/12/ /12/ Financial assets available for sale 11,662 8, Property, plant and equipment Intangible assets Hedging of foreign investments Cash flow hedging Exchange rate differences Non-current assets and discontinued operations Special revaluation laws 61, ,312 Total 73, , Valuation reserves: annual changes Financial assets available for sale Property, plant and equipment Intangible assets Hedging of foreign investments Cash flow hedging Exchange rate differences Non current assets and discontinued operations 2007 Special revaluation laws A. Opening balance 8, ,312 B. Increases 3, B.1 Increases in fair value 3, X B.2 Other changes C. Decreases ,530 C.1 Decreases in fair value X C.2 Other changes ,530 D. Closing balance 11, ,

160 15.8 Valuation reserves for financial assets available for sale: breakdown Asset/Amounts 31/12/ /12/2006 Positive reserve Negative reserve Positive reserve Negative reserve 1. Debt securities Equity securities 11,662-8, Quotas of UCI Loans Total 11,662-8, Valuation reserves for financial assets available for sale: annual changes Debt securities Equity securities Quotas of UCI 1. Opening balance - 8, Positive changes - 3, Increases in fair value - 3, Transfer of negative reserves to the income statement: 2007 Loans - from impairment on disposal Other changes Negative changes Decreases in fair value Adjustments from impairment Transfer of positive reserves to the income statement: on disposal Other changes Closing balances - 11, SECTION 16 MINORITY INTERESTS ITEM Minority interests: breakdown Items/Amounts 31/12/ /12/ Capital 81,347 82,331 2 Share premium reserve 45,922 50, Reserves 48,272 32, (Treasury shares) Valuation reserves 25,052 25, Equity instruments Net income (loss) for the period pertaining to third parties 16,341 12,513 Total 216, ,

161 Valuation reserves: breakdown Items/Amounts 31/12/ /12/ Financial assets available for sale Property, plant and equipment: Intangible assets Hedging of foreign investments Cash flow hedging Exchange rate differences Non-current assets and discontinued operations Special revaluation laws 25,080 25,461 Total 25,052 25, Valuation reserves for financial assets available for sale: breakdown 31/12/2007 Asset/Amounts 1. Debt securities 2. Equity securities 3. Quotas of UCI 4. Loans Total Positive reserve Negative reserve Valuation reserves: annual changes Financial assets available for sale Property, plant and equipment Intangible assets Hedging of foreign investments Cash flow hedging Exchange rate differences Non current assets held for sale and discontinue d operations 2007 Special revaluation laws A. Opening balance ,461 B. Increases B1. Increases in fair value X B2. Other changes C. Decreases C1. Decreases in fair value X C2. Other changes D. Closing balance ,

162 OTHER INFORMATION 1. Guarantees given and commitments Transactions 31/12/ /12/2006 1) Financial guarantees a) Banks - - b) Customers 94,070 81,658 2) Commercial guarantees a) Banks 84,934 62,126 b) Customers 1,051, ,877 3) Irrevocable commitments to grant finance a) Banks i) certain to be called on 40,057 44,977 ii) not certain to be called on 22,831 47,457 b) Customers i) certain to be called on 88,188 41,267 ii) not certain to be called on 798, ,402 4) Commitments underlying credit derivatives: sales of protection - - 5) Assets lodged to guarantee third-party obligations - - 6) Other commitments 222, ,697 Total 2,403,415 1,926,461 2 Assets lodged to guarantee the Bank s liabilities and commitments Portfolios 31/12/ /12/ Financial assets held for trading 1,030,208 1,050, Financial assets designated at fair value Financial assets available for sale Financial assets held to maturity Due from banks 747, Loans to customers Property, plant and equipment: Information on operating leases In terms of operating leases, the Group acts solely as lessee. The counterparties in the main operating lease contracts stipulated by Group companies, which cannot be cancelled, are the following: - Overlease S.r.l., for car rental, in respect of which minimum future payments due within one year amount to EUR 782 thousand, after one to five years amount to EUR 1,040 thousand; no amounts are due after more than five years. Additional costs of between EUR 39 and EUR 160 per 1,000 Km are envisaged for some of these contracts if the maximum mileage indicated in the contract is exceeded. - Pitney Bowes Italia S.r.l. for the leasing of stamping and envelope sealing machines, with the following minimum future payments: a. EUR 24 thousand within one year b. EUR 60 thousand after one to five years c. No payment due after more than five years. 162

163 - Cicrespi S.p.A. and C.A.S.T. di Randazzo F.M. for the leasing of banknote counting machines, with the following minimum future payments: a. EUR 46 thousand within one year b. EUR 66 thousand after one to five years c. No payment due after more than five years. - Sundry suppliers, for the leasing of photocopiers, in respect of which minimum future payments due are as follows: EUR 230 thousand within one year, EUR 103 thousand after one to five years and no amounts due after more than five years, with the option to have the equipment replaced in case of wear and tear. For all these contracts, in 2007 minimum payments totalling EUR 1,115 thousand were recorded as costs. 5 - Administration and trading on behalf of third parties Type of service 31/12/ /12/ Trading of financial instruments on behalf of third parties a) Purchases b) Sales 1. settled unsettled settled unsettled 2. Asset management - - a) individual 4,170,553 4,416,422 b) collective 3. Custody and administration of securities a) third-party securities held on deposit: when acting as custodian bank (excluding asset management) Securities issued by companies included in the scope of consolidation other securities b) other third-party securities held on deposit (excluding asset management): other Securities issued by companies included in the scope of consolidation 2,071,604 1,694, other securities 4,586,843 4,720,878 c) third-party securities deposited with third parties 6,547,266 6,828,327 d) portfolio securities deposited with third parties 1,737,955 1,426, Other transactions 1,308,335 1,420,

164 PART C INFORMATION ON THE CONSOLIDATED INCOME STATEMENT SECTION 1 INTEREST ITEMS 10 AND Interest income and similar income: breakdown Items/Technical forms Perfor ming financi al assets Impaire d financi al assets Other assets Change % Debt securities Loans 1. Financial assets held for trading 16, ,570 6, % 2. Financial assets designated at fair value Financial assets available for sale Financial assets held to maturity Due from banks 1,460 21, ,308 26, % 6. Loans to customers ,941 8, , , % 7 - Hedging derivatives: X X X % 8. Financial assets sold and not cancelled 41, ,647 23, % 9. Other assets X X X 1,089 1, % Total 59, ,777 8,444 1, , , % Interest income and similar income: differentials relative to hedging transactions Items/Sectors Change % A. Positive differentials relative to following transactions: - A.1 Assets fair value hedging A.2 Liabilities fair value hedging A.3 Interest rate risk macro-hedging % A.4 Asset cash flow hedging A.5 Liabilities cash flow hedging A.6 Cash flow macro-hedging Total positive differentials (A) % B. Negative differentials relative to the following transactions: - B.1 Assets fair value hedging B.2 Liabilities fair value hedging B.3 Interest rate risk macro-hedging - (134) % B.4 Assets cash flow hedging B.5 Liabilities cash flow hedging B.6 Cash flow macro-hedging Total negative differentials (B) - (134) % C. Balance (A-B) % 164

165 1.3 - Interest income and similar income: other information Interest income on financial assets in foreign currency Change % Interest on foreign currency assets 21,319 15, % Interest income on finance lease transactions Change % Interest on finance lease transactions 44,900 31, % interest expense and similar expenses: breakdown Items/Technical forms Payables Securitie s Other liabiliti es Change % 1. Due to banks (27,932) X - (27,932) (28,538) -2.12% 2. Due to customers (170,099) X - (170,099) (136,586) 24.54% 3. Securities issued X (134,922) - (134,922) (84,017) 60.59% 4. Trading liabilities - - (152) (152) (210) % 5. Financial liabilities designated at fair value Financial liabilities for assets sold and not cancelled (62,941) - - (62,941) (4,719) % 7. Other liabilities X X Hedging derivatives: X X Total (260,972) (134,922) (152) (396,046) (254,070) 55.88% Interest expense and similar expenses: other information Interest expense on foreign currency liabilities Change % Interest on foreign currency liabilities (5,699) (8,534) % 165

166 SECTION 2 FEES AND COMMISSIONS ITEMS 40 AND Fee and commission income: breakdown Type of service/sector Change % a) guarantees given 6,979 6, % b) credit derivatives c) management, dealing and consulting services: 67,356 68, % 1. trading of financial instruments % 2. currency dealing 5,086 4, % 3. Asset management 37,408 38, % 3.1 individual 35,866 36, % 3.2 collective 1,542 1, % 4. Custody and administration of securities 1,112 1, % 5. custodian bank placement of securities 5,288 6, % 7. collection of orders 7,758 6, % 8. consultancy services 771 1, % 9. distribution of services to third parties 9,902 9, % 9.1. Asset management individual collective insurance products 9,902 9, % 9.3 other products d) collection and payment services 45,349 47, % e) servicing services for securitisation transactions f) factoring transaction services g) tax collection services 3, % h) other services 88,424 85, % Total 211, , % Commission income shown under item h) other services refer to commissions on current accounts and deposits of EUR 46,866 thousand, commissions credit transactions of EUR 29,156 thousand and commissions on other transactions of 12,402 thousand. 166

167 2.2 - Fee and commission income: distribution channels of products and services Channels/Amounts Change % a) at Bank branches: 49,194 50, % 1. asset management 35,725 36, % 2. placement of securities 3,847 4, % 3. third-party products and services 9,622 9, % b) outside bank branches: asset management placement of securities third-party products and services c) other distribution channels: 3,750 3, % 1. asset management 1,683 1, % 2. placement of securities 1,788 1, % 3. third-party products and services % Fee and commission expense: breakdown Services/Sectors Change % a) guarantees received (36) (64) % b) credit derivatives c) management and dealing services (946) (1,493) % 1. trading of financial instruments - (58) % 2. currency dealing (385) (383) 0.52% 3. Asset management: own portfolio third party portfolio custody and administration of securities (561) (535) 4.86% 5. placement of financial instruments - (517) % 6. offer outside banking premises of financial instruments, products and services d) collection and payment services (14,913) (14,148) 5.41% e) other services (3,103) (2,111) 46.99% Total (18,998) (17,816) 6.63% 167

168 SECTION 3 DIVIDENDS AND SIMILAR INCOME ITEM Dividends and similar income: breakdown Items/Income Dividends Income from quotas of UCI Dividends Income from quotas of UCI Dividends Change % Income from quotas of UCI A. Financial assets held for trading % - B. Financial assets available for sale 1,178-1, % - C. Financial assets designated at fair value D. Investments in associates and companies subject to joint control - X - X - X Total 1,653-1, % - SECTION 4 PROFITS (LOSSES) ON TRADING ACTIVITIES ITEM Profits (losses) on trading activities: breakdown Transactions/Income components Capital gains (A) Profit on trading (B) Capital losses (C) Losses on trading (D) Net profit (loss) [(A+B)- (C+D)] 1. Financial assets held for trading 1,176 13,486 (6,804) (1,071) 6, Debt securities ,342 (5,874) (528) 5, Equity securities - 1,153 (865) (533) (245) 1.3 Quotas of UCI (65) (10) 1, Loans Other Trading liabilities Debt securities Payables Other Other financial assets and liabilities: exchange rate differences X X X X 2, Derivatives 3,440 10,914 (2,495) (11,639) 1, Financial derivatives: - On debt securities and interest rates 2,974 10,914 (2,029) (11,639) On equity securities and share indices (466) On currencies and gold X X X X Other Credit derivatives Total 4,616 24,400 (9,299) (12,710) 10,

169 SECTION 5 PROFITS (LOSSES) ON TRADING ACTIVITIES ITEM Fair value adjustments in hedge accounting: breakdown Income components/amounts Change % A. Income from: A.1 Fair value hedges A.2 Financial assets with fair value hedges A.3 Financial liabilities with fair value hedges % A.4 Financial derivatives for cash flow hedges A.5 Assets and liabilities denominated in foreign currencies Total income from hedging activities (A) % B. Charges from: B.1 Fair value hedges - (147) % B.2 Financial assets with fair value hedges B.3 Financial liabilities with fair value hedges B.4 Financial derivatives for cash flow hedges B.5 Assets and liabilities denominated in foreign currencies Total charges from hedging activities (B) - (147) % C. Fair value adjustments in hedge accounting (A-B) % SECTION 6 - PROFIT (LOSS) FROM DISPOSALS/REPURCHASES - ITEM Profit (loss) from disposals/repurchases: breakdown Items/Income components Financial assets Profits Losses Net result Profits Losses Net result Profits Losses Change % Net result 1. Due from banks Loans to customers (93) (93) % % 3 - Financial assets available for sale 3.1 Debt securities Equity securities 8-8 3,288-3, % % 3.3 Quotas of UCI Loans Financial assets held to maturity Total assets 8-8 3,288 (93) 3, % % % Financial liabilities 1. Due to banks Due to customers Securities issued (165) % % % Total liabilities (165) % % % 169

170 SECTION 8 NET LOSSES/RECOVERIES ON IMPAIRMENT ITEM Net losses/recoveries on impairment of loans: breakdown Transactions/Income components Cancellat ion Value adjustm. Recove ries Specific Portfolio Specific - Portfolio Other A B A B A. Due from banks (116) B. Loans to customers (7,955) (91,973) (15,329) 22,026 16, (75,142) (57,991) C. Total (7,955) (91,973) (15,329) 22,026 16, ,062 (75,038) (58,107) Key A = from interest B = other recoveries Transactions/Income components Change % A. Due from banks 104 (116) -189,66% B. Loans to customers (75.142) (57.991) 29,58% C. Total (75.038) (58.107) 29,14% Net losses/recoveries on impairment of other financial transactions: breakdown Transactions/Income components Cancellat ion Value adjust m. Recove ries Specific Portfolio Specific Portfolio Other A B A B A. Guarantees given - (194) (19) (87) 29 B. Credit derivatives C. Commitments to grant finance D. Other transactions E. Total - (194) (19) (87) 29 Key A = from interest B = other recoveries Transactions/Income components Change % A. Guarantees given (87) % B. Credit derivatives C. Commitments to grant finance D. Other transactions E. Total (87) % 170

171 SECTION 11 ADMINISTRATIVE EXPENSES - ITEM Personnel expenses: breakdown Type of expense/amounts Change % 1) Employees (228,729) (216,759) 5.52% a) wages and salaries (141,806) (129,625) 9.40% b) social security charges (40,635) (42,744) -4.93% c) termination indemnity (3,497) (1,776) 96.90% d) pension expenses e) provision to termination indemnities (10,879) (9,957) 9.26% f) provision to the pension fund and similar commitments: - - defined contribution defined benefit (1,499) (8,141) % g) payments to external supplementary pension funds: - - defined contribution (5,783) (4,622) 25.12% - defined benefit h) costs from equity payments i) other employee benefits (24,630) (19,894) 23.81% 2) Other personnel (1,279) (1,227) 4.24% 3) Directors (6,055) (5,004) 21.00% Total (236,063) (222,990) 5.86% The individual items relative to employees include the share of costs relative to staff seconded from other companies Average number of employees by category Employees: 3,418 3,307 a) executives b) total middle managers 1,079 1,019-3rd and 4th level c) other employees 2,284 2,237 Other staff Total 3,548 3, Defined benefit company pension funds: total costs The total costs for the year amount to EUR 1,796 thousand and include interests for EUR 1,975 thousand and actuarial gains for EUR 179 thousand. 171

172 11.5 Other administrative expenses: breakdown Change % Fees for professional and consultancy services (17,456) (14,726) 18.54% Statutory auditors fees (1,039) (656) 58.38% Insurance premiums (3,558) (3,600) -1.17% Advertising (6,856) (6,103) 12.34% Postage, telegraph and telephone (11,906) (10,000) 19.06% Print and stationery (1,704) (2,124) % Maintenance and repairs (3,588) (3,482) 3.04% Data processing services (11,722) (10,084) 16.24% Hardware lease rentals (72) (970) % Electricity, heating and shared property service charges (7,203) (7,223) -0.28% Charges for miscellaneous services provided by third parties (19,081) (18,431) 3.53% Cleaning costs (3,530) (4,029) % Transport and travel (1,553) (1,434) 8.30% Security and transport of valuables (7,866) (7,583) 3.73% Membership fees (1,765) (1,555) 13.50% Independent auditors fees (1,245) (1,280) -2.73% Commercial information and searches (4,996) (4,409) 13.31% Subscriptions to newspapers, magazines and publications (641) (634) 1.10% Rents payable (15,794) (13,943) 13.28% Entertaining expenses (1,676) (1,534) 9.26% Taxes and dues (39,917) (36,841) 8.35% Contractual charges for cash management services (1,754) (1,683) 4.22% Training costs (2,284) (1,940) 17.73% Miscellaneous items (3,140) (4,197) % Total (170,346) (158,461) 7.50% SECTION 12 NET PROVISIONS FOR RISKS AND CHARGES ITEM Net provisions for risks and charges: breakdown Items Change % Provision for legal disputes and claims from liquidators (4,551) (7,783) % Provision for sundry risks and charges (1,914) (874) % Total (6,465) (8,657) % 172

173 SECTION 13 NET ADJUSTMENTS TO/RECOVERIES ON PROPERTY, PLANT AND EQUIPMENT ITEM Net adjustments to property, plant and equipment: breakdown Assets/Income components Deprecia tion (a) Value Recoveri adjustm. es (c) on impairme nt (b) 2007 Net profit (loss) (a+b-c) A. Property, plant and equipment A.1 Owned - Used in the business (19,230) - - (19,230) - For investment (133) - - (133) A.2 Acquired through a finance lease - Used in the business For investment Total (19,363) - - (19,363) SECTION 14 NET ADJUSTMENTS TO/RECOVERIES ON INTANGIBLE ASSETS ITEM Net adjustments to Intangible assets: breakdown Assets/Income components Amortisa tion (a) Value Recoveri adjustm. es (c) on impairme nt (b) 2007 Net profit (loss) (a+b-c) A. Intangible assets A.1 Owned - generated internally (2,448) - - (2,448) - Other (1,642) - - (1,642) A.2 Acquired through a finance lease Total (4,090) - - (4,090) SECTION 15 - OTHER OPERATING INCOME AND EXPENSES - ITEM Other operating expenses: breakdown Change % Depreciation of leasehold improvements (5,997) (5,806) 3.29% Other charges (3,036) (5,775) % Total (9,033) (11,581) % 173

174 Other operating income: breakdown Change % Rentals receivable 1,044 1, % Income from data processing services 5,185 3, % Income from other services 1, % Recovery of indirect taxes 30,751 27, % Recovery of insurance policy payments 1,622 1, % Recovery of legal and notarial costs 6,229 5, % Other income 9,501 16, % Total 55,375 56, % SECTION 16 PROFIT (LOSSES) ON INVESTMENTS IN ASSOCIATES AND COMPANIES SUBJECT TO JOINT CONTROL - ITEM Profit (loss) on investments in associates and companies subject to joint control breakdown Income components/amounts Change % 1) Companies subject to joint control A. Income 1,739 1, % 1.Revalutations 1,739 1, % 2. - Profit from disposals Recoveries Other positive changes B. Charges Write-downs Losses on impairment Losses from disposals Other negative changes Net profit (loss) 1,739 1, % 2) Companies subject to significant influence A. Income 11,590 11, % 1.Revalutations 11,568 11, % 2. Profit from disposals Recoveries Other positive changes B. Charges Write-downs Losses on impairment Losses from disposals Other negative changes Net profit (loss) 11,590 11, % Total 13,329 13, % 174

175 SECTION 18 - GOODWILL IMPAIRMENT ITEM Goodwill impairment: breakdown Creset Total Change % (1,199) - - (1,199) - - SECTION 19 - PROFIT (LOSSES) ON DISPOSAL OF INVESTMENTS - ITEM Profit (losses) on disposal of investments: breakdown Income components/amounts Change % A. Property - - Profit from disposals % - Losses from disposals (13) - - B. Other assets - Profit from disposals % - Losses from disposals (46) (11) % Net profit (loss) % SECTION 20 TAXES ON INCOME FROM CONTINUING OPERATIONS ITEM Taxes on income from continuing operations: breakdown Income components/amounts Change % 1. Current taxes (-) (100,821) (62,780) 60.59% 2. Changes in current taxes of prior periods (+/-) (41) (261) % 3. Reduction in current taxes for the year (+) Change in prepaid taxes (+/-) 7,663 (21,105) % 5. Change in deferred taxes (+/-) (3,060) 14, % 6. Income taxes for the yea (-) (-1 +/ /-4 +/-5) (96,259) (69,940) 37.63% 175

176 20.2 Reconciliation between theoretical tax expense and actual tax expense - IRES 2007 Income (loss) before tax from continuing operations 198,373 Profit (loss) from groups of discontinued operations - Taxable income 198,373 Theoretical tax expense - IRES (65,462) Effect of non-deductible negative components of income (10,596) Effect of non-taxable positive components of income 6,606 Actual tax expense - IRES (69,452) - on continuing operations (69,452) - on groups of discontinued operations - The negative and positive income components also include the reduction of prepaid and deferred taxes deriving from the reduction in the IRES rate from 33% to 27.5% introduced by the 2008 Finance Act (Law no. 244/07) Reconciliation between theoretical tax expense and actual tax expense - IRAP 2007 Profit (loss) before tax from continuing operations 198,373 Profit (loss) from groups of discontinued operations - Taxable income 198,373 Theoretical tax expense - IRAP (10,340) Effect of non-deductible negative components of income (17,063) Effect of non-taxable positive components of income 1,690 Effect of lower tax rates (1,094) Actual tax expense - IRAP (26,807) - on continuing operations (26,807) - on groups of discontinued operations - The negative and positive income components also include the effect of the reduction of prepaid and deferred taxes deriving from the reduction in the IRAP rate from 5.25% to 3.9% introduced by the 2008 Finance Act (Law no. 244/07). 176

177 SECTION 21 - INCOME (LOSS) FROM GROUPS OF DISCONTINUED OPERATIONS (AFTER TAX) ITEM Income (loss) from groups of assets/liabilities associated with discontinued operations (after tax): breakdown Income components/sectors Group of assets/liabilities Change % 1. Income % 2. Charges - (87) % 3. Result of the valuation of the group of assets and associated liabilities Profit (loss) on disposal - 1, % 5. Taxes and dues Profit (loss) - (4) % - 1, % 21.2 Breakdown of income taxes related to groups of assets/liabilities assets/liabilities associated with discontinued operations Change % 1. Current taxation (-) - (4) % 2. Change in prepaid taxes (+/-) Change in deferred taxes (+/-) Income taxes for the year (-1+/-2 +/-3) - (4) % SECTION 22 MINORITY INTERESTS ITEM breakdown of item 330 Minority interests The main components concern the following investee companies: Change % Credito Artigiano (13,068) (9,826) 32.99% Credito Siciliano (1,731) (832) % Banca dell Artigianato e dell Industria (141) % Mediocreval (1,137) (1,334) % Bancaperta (398) (830) % Other % 177

178 SECTION 24 EARNINGS PER SHARE The basic earnings per share and diluted earnings per share are calculated according to the methods described in IAS 33 Earnings per share. The basic earnings per share are defined as the profit or loss attributable to ordinary equity holders divided by the weighted average number of ordinary shares outstanding during the period. The diluted earnings per share are calculated taking into account also the dilutive effects of the conversion of the potential ordinary shares, defined as financial instruments that attribute to the holder the right to obtain ordinary shares. As a result, for the purposes of the calculation, the numerator and denominator of the ratio are adjusted to take account of the effects of additional shares which would be outstanding in case of conversion of all the potential ordinary shares with dilutive effects. The following table displays the basic earnings per share Attributable profit 82,463 66,078 Weighted average number of ordinary shares 130,347,319 87,226,387 Basic earnings per share The diluted earnings per share also take account of the potential ordinary shares resulting from the share capital increase carried out in the first half of the year. In particular, reference is made to the warrants issued (warrants expiring on 30 April 2008 and on 30 April 2009), the "bonus share" owed to the subscribers of the share capital increase (a new share will be assigned free of charge for every 10 shares subscribed and held uninterruptedly until 12 July 2008). The following table displays the diluted earnings per share Adjusted attributable profit 82,463 68,326 Weighted average number of ordinary shares 147,521, ,362,287 Diluted earnings per share

179 PART D SEGMENT REPORTING IAS 14 establishes principles for reporting financial information by segment (information about the different types of products and services an entity produces and the different geographical areas in which it operates) to help users of financial statements: - better understand the entity s past performance; - better assess the entity s risks and returns; - make more informed judgements about the entity as a whole. Standard 14 requires that an entity provide segment information through a primary and a secondary format. The dominant source and nature of an entity s risks and returns governs whether its primary segment reporting format will be business segments or geographical segments. If the entity s risks and rates of return are affected predominantly by differences in the products and services it produces, its primary format for reporting segment information shall be business segments, with secondary information reported geographically. Similarly, if the entity s risks and rates of return are affected predominantly by the fact that it operates in different countries or other geographical areas, its primary format for reporting segment information shall be geographical segments, with secondary information reported for business segments. A business segment is a distinguishable component of an entity that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. Factors that shall be considered in determining whether products and services are related include: - the nature of the products or services; - the nature of the production processes; - the type or class of customer for the products or services; - the methods used to distribute the products or provide the services; - if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities. A geographical segment is a distinguishable component of an entity that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. The factors that should be considered in identifying the geographical sectors include: - similarity of economic and political conditions; - relationships between the various geographical areas; - proximity of operations; - special risks associated with operations in a particular area; - exchange control regulations; - the underlying currency risks. A detailed analysis of both the specificities of the Credito Valtellinese Banking Group and of IAS 14 brought to the identification of business segment for the primary reporting format. The geographical distribution of business activities, deemed less significant in comparison with the analysis by business segment, was identified as secondary reporting format. The segment-related financial information has been disclosed according to the following criteria: - if the whole activity of an entity of the Group was entirely ascribable to a specific business segment, the accounts of the entity have been included in such business segment, net of the consolidation entries of the entity; - if the whole activity of an entity of the Group was ascribable to different business segments, the accounts of the entity have been divided and included in such business segments, net of the consolidation entries of the entity. - the interest margin of the segments has been determined using applicable internal rates of transfer. 179

180 A. PRIMARY REPORTING FORMAT The Credito Valtellinese Group carries out its banking activities mainly in the retail segment (households, trades, professionals, small- and medium-sized companies) and offers a wide and developed range of products and services in the payment system and asset management segments. The central functions (administration, planning and control, risk management, marketing, HR, organisation, auditing) and the production activities are delegated to special purpose companies that provide support services to the banking activity, especially as regards IT, communication technology and real estate management. The specialisation and the univocality of each Group entity s mission allow the assignment of each company or its divisions to a specific segment. Consistently with the management approach, the activity of the Group can be ascribed to the following three business segments: 1. Retail banking; 2. Asset management; 3. Corporate center. In the report by business segment, the most significant segment is represented by the four territorial banks (Credito Valtellinese, Credito Artigiano, Credito Siciliano, Banca dell Artigianato e dell Industria) and by Mediocreval, whose activities may be ascribed almost entirely to the Retail Banking segment. The Asset Management segment includes the activities of Aperta SGR and the revenues from asset management of the territorial banks. The Corporate Center segment includes activities of the Group s special purpose companies, the treasury's activities, the management of strategic investments and the management of impaired loans. 180

181 A.1 A.2 Breakdown by business segment: economic and financial figures The following table displays a summary of the economic and financial figures of the business segments described above. Business segments Figures in thousands of Euro Retail banking Asset management Corporate center Consolidated Change % Change % Change % Change % INCOME STATEMENT DATA Interest margin , , % ,316 3, % 445, , % Net fee and commission income 162, , % 29,876 27, % % 192, , % Other revenues ,430 27, % 12,430 27, % Net interest and other banking 573, , % 29,876 27, % 47,750 30, % 651, , % income Net losses for impairment -73,075-57, % , % -75,125-58, % Net income from banking activities 500, , % 29,876 27, % 45,700 30, % 575, , % Operating expenses -319, , % -3,856-3, % -66,916-56, % -389, , % Other income and charges % ,130 13, % 12,419 13, % Income (loss) before tax from continuing operations 181, , % 26,020 24, % -9,086-13, % 198, , % BALANCE SHEET FIGURES Loans to customers 13,629,004 11,314, % % 124, , % 13,754,333 11,445, % Due from banks , , % 760, , % Treasury securities and investments in associates and companies subject to joint control ,556,539 1,503, % 1,556,539 1,503, % Direct deposits 13,708,656 12,073, % ,708,656 12,073, % - Due to customers 9,858,921 9,096, % ,858,921 9,096, % - Securities issued 3,849,735 2,977, % ,849,735 2,977, % Due to banks , , % 848, , % ORGANISATIONAL FIGURES Personnel 2,964 2, % % % 3,479 3, % 17 The significant rise in interest margin reported by the corporate segment is attributable to the capital increase resolved by the Extraordinary Shareholders' Meeting of 10 February

182 Retail banking Retail banking is the core business of the Group, as it includes all the (lending, investment and transfer) products and services offered to the customers of the Group, traditionally represented by households, trades, professionals and small- and medium-sized enterprises. Consequently, the income statement and balance sheet aggregates of this segment are largely ascribable to the territorial banks of the Group. During 2007, the Retail Banking segment generated net interest and other banking income for EUR million, a 13.3% increase compared with the previous year s figure. The segment accounts for 88.1% of the net interest and other banking income of the Group. The revenues in the segment were mainly driven by the interest margin, which registered a significant growth (+19.5%). The operating expenses amounted to EUR million (+3%) and a strengthened territorial network. The income (loss) before tax from continuing operations amounted to EUR million, an increase of 30.2%. At year end, the Retail banking segment had 389 branches, compared to 368 at the end of The human resources employed in the segment were 2,964, equal to 85.2% of the total employees of the Group. The direct deposits of the Retail Banking segment amounted to EUR 13,708.7 million, a 13.5% increase. Indirect deposits reached EUR 12,371.3 million (- 1.9%). Also loans to customers registered a strong performance (+20.5%), equal to EUR 13,629.0 million. Figures in thousands of Euro INCOME STATEMENT FIGURES Retail banking Change % Interest margin 410, , % Net fee and commission income 162, , % Other revenues Net interest and other banking income 573, , % Net losses for impairment -73,075-57, % Net income from banking activities 500, , % Operating expenses -319, , % Other income and charges % Income (loss) before tax from continuing operations 181, , % BALANCE SHEET FIGURES Loans to customers 13,629,004 11,314, % Direct deposits 13,708,656 12,073, % - Due to customers 9,858,921 9,096, % - Securities issued 3,849,735 2,977, % Indirect deposits 12,137,335 12,370, % Total deposits 25,845,991 24,444, % ORGANISATIONAL FIGURES Personnel 2,964 2, % Branches % Asset management The Asset Management segment includes the managed savings products offered both to the retail customers (distributed through the territorial banking network of the Group) and to the institutional investors. The segment includes the activities of Aperta SGR and the revenues of the territorial banks deriving from the offer of managed savings products. During the period the Asset Management segment generated net interest and other banking income for EUR 29.9 million (+8.2%), accounting for 4.6% of the Group net interest and other banking income, and registered Income before tax from continuing operations for EUR 26.0 million (+7.9%). 182

183 At year end, assets under management stood at EUR 4,565.0 million, an increase of 0.8% compared to EUR 4,528.2 million at the end of Business segments Figures in thousands of Euro INCOME STATEMENT FIGURES Asset management Change % Interest margin Net fee and commission income 29,876 27, % Other revenues Net interest and other banking income 29,876 27, % Net losses for impairment Net income from banking activities 29,876 27, % Operating expenses -3,856-3, % Other income and charges Income (loss) before tax from continuing operations 26,020 24, % BALANCE SHEET FIGURES Managed assets 4,565,018 4,528, % - collective 359, , % - individual 4,205,321 4,271, % ORGANISATIONAL FIGURES Personnel % 183

184 Corporate center The Corporate Center comprises the central functions performed for the benefit of the whole Group and, to a lesser extent, of third parties. The scope of the segment includes revenues generated from the treasury securities portfolio and profits from investments. The segment includes the activities of the Group s special purpose companies. During 2007, the Corporate center segment generated net interest and other banking income for EUR 47.8 million (+55.8%) accounting for 7.3% of the Group s net interest and other banking income. The performance of this component benefited from the positive trend of the net interest margin. Operating expenses stood at EUR 66.9 million. The result of the segment was EUR -9.1 million, compared to million of the previous period. The improvement is due to the positive trend in revenues. At year end, the amount of Due from banks for the segment amounted to EUR million (-13.6%), while the amount of Due to banks was equal to EUR million (-12.3%). Investments in securities and in associates and companies subject to joint control amounted to EUR 1,556.5 million (+3.5%). The human resources employed in the Corporate center were 493, equal to 14.2% of the Group s employees. Business segments Figures in thousands of Euro INCOME STATEMENT FIGURES Corporate center Change % Interest margin 35,316 3, % Net fee and commission income % Other revenues 12,430 27, % Net interest and other banking income 47,750 30, % Net losses for impairment -2, % Net income from banking activities 45,700 30, % Operating expenses -66,916-56, % Other income and charges 12,130 13, % Income (loss) before tax from continuing operations -9,086-13, % BALANCE SHEET FIGURES Loans to customers 124, , % Due from banks 760, , % Treasury securities and investments in associates and 1,556,539 1,503, % companies subject to joint control Due to banks 848, , % ORGANISATIONAL FIGURES Personnel % 184

185 B. SECONDARY REPORTING FORMAT The Credito Valtellinese Group operates in Northern and Central Italy (branch network of the Parent Company, of Credito Artigiano and Banca dell'artigianato e dell Industria) and in Southern Italy (branch network of Credito Siciliano). The Group does not include foreign branches. The results have been broken down according to the site of the branches, which substantially reflects the actual location of the clientele in the markets covered by the banks of the Group. Therefore, the income statement and balance sheet data of Southern Italy are mainly ascribable to the activities of Credito Siciliano, while the geographical segment Northern and Central Italy includes the results of the other territorial banks of the Group, and of the special purpose companies. B.1 B.2 Breakdown by geographical areas: economic and financial figures The following table displays the income statement and balance sheet figures of the geographical segments described above. Geographical segments Figures in thousands of Euro Northern and Central Italy Southern Italy Consolidated Change % Change % Change % INCOME STATEMENT FIGURES Interest margin 338, , % 107,357 82, % 445, , % Net fee and commission income 145, , % 47,246 46, % 192, , % Other revenues 11,631 23, % 799 3, % 12,430 27, % Net interest and other banking income 495, , % 155, , % 651, , % BALANCE SHEET FIGURES Loans to customers 11,532,027 9,603, % 2,222,306 1,842, % 13,754,333 11,445, % Due from banks 740, , % 19,359 22, % 760, , % Treasury securities 1,338,294 1,274, % 16,555 62, % 1,354,849 1,336, % Direct deposits 11,299,073 9,841, % 2,409,583 2,231, % 13,708,656 12,073, % - Due to customers 7,671,767 7,058, % 2,187,154 2,038, % 9,858,921 9,096, % - Securities issued 3,627,306 2,783, % 222, , % 3,849,735 2,977, % Due to banks 844, , % 3,761 1, % 848, , % Indirect deposits 10,633,489 10,865, % 1,503,846 1,505, % 12,137,335 12,370, % Total deposits 21,932,562 20,707, % 3,913,429 3,737, % 25,845,991 24,444, % ORGANISATIONAL FIGURES Personnel 2,673 2,487 7,5% ,7% 3,479 3,333 4,4% Branches ,1% ,0% ,7% Northern and Central Italy During 2007, the Northern and Central segment generated net interest and other banking income for EUR million, a 15.0% increase compared with the previous year s figure. The segment accounts for 76.1% 185

186 of the net interest and other banking income of the Group. The revenues in the segment were mainly driven by the interest margin, which registered a significant growth (+28.0%). At year end, the segment had 253 branches, compared to 232 of the previous year. The human resources employed in the segment were 2,673, equal to 76.8% of the total employees of the Group. The direct deposits of the segment rose by 14.8% reaching EUR 11,299.1 million. Indirect deposits reached EUR 10,633.5 million (-2.1%). Loans to customers amounted to EUR 11,532.0 million (+20.1%). Southern Italy During 2006, the Southern segment generated net interest and other banking income for EUR million (16.3% compared with 2006) accounting for 23.9% of the Group s net interest and other banking income. The trend of revenues was mainly driven by the positive performance of the interest margin. At the end of 2007, the segment operated through 136 branches. The human resources employed in the segment were 846, equal to 23.2% of the total employees of the Group. The direct deposits of the segment rose by 8.0% reaching EUR 2,409.6 million. Indirect deposits reached EUR 1,504 million (-0.1%). Also loans to customers registered a strong performance (20.6%), equal to EUR 2,222.3 million. 186

187 PART E INFORMATION ON RISKS AND HEDGING POLICIES SECTION 1 RISKS OF THE BANKING GROUP The clear identification of risks to which the Group is 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. Careful risk management, based on criteria of prudence and implemented within a specific organisational sphere, aims to limit the volatility of expected results In line with its focus on retail banking, the Group is mainly exposed to credit risk. The set of internal rules, operating procedures and control structures established to oversee company risks is structured according to a model that integrates control methods at various levels, all converging with the objectives of ensuring efficiency and effectiveness of operating processes, safeguarding integrity of corporate assets, protecting from losses, ensuring reliability and integrity of information and verifying proper execution of activities with respect to the internal and external regulation. Controls may be of various types, namely: - line controls, aimed at ensuring proper execution of transactions, normally incorporated into the procedures or attributed to the productive structures and carried out as part of back office activities; - controls on risk management, assigned to structures other than the productive ones, aimed at defining risk measurement methods, verifying respect of assigned powers and control of the consistency of operations within the single areas with the risk-return objectives assigned; - internal auditing controls, aimed at identifying anomalous trends and violations of procedures and regulations, as well as evaluation of the functions of the overall internal control systems, attributed, also through on-site inspections, continuously, periodically or, in exceptional cases, to independent structures outside of the operating units. The entire internal auditing system is periodically verified by the Boards of Directors and the Internal Control Committees set up with the aim of constantly adjusting operating strategies and processes as well as evaluating business risks. SECTION 1 CREDIT RISK Qualitative information 1. General aspects The attention paid to the development of the territorial areas where the Group operates continues to be the feature of its credit activity, particular care being given to all those sectors, such as tourism and real estate, which guarantee a sound base for a significant improvement of the local production framework. The aggregate in question is represented by households and SMEs which absorb a good share of the loans granted by the Group. 2. Credit risk management policies 2.1 Organisational aspects The organisational structure of the credit area, parallel at the various territorial banks of the Group, is distributed over the sales network with hierarchically ascending powers and competences towards central structures in order to take advantage of the local knowledge while maintaining more and more specialist competences within the central structures. Thus, every loan proposal is formulated by bodies within the territorial network, which then complete the related decision-making procedure. Applications for larger credit 187

188 lines, differentiated also on the basis of risk, are automatically forwarded to central structures, which decide on a case-by-case basis. In this perspective, all the credit lines files which are dealt with by the Executive Committee and the Board of Directors of the various banks, in addition to any particularly important topic related to lending issues, are systematically and compulsorily monitored by the Credit Risk Management Department of Mediocreval, the Group company managing credit risk, which expresses a mandatory though not binding opinion. On the other hand, the new mission assigned to Mediocreval has led to a different allocation of the Group Credit Risk Management which, form 1 January 2008 has started operating within the Parent Bank which, as prescribed by the banking supervision rules, houses the management, coordination and verification functions that are responsible for ensuring that the rules on capital adequacy, risk mitigation and internal control of the whole Group are complied with. The new management has been assigned the task of managing the quality of assets for the whole Group, defining the policies and criteria that are necessary for assessing and managing credit risks. This organisational change has been matched by a change in the composition of the Credit Committee of the Group which has the task of allowing Credito Valtellinese, as the Parent Bank, to supervise the credit activity of controlled banks, by carrying out controls and giving instructions to optimise the type and extent of credit risks that the Group is exposed to. As regards the control function assigned to the parent banks of the banking groups by current legal regulations, the implementation of the resolutions passed by the Boards of Directors of the banks of the Group with regard to new credit lines granted or changes to existing credit lines exceeding the limits set for each Bank, is expected to be subordinated to a congruence opinion by the Executive Committee of Credito Valtellinese. The Board of Directors of each Bank, the only body authorised to grant powers, is regularly informed during its meetings on the exercise of delegated powers and the performance of the most significant loans (including anomalously performing loans and doubtful loans). Furthermore, the Board of Directors of Credito Valtellinese, as the Parent Bank s body, also extends its examination to the loans of the entire Group. Any performance anomalies can be identified through advanced IT systems which are extremely versatile and easy to use. Particularly serious omissions can lead to normal operations being halted until these are clearly outlined, the relevant bodies have been notified and the competent functions have authorised them. The Risk Control Department of the Loans Department of each Bank is responsible for managing of at-risk loans (falling in the watchlist, substandard and restructured loan categories) and ensure that these files are adequately monitored. In order to guarantee the highest level of objectivity in the assessment, the Loans Department reports to the General Management of the bank autonomously and independently from the Sales Department. On the other hand, worthy of notice are some significant changes which, from 1 January 2008, applied to the territorial banks, where inspection activities, already assigned to the Risk Control Department of the Loans Departments, have now been assigned to the Inspection Services of the banks. Following such changes, the Credit Performance Management Department (the new name of the Risk Control Department), relieved of the line tasks previously carried out, may assist the network in managing anomalous positions better and directly, whilst the Inspection Service, that is not involved in managing activities, may report directly to the general Management and the Board of Statutory Auditors (with the possibility of joining the inspections on operating risk and those on loans). The two services will be preferential contacts and will follow the guidelines of the Auditing Department and the New Group Credit Risk Management Department and their collaboration will allow the coordination of the various operating units and harmonise Group operations Management, measurement and control systems The factors that enable to evaluate and manage credit risk include all the traditional quantitative (income items, financial statement analysis and internal performance data) and qualitative elements, such as the indepth knowledge of the customer, the competitive context in which it operates and, especially as far as the corporate segment is concerned, the assessment of management effectiveness. All these evaluation elements are complemented by all the modern databases available to credit operators such as risk centres, sector studies and the scoring of performance analyses. 188

189 High levels of loan fragmentation contribute to keeping the portfolio risk under control. In fact, at year end no consolidated loan exposures could be qualified as major risks according to supervisory regulations. In May 2007 the new corporate rating model became effective. Business customers, defined as the group of counterparties of any legal form which carry out the production and/or sale of goods and services, are divided into two segments: - corporate, which includes companies with turnover in excess of EUR 5 million or credit lines greater than EUR 250,000. This segment comprises a limited number of counterparties which, however, absorb a significant portion of loans; - small business, which includes companies with turnover of up to EUR 5 million and credit lines up to EUR 250,000. This segment comprises a high number of counterparties with loans of small amounts. The model used to assign the rating may be traced back to systems that rely on automation and includes objectified qualitative elements excluding the so-called overrides made by the analysts. This model is structured according to a module-based scheme or partial approach; there are five modules: quantitative analysis of financial statement indicators; trend of the enterprise Banking Group relationship, enterprise position vis-à-vis the banking system; macro-economic assessments concerning the enterprise activity sector and qualitative analysis of the enterprise. Each module is independent of the other modules and generates a partial assessment score. Depending on the scores obtained in the various enterprise assessments, the enterprise is assigned to a specific rating class. There are 9 rating classes for performing counterparties and a class for defaulting ones. The assignment of the rating is linked to the credit granting process and is triggered upon granting credit facilities or reviewing credit line files. Ratings are automatically reviewed on a monthly basis. Considering that the backtesting activities carried out on the model highlighted a good match between the creditworthiness rating classes and historical default frequencies, the model was considered to be reliable to be used in managing the various credit processing stages. At 31 December 2007, loans to enterprises, which were assigned a rating, represented 81% of loans to customers of the Group. The following chart shows the distribution of the portfolio of loans to enterprises by rating class. Chart 1 - Distribution of loans to enterprises by rating class AAA AA A BBB BB B CCC CC C Unrated 0 COMPANIES Rating Class EXPOSURE Compared to 30 June 2007, the distribution of loans highlights that the portfolio quality has improved. Performance scoring systems ((A.R.I.E.T.E.) have also been in use for some time in order to highlight particularly serious positions and implement simplified procedures to review the credit line of those companies that have passed the strict selection procedures. The entire credit process is constantly monitored and accurately verified. Please note that also this year all the Territorial Banks of the Group passed the test to obtain the quality certification of the Loan application, granting and management process which Credito Valtellinese has been awarded since The 189

190 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 Inspection Service (which reports to the General Management). The aim is to guarantee maximum stringency in the assessment of risk, yet maintaining a streamlined and efficient assessment and management process. Also the ABI PattiChiari Project relating to the average response time for granting credit to SMEs has highlighted, since the very first quarterly publications, the efficiency of the decision-making process used, which sees all the territorial banks constantly ranking first at national level. 2.3 Credit risk mitigation techniques The acquisition of guarantees undergoes a rigorous procedure, which envisages that the employee in charge of the collection can be unambiguously identified and that the formal and substantial validity of the guarantee is assessed, including also the verification of legal capacity required for the assignment. In case of interpretation difficulties, the Group Legal Service becomes involved and provides further verifications or recommendations in order to ensure the necessary legal effectiveness. The control is further reinforced at central level, where the security or the contracts are kept, and periodically sample-checked by the Inspection Service. In the event of pledges, the procedure requires the assessment of only pre-determined and readily liquid elements. In case of mortgages, the assets are evaluated by external experts, possibly employed by other Group companies but who are not involved in the creditworthiness evaluation process. This does not apply to special mortgages or mortgages of small amount. The acceptance of personal guarantees is often preceded by verifications carried out at the competent Property Registry, with the purpose of ascertaining that the property is effectively owned by the guarantor, always taking well into account the fact that the asset in question may suffer a swift and unexpected fall in value. In any case, the guarantees are always treated as an additional element to the credit line file and do not represent the sole basis for granting credit. 2.4 Impaired financial assets As regards impaired loans, that is doubtful and substandard loans, the Group Banks use technical and organisational procedures and homogeneous methodologies that are illustrated below. Substandard loans are identified by the Risk Control Departments of the single banks on the basis of a set of analyses on internal performance indicators (particular attention being paid to positions that are overdue by more than 90/180 days), responses received from the risk centres, sector data and the figures of the financial statements of the borrowers as well as the presence of prejudicial encumbrances. Loans become substandard when so resolved by the Credit Committee of each Bank, normally upon proposal by the Risk Control Department. When passing the resolution, the Committee also decides on the amount of provisions to be made in the financial statements. Likewise, the reversal of a substandard loan to "performing" status is also approved by the Credit Committee of the bank. The decision-making powers granted to the bodies of the individual banks do not apply to substandard and under control loans which are managed exclusively by the Boards. Substandard loans are systematically verified by the Risk Control Department, using also a set of checks available on the web, which provides constant support each branch on how to manage relationships and on any actions required to turn substandard loans into performing loans. In order to support the branches and guarantee the correct application of supervisory regulations, a webbased procedure has been implemented since 2006 with regard to objective substandard loans, that is those loans to be repaid by instalments which reach predetermined default parameters. The procedure requires the anomaly to be highlighted in the electronic diary of the concerned corporate functions. If the anomaly is not adequately resolved within six-months, it is gradually transferred from the branches to the up from the to the attention of the area heads and then to the Risk Control Department so that the loan may be properly labelled as "substandard". Moving onto the examination of the management of substandard loans, it is worth noting that said activity, within the Group, is controlled by Finanziaria San Giacomo which, in line with the rationalisation of the credit 190

191 activities of the Group, was assigned the majority of the non-performing loans of Group banks and the management of non-assigned ones. The aim of centralising this specialist activity within a single company was to promote the transfer of the best operating modalities to the various units operating nationwide and generate a significant improvement of the overall management of problem loans. A Legal Dispute Committee has been set up within Finanziaria San Giacomo with the aim of managing, within the delegated powers, any ownership files and expressing a mandatory yet not binding opinion on those falling under the jurisdiction of the Board of Directors, as well as those directly managed by it. The extent of the provisions to be set up for each doubtful loan is established in accordance with a formal Group policy, approved by the Boards of Directors of the Banks, which indicates, for the various types of doubtful loans classified on the basis of the single procedures, the criteria to be applied in calculating the doubtful amounts. The decision on the amount of the provision made on a case-by-case basis, as well as any changes, is taken by the Credit Committees upon recommendation by the competent functions of Finanziaria San Giacomo. In order to further improve the management of doubtful loans a web-based procedure (W2PEC) was developed to allow the constant monitoring of the status of the single recovery procedures. In particular, it is now possible to monitor the status of doubtful loans by mapping them on the basis of a wealth of selection criteria (amount range, stage of procedures, manager, loan application administrator, generating unit, reference legal advisor, etc.). The monitoring of impaired loans through the aforesaid methodologies helped bring the ratio of net doubtful loans/loans down to 1.4%, that is a rather low and further reducing level compared to 1.6% of the previous year. 191

192 QUANTITATIVE INFORMATION A. QUALITY OF CREDIT A.1 IMPAIRED AND PERFORMING POSITIONS: AMOUNTS, VALUE ADJUSTMENTS, TRENDS, ECONOMIC AND TERRITORIAL DISTRIBUTION A.1.1 Distribution of financial assets by portfolio and credit quality (book values) Portfolio/Quality Doubtful loans Substandard loans Restructured positions Past-due positions Country risk Other assets 1. Financial assets held for trading ,284,531 1,284, Financial assets available for sale ,288 70, Financial assets held to maturity Due from banks , , Loans to customers 186, ,671 4,136 85, ,355,211 13,754, Financial assets designated at fair value Financial assets held for sale Hedging derivatives Total at 31/12/ , ,671 4,136 85, ,470,021 15,869,207 Total Total at 31/12/ ,401 91,538 1, , ,279,402 13,662,256 A Distribution of financial assets by portfolio and credit quality (gross and net values) Portfolio/Quality Impaired assets Other assets Total Gross exposure Specific adjustments Portfolio adjustments Net exposure Gross exposure Portfolio adjustments Net exposure (net exposure) 1. Financial assets held for trading X X 1,284,560 1,284, Financial assets available for ,288-70,288 70,288 sale 3 - Financial assets held to maturity Due from banks , , , Loans to customers 813, , ,964 13,428,730-73,361 13,355,369 13,754, Financial assets designated at fair value X X Financial assets held for sale Hedging derivatives X X - - Total at 31/12/ , , ,964 14,259,059-73,376 15,470,243 15,869,207 Total at 31/12/ , , ,503 12,056,440-64,100 13,279,753 13,662,

193 A Cash and off-balance sheet exposures to banks: gross and net values 31/12/2007 Gross exposure Type of exposure/amount A. CASH EXPOSURES Value adjustm. adjustments Value adjustm. adjustments Net exposure a) Doubtful loans b) Substandard loans c) Restructured loans d) Past-due positions e) Country risk 50 X f) Other assets 986,399 X - 986,399 TOTAL A 986, ,434 B. OFF-BALANCE SHEET EXPOSURES a) Impaired b) Other 313,486 X ,485 TOTAL B 313, ,494 A Cash exposures to banks: trend of impaired positions and positions exposed to country risk (gross value) 2007 Causes/Categories Doubtful loans Substandar d loans Past-due exposures Past-due positions Country risk A. Opening exposure (gross) of which: positions sold and not cancelled B. Increases B.1 transfers from performing loans B.2 transfers from other categories of impaired loans B.3 other increases C. Decreases C.1. transfers to performing loans C.2 write-offs C.3 collections C.4 gains on disposals C0.5 transfers from other categories of impaired loans C.6 other decreases D. Closing exposure (gross) of which: positions sold and not cancelled

194 A Cash exposures to banks: trend in total value adjustments 2007 Causes/Categories Doubtful loans Substandar d loans Restructured positions Past-due exposures Country risk A. Opening total adjustments of which: positions sold and not cancelled B. Increases B.1 value adjustments B.2 transfers from other categories of impaired loans B.3 other increases C. Decreases C.1 recoveries from valuations C.2 recoveries from collections C.3 write-offs C.4 transfers from other categories of impaired loans C.5 other decreases D. Closing total adjustments of which: positions sold and not cancelled A Cash and off-balance sheet exposures to customers: gross and net values 2007 Gross exposure Specific value adjustments Portfolio value adjustments Net exposure Type of exposure/amount A. CASH EXPOSURES a) Doubtful loans 584, , ,582 b) Substandard loans 137,054-14, ,671 c) Restructured loans 4, ,136 d) Past-due positions 87,390-1, ,575 e) Country risk 247 X f) Other assets 14,547,554 X -73,301 14,474,253 TOTAL A 15,360, ,085-73,374 14,873,404 B. OFF-BALANCE SHEET EXPOSURES a) Impaired 4, ,645 b) Other 2,095,671 X -26 2,095,645 TOTAL B 2,099, ,099,

195 A Cash exposures to customers: trend of impaired positions and positions exposed to country risk (gross value) 2007 Causes/Categories Doubtful loans Substandard loans Past-due exposures Past-due positions Country Risk A. Opening exposure (gross) 568, ,038 1, , of which: positions sold and not cancelled B. Increases 117, ,896 4,646 76, B.1 transfers from performing loans 48, ,049 3,854 62, B.2 transfers from other categories of impaired loans 63,680 16, B.3 other increases 5,750 6, , C. Decreases -101,979-93,880-2, , C.1. transfers to performing loans , ,108 - C.2 write-offs -68, C.3 collections -33,050-25, ,119-4 C.4 gains on disposals C.5 transfers from other categories of impaired loans - -55,722-2,131-22,513 - C.6 other decreases D. Closing exposure (gross) 584, ,054 4,268 87, of which: positions sold and not cancelled A Cash exposures to customers: trend in total value adjustments 2007 Causes/Categories Doubtful loans Substandard loans Past-due exposures Past-due exposures Country risk A. Opening total adjustments 388,424 14, , of which: positions sold and not cancelled B. Increases 114,923 12, , B.1 value adjustments 102,065 11, , B.2 transfers from other categories of impaired loans 11, B.3 other increases 1, C. Decreases -105,579-12, ,949-1 C.1 recoveries from valuations -21, C.2 recoveries from collections -16,050-1, ,078 - C.3 write-offs -68, C.4 transfers from other categories of impaired loans - -11, C.5 other decreases D. Closing total adjustments 397,768 14, , of which: positions sold and not cancelled

196 A.2 CLASSIFICATION OF EXPOSURES BASED ON INTERNAL AND EXTERNAL RATINGS A Distribution of cash and off-balance sheet exposures by external rating class (book values) In consideration of the composition of the portfolio of loans to customers of the Group, mostly comprised of loans to small and medium-sized companies, family and craft businesses, professionals and households, the distribution of cash and off-balance sheet exposures by external rating class is not significant. The table below highlights the distribution of cash and off-balance sheet exposures to banks by external rating class. External rating classes Loans AAA/AA- A+/A- BBB+/BBB- BB+/BB- B+/B- Less than B- No rating Total A. Cash exposures 118, , , , ,434 B. Derivatives 1, ,324 3,670 B.1 Financial derivatives 1, ,324 3,670 B.2 Credit derivatives C. Guarantees given , ,893 84,934 D. Commitments to grant finance 1, , , ,890 Total 121, , , ,251 1,299,928 A.3 DISTRIBUTION OF SECURED LOANS BY TYPE OF GUARANTEE A.3.1 Secured cash exposures to banks and customers 31/12/2007 Value of exposure Collateral Total 1. Secured loans to banks: Property Securities Other assets 1.1 fully secured partially secured Secured loans to customers: 2.1 fully secured 6,799,356 4,881, ,438 47,239 5,125, partially secured 576,262 2,555 98,721 8, ,454 31/12/ Secured loans to banks: Value of exposure Governme nts Personal guarantees: Credit derivatives Other public entities Banks Other parties 1.1 fully secured partially secured Loans to customers: 2.1 fully secured 6,799, partially secured 576, Total 196

197 31/12/ Secured loans to banks: Value of exposure Governm ents Personal guarantees: Credit commitments Other public entities Banks Other parties 1.1 fully secured partially secured Secured loans to customers: 2.1 fully secured 6,799, ,805 2,714,654 2,725, partially secured 576, , , ,921 Total 31/12/2007 Value of exposure Collateral Personal guarantees: Credit derivatives Personal guarantees: Credit commitments Total 1. Secured loans to banks: 1.1 fully secured partially secured Secured loans to customers: 2.1 fully secured 6,799,356 5,125,185-2,725,481 7,850, partially secured 576, , , ,375 A Secured off-balance sheet exposures to banks and customers 31/12/2007 Value of exposure Collateral Total Property Securities Other assets 1. Secured loans to banks: 1.1 fully secured partially secured Secured loans to customers: 2.1 fully secured 584, ,481 35,755 16, , partially secured 36, , ,998 31/12/ Secured loans to banks: Value of exposure Governm ents Personal guarantees: Credit derivatives Other public entities Banks Other parties 1.1 fully secured partially secured Secured loans to customers: 2.1 fully secured 584, partially secured 36, Total 197

198 31/12/ Secured loans to banks: Value of exposure Governm ents Personal guarantees: Credit commitments Other public entities Banks Other parties 1.1 fully secured partially secured Secured loans to customers: 2.1 fully secured 584, , , , partially secured 36, ,845 11,845 Total 31/12/ Secured loans to banks: Value of exposure Collateral Personal guarantees: Credit derivatives Personal guarantees: Credit commitments 1.1 fully secured partially secured Secured loans to customers: 2.1 fully secured 584, , , , partially secured 36,764 16,998-11,845 28,843 Total 198

199 A Secured, impaired cash exposures to banks and customers 31/12/2007 Secured exposures to banks: Secured loans to customers: Beyond 150% Between 100% and 150% Between 50% and 100% Within 50% Beyond 150% Between 100% and 150% Between 50% and 100% Value of exposure ,154 57,815 18,187 7,565 Amount secured ,503 88,887 18,853 3,995 GUARANTEES (FAIR VALUE) Collateral A. Property ,331 3,572-1,500 B. Securities ,245 3,871 1, C. Other assets ,133 4 Personal guarantees A. Credit derivatives A.1 Governments and Central Banks Within 50% A.2 Other public entities A.3 Banks A.4 Financial businesses A.5 Insurance companies A.6 Non-financial businesses A.7 Other B. Credit commitments B.1 Governments and Central Banks B.2 Other public entities B.3 Banks B.4 Financial businesses B.5 Insurance companies B.6 Non-financial businesses B.7 Other ,883 80,543 16,403 2,017 Total ,503 88,887 18,853 3,995 Surplus of fair value of guarantee

200 A.3.4 Secured, impaired off-balance sheet exposures to banks and customers 31/12/2007 Secured exposures to banks: Secured loans to customers: Beyond 150% Between 100% and 150% Between 50% and 100% Within 50% Beyond 150% Between 50% and 100% Between 50% and 100% Value of exposure , ,146 Amount secured , ,353 GUARANTEES (FAIR VALUE) Collateral A. Property , B. Securities C. Other assets Personal guarantees A. Credit derivatives A.1 Governments and Central Banks Within 50% A.2 Other public entities A.3 Banks A.4 Financial businesses A.5 Insurance companies A.6 Non-financial businesses A.7 Other B. Credit commitments B.1 Governments and Central Banks B.2 Other public entities B.3 Banks B.4 Financial businesses B.5 Insurance companies B.6 Non-financial businesses B.7 Other , ,331 Total , ,353 Surplus of fair value of guarantee

201 B. DISTRIBUTION AND CONCENTRATION OF CREDIT B.1 Distribution of cash and off-balance sheet exposures to customers by sector Exposures/Counterparts Governments and Central Banks Other public entities Gross exposure Portfolio value adjustments Portfolio value adjustment s Net exposure Gross exposure Portfolio value adjustments Portfolio value adjustmen ts Net exposure A. Cash exposures A.1 Doubtful loans A.2 Substandard loans A.3 Restructured loans A.4 Past-due loans A.5 Other loans 1,048,725 X - 1,048,725 98,566 X ,501 TOTAL 1,048, ,048,725 98, ,501 B. Off-balance sheet exposures B.1 Doubtful loans B.2 Substandard loans B.3 Other impaired assets B.4 Other loans 48,038 X - 48,038 16,702 X - 16,702 TOTAL 48, ,038 16, ,702 TOTAL 31/12/2007 1,096, ,096, , ,203 TOTAL 31/12/2006 1,084, ,084, , ,288 Exposures/Counterparts Financial businesses Insurance companies Gross exposure Specific value adjustmen ts Portfolio adjustment s Net exposure Gross exposure Specific value adjustmen ts Portfolio adjustment s Net exposure A. Cash exposures A.1 Non-performing loans 1, A.2 Substandard loans A.3 Restructured loans A.4 Past-due loans A.5 Other loans 430,242 X ,883 2,935 X - 2,935 TOTAL 431, ,830 2, ,938 B. Off-balance sheet exposures B.1 Doubtful loans B.2 Substandard loans B.3 Other impaired assets B.4 Other loans 136,321 X - 136, X TOTAL 136, , TOTAL 31/12/ , ,151 3, ,196 TOTAL 31/12/ ,426-1, ,746 5, ,

202 Exposures/Counterparts Non-financial businesses Other parties Gross exposure Specific value adjustments Portfolio adjustments Net exposure Gross exposure Specific value adjustments Portfolio adjustments Net exposure A. Cash exposures A. Non-performing loans 402, , , , ,232-52,783 A.2 Substandard loans 110,591-12, ,899 24,187-1,691-22,496 A.3 Restructured loans 4, , A.4 Past-due loans 53,602-1, ,529 33, ,748 A.5 Other loans 10,799,802 X -64,118 10,735,684 2,169,795 X -8,814 2,160,981 TOTAL 11,371, ,634-64,136 11,023,402 2,407, ,662-8,814 2,269,008 B. Off-balance sheet exposures B.1 Doubtful loans 1, , ,254 B.2 Substandard loans B.3 Other impaired assets B.4 Other loans 1,556,134 X -18 1,556, ,218 X ,210 TOTAL 1,558, ,558, , ,798 TOTAL 31/12/ ,929, ,158-64,154 12,581,575 2,747, ,776-8,822 2,608,806 TOTAL 31/12/ ,747, ,294-57,599 10,404,479 2,215, ,823-6,402 2,089,884 B.2 Distribution of loans to non-financial resident businesses 31/12/ /12/2006 a) Other services for sale 3,582,373 2,645,730 d) Commerce, salvage and repairs 2,091,373 1,771,085 c) Building and public works 1,706,714 1,175,685 d) Hotel and commercial business 483, ,947 b) Textiles, leather and footwear, apparel 409, ,213 f) Other 2,666,688 2,560,367 Total 10,940,726 8,929,

203 B.3 Distribution of cash and off-balance sheet exposures to customers by region Exposure/Geographical area A. Cash exposures Gross exposure ITALY Net exposure OTHER EUROPEAN COUNTRIES Gross exposure Net exposure Gross exposure AMERICA Net exposure A.1 Doubtful loans 584, , A.2 Substandard loans 136, , A.3 Restructured loans 4,268 4, A.4 Past-due loans 87,362 85, A.5 Other loans 14,491,907 14,418,721 48,146 48,004 7,551 7,527 TOTAL 15,304,816 14,817,535 48,293 48,148 7,554 7,530 B. Off-balance sheet exposures B.1 Doubtful loans 2,497 1, B.2 Substandard loans B.3 Other impaired assets 1,108 1, B.4 Other loans 2,082,264 2,082,256 13,407 13, TOTAL 2,086,545 2,085,881 13,409 13, TOTAL 31/12/ ,391,361 16,903,416 61,702 61,557 7,554 7,530 TOTAL 31/12/ ,554,758 14,085, , ,102 8,792 8,730 Exposure/Geographical area ASIA REST OF THE WORLD A. Cash exposures Gross exposure Net exposure Gross exposure Net exposure A.1 Doubtful loans A.2 Substandard loans A.3 Restructured loans A.4 Past-due loans A.5 Other loans TOTAL B. Off-balance sheet exposures B.1 Doubtful loans B.2 Substandard loans B.3 Other impaired assets B.4 Other loans TOTAL Total at 31/12/ Total at 31/12/

204 B.4 - Distribution of cash and off-balance sheet exposures to banks by region Exposure/Geographical area A. Cash exposures Gross exposure ITALY Net exposure OTHER EUROPEAN COUNTRIES Gross exposure Net exposure Gross exposure AMERICA Net exposure A.1 Doubtful loans A.2 Substandard loans A.3 Restructured loans A.4 Past-due loans A.5 Other loans 963, ,626 16,804 16,804 3,753 3,753 TOTAL 963, ,626 16,804 16,804 3,753 3,753 B. Off-balance sheet exposures B.1 Doubtful loans B.2 Substandard loans B.3 Other impaired assets B.4 Other loans 210, , , , TOTAL 210, , , , TOTAL 31/12/2007 1,173,891 1,173, , ,850 3,774 3,774 TOTAL 31/12/2006 1,171,449 1,171,448 48,489 48,489 3,908 3,908 Exposure/Geographical area ASIA REST OF THE WORLD A. Cash exposures Gross exposure Net exposure Gross exposure Net exposure A.1 Doubtful loans A.2 Substandard loans A.3 Restructured loans A.4 Past-due loans A.5 Other loans 1,135 1,135 1,116 1,116 TOTAL 1,135 1,135 1,116 1,116 B. Off-balance sheet exposures B.1 Doubtful loans B.2 Substandard loans B.3 Other impaired assets B.4 Other loans TOTAL Total at 31/12/2007 1,265 1,265 1,168 1,163 Total at 31/12/2006 1,853 1,738 1,681 1,

205 B.5 Significant exposures At 31 December 2007 there were no significant exposures. C. SECURITISATION TRANSACTIONS AND DISPOSAL OF ASSETS C.1 SECURITISATION TRANSACTIONS Exposures deriving from own securitisation transactions The Parent Bank and the other consolidated companies did not perform any securitisation transaction. At the balance sheet date, there we no transactions of this type in place. Exposures deriving from own securitisation transactions The following security is held in the portfolio in relation to the securitisation of health receivables of the Sicily Region Sicilia CSR 03/ % (Code ISTN IT ); nominal value of EUR 8 million (the securitisation transaction amounted in total to EUR million). C.1.1 Exposures deriving from securitisation transactions analysed by the quality of the underlying assets Cash exposures Senior Mezzanine Junior Quality of Gross Net Gross Net Gross Net underlying assets/exposures exposure exposure exposure exposure exposure exposure A. With own underlying assets a) Impaired b) Other A. With third party s underlying assets 3,750 3, a) Impaired b) Other 3,750 3,

206 Guarantees given Senior Mezzanine Junior Quality of Gross Net Gross Net Gross Net underlying assets/exposures exposure exposure exposure exposure exposure exposure A. With own underlying assets a) Impaired b) Other A. With third party s underlying assets a) Impaired b) Other Credit lines Senior Mezzanine Junior Quality of Gross Net Gross Net Gross Net underlying assets/exposures exposure exposure exposure exposure exposure exposure A. With own underlying assets a) Impaired b) Other A. With third party s underlying assets a) Impaired b) Other C.1.3 Exposures deriving from the main third party s securitisation transactions analysed by type of securitised asset and type of exposure Cash exposures Senior Mezzanine Junior Type of securitised assets Book Adjustments/ Book Adjustments/ Book Exposure /Exposures value recoveries value recoveries value recoveries A.1 Sicilia CSR 3, Guarantees given Senior Mezzanine Junior Type of securitised assets Book Adjustments/ Book Adjustments/ Book Exposure /Exposures value recoveries value recoveries value recoveries A.1 Sicilia CSR

207 Credit lines Senior Mezzanine Junior Type of securitised assets Book Adjustments/ Book Adjustments/ Book Exposure /Exposures value recoveries value recoveries value recoveries A.1 Sicilia CSR C.1.4 Exposures to securitisations analysed by portfolio and by type Exposure portfolio Financial assets held for trading Financi al assets (fair value option) Financial assets available for sale Financial assets held to maturity Loans 31/12/ /12/ Cash exposures Senior 3, ,733 4,595 - Mezzanine Junior Off balance sheet exposures Senior Mezzanine Junior

208 C.2 DISPOSAL TRANSACTIONS C.2.1. Financial assets sold and not cancelled 31/12/2007 Technical forms/portfolio Financial assets held for trading Financial assets designated at fair value A B C A B C A. Cash assets 1,009, Debt securities 1,009, Equity securities UCI Loans Impaired assets B. Derivatives X X X TOTAL 31/12/2007 1,009, TOTAL 31/12/ , /12/2007 Technical forms/portfolio Financial assets available for sale Financial assets held to maturity A B C A B C A. Cash assets Debt securities Equity securities X X X 3. UCI X X X 4. Loans Impaired assets B. Derivatives X X X X X X TOTAL 31/12/ TOTAL 31/12/ /12/ /12/2006 Technical forms/portfolio Due from banks Loans to customers Total Total A B C A B C A. Cash assets 271, ,281, , Debt securities 271, ,281, , Equity securities X X X X X X UCI X X X X X X Loans Impaired assets B. Derivatives X X X X X X - - TOTAL 31/12/ , ,281, ,202 TOTAL 31/12/ , ,202 A = financial assets sold recorded in full (book value). B = financial assets sold recorded in part (book value). C = financial assets sold recorded in part (full value). 208

209 C.2.2. Financial liabilities for assets sold and not cancelled Financial Financial Financial Financial assets assets assets assets Due Loans - Liabilities/Asset portfolio held for valued available held from banks to customers Total trading at fair value for sale to maturity Due to customers 1,103, ,299-1,123,802 a) for assets recorded In full 1,103, ,299-1,123,802 b) for assets recorded In part Due to banks , ,156 a) for assets recorded In full , ,156 b) for assets recorded In part TOTAL 31/12/2007 1,103, ,455-1,340,958 TOTAL 31/12/ , ,

210 D. CREDIT RISK MEASUREMENT MODELS Please refer to the qualitative information on credit risk. 1.2 MARKET RISK INTEREST RATE RISK SUPERVISORY TRADING PORTFOLIO In accordance with supervisory legislation, the portfolio of financial instruments subject to capital requirements for market risks is part of the "trading portfolio. QUALITATIVE INFORMATION A. General aspects The trading portfolio consists of: - bonds; - shares; - harmonised quotas of UCI; - trading derivatives. The bond component of the portfolio consists mainly of floating rate securities. The fixed-rate portion (BOT with varying expiries) has a limited duration. The bonds held are issued almost exclusively by the Italian Republic or by banks with ratings of higher than investment grade. The UCIs in which the Bank holds quotas are also prevalently bond-based. 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 portfolio are almost exclusively in euro. B. Management processes and measurement methods for interest rate risk The Group s investment policy is based on the criteria of containing market risk, with reference to all of its components: - interest rate risk; - price risk; - exchange rate risk. No positions involving commodities risk are normally adopted. The portfolio is managed using risk-hedging tools and techniques. The investment and trading activity is carried out in compliance with the guidelines established by the relative Group governance levels and is implemented as part of an extensive system of assigned management powers and according to detailed regulations on, among other things, modification of the set stock, type of negotiable assets, the investment market, type of issuer, maturity of the securities and rating. For the daily trading activities, there are maximum daily loss limits and overall open position limits. Risk is measured through both analytical calculations (establishing the duration of the bond portfolio with regard to the exposure to interest rate risk) and statistical techniques (estimate of the overall value at risk, after the mitigation generated by the portfolio diversification). The portfolio approach is based on the daily estimate of parametric VaR over a 10-day period and a 99% confidence interval. The VaR measures the maximum loss that the trading portfolio may undergo based on volatility and historic correlations of the individual risk factors (interest rates, share prices and exchange rates). This model is not used to determine the minimum capital requirement with respect to market risk. 210

211 QUANTITATIVE INFORMATION 1. Supervisory trading portfolio: distribution by residual duration (by repricing date) of cash financial assets and liabilities and derivatives Currency: EURO On demand Up to 3 months Beyond 3 months and up to 6 months Beyond 6 months and up to 1 year Beyond one year And up to 6 years Beyond 5 years and up to 10 years Beyond 10 years Unspecifie d maturity Type/Residual duration A. Cash assets , ,379 2,599 25,287 2, Debt securities , ,379 2,599 25,287 2, with early repayment option other , ,379 2,599 25,287 2, Other assets - 26, Cash liabilities - 796, , Funding repurchase agreements - 796, , Other liabilities Financial derivatives: ,253-4,822 10, With underlying security Options long positions short positions Other long positions short positions Without underlying security ,308-4,822 10, Options long positions short positions Other ,308-4,822 10, long positions ,717 45,242 13,779 24,264 4, short positions 8 277,024 50,064 3,572 24,661 4,

212 Other currencies On demand Up to 3 months Beyond 3 months and up to 6 months Beyond 6 months and up to 1 years Beyond 1 year ad up to 5 years Type/Residual duration Beyond 5 years and up to 10 years Beyo nd 10 years Unspeci fied maturit y A. Cash assets Debt securities with early repayment option other Other assets Cash liabilities Funding repurchase agreements Other liabilities Financial derivatives: ,009 15,817-9,438-3, With underlying security Options long positions short positions Other long positions short positions Without underlying security ,009 15,817-9,438-3, Options long positions short positions Other ,009 15,817-9,438-3, long positions 8 221,225 39,523 1, short positions ,216 23,706 11,097 3, The main currency of the Supervisory trading portfolio included among other currencies is the US dollar. 2. Supervisory trading portfolio internal models and other sensitivity analysis methods The Group uses a single model to monitor the risk to which the trading portfolio is exposed. Thus, the following tables show information on the VaR, including all the risk factors that contribute to it. During the financial year the VaR values remained rather small in relation to the size of the portfolio. The main risks that it is exposed to are interest rate risk and the risk associated with hedge fund units. Credit risk associated with bond investments is rather low considering the type and creditworthiness of the issuers. Table 1 Supervisory trading portfolio VaR performance (in thousands of EUR) Average Minimum Maximum Average Minimum Maximum 1, ,807 1,739 1, ,

213 Chart 1 - Supervisory trading portfolio - VaR performance Group VaR gen 31-gen 1-mar 30-mar 3-mag 1-giu 29-giu 30-lug 29-ago 27-set 26-ott 27-nov 28-dic VaR Table 2 Supervisory trading portfolio Contribution by risk factors to the calculation of VaR Position at Price risk Interest rate risk Exchange rate risk Issuer risk Quotas of UCI Hedge funds Diversificatio n benefit 7.2% 47.6% 0.9% 1.1% 3.6% 48.2% -8.6% Table 3 Supervisory trading portfolio Composition of bond exposures by type of issuer Sovereign issuers Public issuers Banks Insurance companies and other financial businesses Corporate 83.1% 0.9% 16.0% 0.0% 0,0% Interest rate risk Banking portfolio The banking portfolio is made up of all the financial instruments, whether assets or liabilities, that are not included in the trading portfolio. It mainly comprises amounts receivable from/payable to banks and customers. Qualitative information A. General aspects, management processes and measurement methods for interest rate risk Usually, the financial statements of financial intermediaries are mostly made up of financial assets and liabilities whose value may vary in relation to fluctuations in interest rates. 213

214 In line with the Group's retail mission, which mostly entails the assumption of credit risk with regard to specific customer segments, the exposure to interest rate risk generated by typical banking activities remains small. Risk management aims at minimising the impact of unfavourable variations in the rates curve on the value of the Bank, as well as on the cash flows generated by balance sheet items. The exposure to interest rate risk is mainly contained by indexing balance sheet assets and liabilities to money market parameters (typically the Euribor) and by matching the duration of assets and liabilities at low levels. The interest rate risk affecting the banking book is measured using the economic value approach, where the economic value is represented by the difference between the present value of assets and liabilities. Measurement is made on the basis of predetermined variations of the interest rate structure, applied to balance sheet items at the reference date (static ALM). The reaction to interest rate variation is measured through sensitivity indicators (changed duration). The impact of instantaneous parallel shifts in the interest rate structure by ± 100 b.p. and ± 200 b.p. is determined on the basis of the changed duration of the assets being assessed. The variations are then normalised in relation to the regulatory capital. B. Fair value hedges No fair value hedges are pending or were carried out. C. Cash flow hedging No cash flow hedges are pending or were carried out. QUANTITATIVE INFORMATION 1. Banking portfolio: distribution by residual duration (by repricing date) of financial assets and liabilities This table is not prepared because a sensitivity analysis to interest rate risk based on internal models is provided in the following point. 2. Banking portfolio: internal models and other sensitivity analysis methods At year end, the changed duration calculated for all balance sheet assets and liabilities was contained; as a result the change in the Group s capital value due to instantaneous shocks to the rate curve was limited. Assuming an instantaneous and parallel shift in the interest rate curve by +100 basis points, the capital value would register a drop of EUR 31.7 million, that is approximately 1.7% of the capital for supervisory purposes. In the event of a shift of -100 basis points, there would be an increase of EUR 34.1 million, equal to 1.8% of the capital for supervisory purposes Price risk Supervisory trading portfolio Qualitative information A. General aspects The price risk affecting the supervisory trading portfolio is generated by investments in quotas of UCI and in equity securities. B. Management processes and measurement methods for price risk 214

215 As regards price risk management and measurement processes please refer to paragraph 2.1 Interest rate risk Supervisory trading portfolio Qualitative information. QUANTITATIVE INFORMATION 1. Supervisory trading portfolio: cash exposures in equity securities and UCI 31/12/2007 Book value Type of exposure/amount Listed Unlisted A. Equity securities 2,517 - A.1 Shares 2,517 - A.2 Innovative equity instruments - - A.3 Other equity securities - - B. UCI 7,262 39,084 B.1 Italian - 33,893 - harmonised open-ended - 6,063 - non-harmonised open-ended closed-ended reserved speculative - 27,830 B.2 Other EU countries 7,262 5,191 - harmonised 2, non-harmonised open-ended non-harmonised closed-ended 5,191 5,191 B.3 Non-EU countries open-ended closed-ended - - Total 9,779 39, Supervisory trading portfolio: distribution of exposures in equity securities and share indices for the main Countries of the quoting market Listed Unlisted Type/quoting index ITALY OTHER EUROPEAN COUNTRIES AMERICA A. Equity securities 1, long positions 1, short positions B. Purchases/sales still unsettled on equity securities long positions short positions C. Other derivatives on equity securities long positions short positions D. Derivatives on share indices long positions short positions

216 3. Supervisory trading portfolio: internal models and other sensitivity analysis methods As regards internal models for price risk please refer to paragraph 2.1 Interest rate risk Supervisory trading portfolio Quantitative information PRICE RISK BANKING PORTFOLIO Qualitative information A. General aspects, management processes and measurement methods for price risk The banking portfolio consists of listed and unlisted shares which, held as part of more in-depth relations with specific companies or representing the instrument supporting significant initiatives undertaken in the Bank's reference territory. The price risk management methods for said financial instruments, therefore, tend more towards the management approach for investments, rather than the risk measurement techniques and instruments used for the trading portfolio. b. Price risk hedging Equity investments allocated to the banking portfolio are not subject to hedging. QUANTITATIVE INFORMATION 1. Banking portfolio: cash exposures in equity securities and UCI 31/12/2007 Book value Items Listed Unlisted A. Equity securities 28,089 54,222 A.1 Shares 28,089 54,222 A.2 Innovative equity instruments - - A.3 Other equity securities - - B. UCI - - B.1 Italian harmonised open-ended non-harmonised open-ended closed-ended reserved speculative - - B.2 Other EU countries harmonised non-harmonised open-ended non-harmonised closed-ended - - B.3 Non-EU countries open-ended closed-ended - - Total 28,089 54,

217 1.2.5 EXCHANGE RATE RISK Qualitative information A. General aspects, management processes and measurement methods for exchange rate risk Exposure by the Bank to exchange rate risk, which is negligible, is largely due to transactions carried out with customers, inter-bank transactions and, to a lesser extent, positions in bonds. As regards exchange rate risk management and measurement processes regarding the trading portfolio please refer to paragraph 2.1 Interest rate risk Supervisory trading portfolio Qualitative information. b. Exchange rate risk hedging All foreign currency positions generated by transaction with customers are collectively managed through the analysis of open gaps (non-offset positions). The monitoring of exchange rate risk is based on defined limits in terms of maximum acceptable loss, forward gap position and overall open gap position. QUANTITATIVE INFORMATION 1. Distribution of assets, liabilities and derivatives by currency 31/12/2007 Currencies Items Swiss Canadian Other US dollars Yen Sterling francs dollars currencies A. Financial assets A.1 Debt securities A.2 Equity securities A.3 Loans to banks 6,609 1,171 1,120 1,051 1,308 2,660 A.4 Loans to customers 38,674 48,976 11,741 4, A.5 Other financial assets B. Other assets 1,845 1, , C. Financial liabilities C.1 Due to banks 16,040 20,171 7,390 21, C.2 Due to customers 84,611 7,055 3,381 3,877 11,319 1,676 C.3 Debt securities C.4 Other financial liabilities D. Other liabilities E. Financial derivatives - Options + Long positions Short positions Other + Long positions 270,014 29,069 44,891 35,644 3,600 7,478 + Short positions 223,760 52,697 50,296 16,793 3,701 9,526 Total assets 317,491 81,097 58,001 42,488 5,232 11,452 Total liabilities 325,647 80,327 61,067 42,562 15,239 11,490 Difference (+/-) -8, , ,

218 2. Internal models and other sensitivity analysis methods As regards exchange rate risk management and measurement processes regarding the trading portfolio please refer to paragraph 2.1 Interest rate risk Supervisory trading portfolio Quantitative information DERIVATIVE FINANCIAL INSTRUMENTS A. FINANCIAL DERIVATIVES A.1 Supervisory trading portfolio: notional values at year-end and averages Type of transaction/underlying Debt securities and interest rates Equity-based securities and share indices Currency and gold-based securities Other valuables Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted 1. Forward rate agreement Interest rate swap - 64, Domestic currency swap Currency interest rate swap Basis swap Trading of share indices Trading of real indices Futures Cap options - purchased issued Floor options - purchased issued Other options - - purchased - Plain vanilla Exotic , Issued - Plain vanilla Exotic , Forward contracts - Purchases 27,523 28, , Sales 26,740 28, , Currency against currency Other derivatives contracts Total 54, , , , Average values 44, ,831 1,213 44, ,

219 Type of transaction/underlying 31/12/ /12/2006 Listed Unlisted Listed Unlisted 1. Forward rate agreement Interest rate swap - 64,975-1,240, Domestic currency swap Currency interest rate swap Basis swap Trading, stock mkt. indices Trading of real indices Futures , Cap options - - purchased Issued Floor options purchased Issued Other options purchased Plain vanilla ,084 - Exotic - 2,151-26,000 - Issued Plain vanilla ,735 - Exotic - 1,000-26, Forward contracts Purchases 27, ,966 4, ,086 - Sales 26, ,999 4, ,968 - currency against currency Other derivatives contracts Total 54, , ,206 1,638,386 Average values 45,738 1,097, ,848 1,511,

220 A.2 - Banking portfolio: notional values at year-end and averages A Hedging Type of transaction/underlying Debt securities and interest rates Equity-based securities and share indices Currency and gold-based securities Other valuables Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted 1. Forward rate agreement Interest rate swap Domestic currency swap Currency interest rate swap Basis swap Trading of share indices Trading of real indices Futures Cap options - purchased Issued Floor options - purchased Issued Other options - purchased - Plain vanilla Exotic Issued - Plain vanilla Exotic Forward contracts - Purchases Sales Currency against currency Other derivatives contracts Total Average values

221 Type of transaction/underlying 31/12/ /12/2006 Listed Unlisted Listed Unlisted 1. Forward rate agreement Interest rate swap Domestic currency swap Currency interest rate swap Basis swap Trading of share indices Trading of real indices Futures Cap options - purchased Issued Floor options - purchased Issued Other options - purchased - Plain vanilla Exotic Issued - Plain vanilla Exotic Forward contracts - Purchases Sales Currency against currency Other derivatives contracts Total Average values ,

222 A Other derivatives Type of transaction/underlying Debt securities and interest rates Equity-based securities and share indices Currency and gold-based securities Other valuables Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted 1. Forward rate agreement Interest rate swap Domestic currency swap Currency interest rate swap Basis swap Trading of share indices Trading of real indices Futures Cap options - purchased Issued Floor options - purchased Issued Other options - purchased - Plain vanilla Exotic Issued - Plain vanilla Exotic Forward contracts - Purchases Sales Currency against currency Other derivatives contracts ,731 Total ,731 Average values ,

223 Type of transaction/underlying 31/12/ /12/2006 Listed Unlisted Listed Unlisted 1. Forward rate agreement Interest rate swap Domestic currency swap Currency interest rate swap Basis swap Trading of share indices Trading of real indices Futures Cap options - purchased Issued Floor options - purchased Issued Other options - purchased - Plain vanilla Exotic Issued - Plain vanilla Exotic Forward contracts - Purchases Sales Currency against currency Other derivatives contracts - 222, ,689 Total - 222, ,689 Average values - 223, ,

224 A.3 Financial derivatives: purchase and sale of underlying Type of transaction/underlying A. Supervisory trading portfolio: 1. Transactions with exchange of capital Debt securities and interest rates Equity-based securities and share indices Currency and gold-based securities Other valuables Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted - Purchases 27,523 28, , Sales 26,740 28, , Currency against currency Transactions without exchange of capital - Purchases - 25,300-2, Sales - 39,675-1, Currency against currency B. Banking portfolio: B.1 Hedging 1. Transactions with exchange of capital - Purchases Sales Currency against currency Transactions without exchange of capital - Purchases Sales Currency against currency B.2 Other derivatives 1. Transactions with exchange of capital - Purchases ,731 - Sales Currency against currency Transactions without exchange of capital - Purchases Sales Currency against currency

225 Type of transaction/underlying 31/12/ /12/2006 Listed Unlisted Listed Unlisted A. Supervisory trading portfolio: 1. Transactions with exchange of capital - Purchases 27, ,966 4, ,893 - Sales 26, ,999 4, ,201 - Currency against currency Transactions without exchange of capital - Purchases - 27, ,641 - Sales - 40,675-1,137,798 - Currency against currency B. Banking portfolio: B.1 Hedging 1. Transactions with exchange of capital - Purchases Sales Currency against currency Transactions without exchange of capital - Purchases Sales Currency against currency B.2 Other derivatives 1. Transactions with exchange of capital - Purchases - 222, ,689 - Sales Currency against currency Transactions without exchange of capital - Purchases Sales Currency against currency

226 A.5 Over the counter financial derivatives: positive fair value counterparty risk Counterparty / Underlying Debt securities and interest rates Equity-based securities and share indices Currency and gold-based securities A. Supervisory trading portfolio: Non-offset gross amount Offset gross amount Future exposure Non-offset gross amount Offset gross amount Future exposure Non-offset gross amount Offset gross amount Future exposure A.1 Governments and Central Banks A.2 Public entities A.3 Banks 1, ,672-1,327 A.4 Financial businesses A.5 Insurance companies A.6 Non-financial businesses , A.7 Other , Total A 31/12/2007 1, ,625-2,333 Total A 31/12/2006 5, ,068-2,084 1,611-1,000 B. Banking portfolio: B.1 Governments and Central Banks B.2 Public entities B.3 Banks B.4 Financial businesses B.5 Insurance companies B.6 Non-financial businesses B.7 Other Total B 31/12/ Total B 31/12/

227 Counterparty / Underlying Other valuables Different underlying A. Supervisory trading portfolio: Non-offset gross amount Offset gross amount Future exposure Offset Future exposure A.1 Governments and Central Banks A.2 Public entities A.3 Banks A.4 Financial businesses A.5 Insurance companies A.6 Non-financial businesses A.7 Other Total A 31/12/ Total A 31/12/ B. Banking portfolio: B.1 Governments and Central Banks B.2 Public entities B.3 Banks B.4 Financial businesses B.5 Insurance companies B.6 Non-financial businesses B.7 Other Total B 31/12/ Total B 31/12/

228 A.5 - Over the counter financial derivatives: negative fair value - financial risk Counterparty / Underlying A. Supervisory trading portfolio Debt securities and interest rates Nonoffset gross amount Offset gross amount Future exposure Equity-based securities and share indices Nonoffset gross amount Offset gross amount Future exposure Currency and gold-based securities Nonoffset gross amount Offset gross amount Future exposure A.1 Governments and Central Banks A.2 Public entities A.3 Banks ,436-1,861 A.4 Financial businesses A.5 Insurance companies A.6 Non-financial businesses A.7 Other , Total A 31/12/2007 1, ,607-2,327 Total A 31/12/2006 1, ,066-2,440 2,875-1,371 B. Banking portfolio: B.1 Governments and Central Banks B.2 Public entities B.3 Banks B.4 Financial businesses B.5 Insurance companies B.6 Non-financial businesses B.7 Other Total B 31/12/ Total B 31/12/

229 Counterparty / Underlying Other valuables Different underlying A. Supervisory trading portfolio: Non-offset gross amount Offset gross amount Future exposure Offset Future exposure A.1 Governments and Central Banks A.2 Public entities A.3 Banks A.4 Financial businesses A.5 Insurance companies A.6 Non-financial businesses A.7 Other Total A 31/12/ Total A 31/12/ B. Banking portfolio: B.1 Governments and Central Banks B.2 Public entities B.3 Banks B.4 Financial businesses B.5 Insurance companies B.6 Non-financial businesses B.7 Other Total B 31/12/ Total B 31/12/ A.6 Residual life of "over the counter financial derivatives: notional values Underlying/Residual life Up to 1 year Beyond 1 year ad up to 5 years Beyond 5 years Total A. Supervisory trading portfolio A.1 Financial derivatives on debt securities and interest rates 112,692 42,075 22, ,767 B.2 Financial derivatives on equity securities and share indices 2,313-1,155 3,468 A.3 Financial derivatives on exchange rates and gold 516,674 9, ,125 A.4 Financial derivatives on other valuables B. Banking portfolio B.1 Financial derivatives on debt securities and interest rates B.2 Financial derivatives on equity securities and share indices - 222, ,731 B.3 Financial derivatives on exchange rates and gold B.4 Financial derivatives on other valuables Total at 31/12/ , ,257 23, ,091 Total at 31/12/2006 1,869, ,317 9,071 2,172,281 As regards the so-called Day One Profit (difference, upon initial recognition, between the fair value of a financial instrument that is not quoted on an active market and the amount determined at that date using a 229

230 valuation technique), taking account of the composition of the financial instrument portfolio and of the results of the analyses carried out, no significant amounts were identified in this respect. B. CREDIT DERIVATIVES No credit derivatives are in place. 1.3 LIQUIDITY RISK Qualitative information A. General aspects, management processes and measurement methods for liquidity risk Generally, the management of liquidity risk envisages the 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). The objective of the Group is to finance assets at the best possible terms under normal operating circumstances and to be able to fulfil its commitments in case of liquidity crises. The aforesaid objective is achieved by: - centralising the management of liquidity within Bancaperta so that financings by non-group subjects are kept to a minimum and access to markets is more efficient; - adequately diversifying funding sources, as regards both technical deposit forms and counterparties. From the operating point of view, the management of liquidity entails two processes: - The management of short-term liquidity aims at ensuring that the Group is always able to meet its commitments. The objective is pursued by aiming at achieving an adequate balance of cash inflows and outflows. Moreover, keeping assets that can be readily converted into cash meets the need to face possible unforeseen requirements; The management of structural liquidity mainly concerns the financing of assets which, in the last analysis, entails assessments about the overall business strategy (size growth objectives and related time schedule; loan and deposit policies by use, source, duration, technical form and cost). 230

231 QUANTITATIVE INFORMATION 1. Time distribution of financial assets and liabilities by residual contractual duration Currency: EURO Items/Time periods On deman d Beyond 1 day and up to 7 days Beyond 7 days and up to 16 days Beyond 15 days and up to 1 month Beyond one month and up to 3 months Beyond 3 months and up to 6 months Beyond 6 months and up to 1 year Beyond 1 year ad up to 5 years Beyond 5 years Indefini te duratio n - Cash assets 4,568, , , , , , ,777 6,708,353 2,235, ,620 A.1 Government bonds 337-2, ,534 1,363 1, , X A.2 Listed debt securities ,594 5,274 X A.3 Other debt securities ,370 15, ,669 1,640,103 47,893 X A.4 Quotas of UCI ,466 8,501 X Doubtful securities X X X X X X X X X - Past due securities X X X X X X X X X - A.5 Loans 4,567, , , , , , ,467 4,020,970 2,172,787 X - Banks 270, ,806 32, X - Customers 4,297, , , , , , ,467 4,020,970 2,172,787 X Doubtful loans X X X X X X X X X 186,582 Past due loans X X X X X X X X X 1,038 Cash liabilities 7,855, , , , , , ,417 2,802, ,793 - B.1 Deposits 7,766,461 67,774 30, ,145 27,747 1, ,574 - X - Banks 117,343 67,774 15, ,965 27,264 1, X - Customers 7,649,118-15, ,149 - X B.2 Debt securities 37,794 2,833 13,126 20, , , ,646 2,727, ,793 X B.3 Other liabilities 51, , , , , ,073 1, X Off-balance sheet transactions -134,228-60,504-37, ,975 56, , , ,375 - C.1 Financial derivatives with exchange of capital ,443-37, ,772-16,620 9,683 4, Long positions ,395 25,627 50,938 83,907 24,888 11,449 4,189 - X - Short positions 8 145,838 63,161 51,787 31,135 41,508 1, X C.2 Deposits and loans to be received Long positions X - Short positions X C.3 Irrevocable commitments to grant finance -134,536 2, ,203 72, , , , Long positions 82,873 2, ,203 72, , , ,375 X - Short positions 217, ,731 - X 231

232 Other currencies Items/Time periods On deman d Beyond 1 day and up to 7 days Beyond 7 days and up to 16 days Beyond 15 days and up to 1 month Beyond one month and up to 3 months Beyond 3 months and up to 6 months Beyond 6 months and up to 1 years Beyond 1 year ad up to 5 years Beyond 5 years Indefini te duratio n Cash assets 97,542 45,350 7,974 5,298 3, A.1 Government bonds X A.2 Listed debt securities X A.3 Other debt securities X A.4 Quotas of UCI X Doubtful securities X X X X X X X X X - Past due securities X X X X X X X X X - A.5 Loans 97,527 45,350 7,974 5,298 3, X - Banks ,350 7,845 5, X - Customers 96, , X Doubtful loans X X X X X X X X X - Past due loans X X X X X X X X X - Cash liabilities 92,949 4,741 1,018 18,997 38,035 5,283 2, B.1 Deposits 92,949 4,741 1,018 17,530 38,035 5, X - Banks 190 4, ,252 34,932 4, X - Customers 92, , X B.2 Debt securities , X B.3 Other liabilities , X Off-balance sheet transactions -4,891 50,945 36, ,572 15,817-9,437-3, C.1 Financial derivatives with exchange of capital ,357 36, ,572 15,817-9,437-3, Long positions 8 86,261 63,328 52,721 29,654 39,523 1, X - Short positions ,904 26,979 51,997 81,226 23,706 11,097 3,728 - X C.2 Deposits and loans to be to be received -10,669 10, Long positions - 10, X - Short positions 10, X C.3 Irrevocable commitments to grant finance 6,082-6, Long positions 6, X - Short positions 164 6, X The main currency found under other currencies is the US dollar. 232

233 2. Distribution of financial liabilities by sector Govern ments and Central Banks Other public entities Financial businesse s - insurance companies Nonfinancial businesse s Other parties Exposures/Counterparts 1. Due to customers 95, , ,300 10,142 3,322,855 5,824, Securities issued , ,715, Trading liabilities - - 6, Financial liabilities designated at fair value TOTAL 31/12/ , , ,926 10,142 3,323,415 9,540,884 TOTAL 31/12/ , , ,002 29,000 3,050,363 8,418, Distribution of financial liabilities by region ITALY OTHER EUROPE AN COUNTRI ES AMERICA ASIA REST OF THE WORLD Exposures/Counterparts 1. Due to customers 9,765,705 73,064 18, , Due to banks 684, , Securities issued 3,849, Trading liabilities 4,343 3, Financial liabilities designated at fair value TOTAL at 31/12/2007 TOTAL at 31/12/ ,304, ,786, ,912 18, , ,486 33, , OPERATIONAL RISK Qualitative information A. General aspects, management processes and measurement methods for operational risk Operational risk management is part of the risk integrated management strategy which aims at containing the overall risk also by preventing the propagation and transformation of risks. Operational risks, which represent a very heterogeneous class, are not risks that are typical of banking or business activities. These risks may originate either internally or externally and may extend to outside the corporate area. The definition adopted by the group, in line with supervisory legislation, identifies operational risk as the risk of suffering losses due to the inadequacy or inefficiency of procedures, human resources and internal systems and external events. It includes, inter alia, losses deriving from frauds, human error, interruption of 233

234 operations, system break-down, contractual non-performance, natural disasters. Operational risk includes legal risk, whilst it excludes strategic and reputational risks. Risk containment also aims at protecting the reputation and the brand of the Group. The operational risk management activity is founded on the following guidelines: - Increase the overall operating efficiency; - Prevent or reduce the probability of occurrence of operating loss-generating events by taking adequate legal, organisational, procedural and training actions; - Mitigate the effects expected from such events; - Transfer unwanted risks through adequate insurance products. An advanced operational risk management system is represented by a complex set of processes, functions and resources for the identification, evaluation and control of operational risks, especially with the aim of ensuring an effective prevention and mitigation of the risks. In line with best practices, the model that is currently being adopted to establish operational risks requires the combined use, based on a bottom-up approach, of the four elements envisaged by prudential regulations for advanced measurement approaches (AMAs): - Internal operating loss data; - External operating loss data; - Scenario analysis (self-assessment); - Factors in the operating context and internal auditing system. From an organisational point of view, the operational risk management function is basically at group and corporate level. At group level, the Risk Management Department of Deltas helps to define risk management policies, develops valuation models, guides and coordinates Group structures in defining and carrying out prudential regulation compliance activities. At corporate level, the activity of the Risk Management Department is supported by subjects who are in charge of handling information and provide the Group structures with adequate knowledge of company matters and exchanging with these the necessary information flows. The network of corporate subjects in charge of handling information, through the use of a software developed within the IT platform used by the Group, ensures the availability of information on potential or effective loss data recorded in operations and the information on the trend of the risk indicators adopted for the various processes. The electronic procedure that aims at the timely and prompt recording of events that may potentially generate operating losses, allows to integrate in the analyses the valuations and estimates of damages, any accounting and off-the-books actual figures and the effects of the mitigation through insurance products. In line with the policy guidelines on operational risks, the identification, valuation and monitoring of operational risks tend to carry out mitigation actions. Risk containment is pursued also through legal, organisational, procedural and training actions. Any critical areas, identified through the joint analysis of the various data sources, are examined in depth by the managers in charge of the activities, who contribute to identify, with the help of the Risk Management Department, any necessary corrective actions. Moreover, Group companies have taken out a number of insurance policies which guarantee a wide cover of various types of potentially harmful events. The optimisation of such covers, in line with the different risk scenarios faced, is one of the objectives of operational risk management. B. Legal risks The risks relating to legal disputes involving various Group banks and companies are constantly monitored by Credito Valtellinese, as the Parent Bank, and by the single banks and companies concerned. If a legal and accounting analysis reveals that a legal dispute is likely to be lost and damages paid, the bank makes a reliable estimate thereof and the provision of risk and charges is adequately increased out of prudence. The following paragraphs deal with the most significant and complex legal disputes. Legal dispute on compound interest (anatocism) The sentence by the Court of Cassation (Joint sitting) no of 4 November 2004, confirmed the principle regarding the contractual nature of the clause on the compounding of quarterly interest that was 234

235 generally included in old current account contracts and therefore, the fact that such clause cannot allow a departure from the general prohibition of compounding interest pursuant to art of the Civil Code. The aforesaid legal stance is open to criticism and cannot be shared on several legal grounds as well as on the plane of substantial fairness. Credito Valtellinese, and all the Group banks and companies, just like the rest of the banking system, have always challenged the above before the relevant courts of jurisdiction, asserting at least the need to calculate interest income and expense on a quarterly basis also for periods preceding the well-known resolution issued by CICR which introduced the reciprocity criterion in this subject area. The prominence given by the newspapers to the aforesaid sentence and the initiatives undertaken by consumers associations led to numerous complaints being filed by the consumers, against Credito Valtellinese and other Group banks, aimed at having the so-called compound interest recalculated and refunded. This was particularly prominent for Credito Siciliano. In the event that legal proceedings are instituted following such complaints, Credito Valtellinese and the other Group banks shall adequately increase the provision for risks and charges, as and when required, to hedge against such risks as quantified by the accounting reconstructions made. Legal dispute on bond default The insolvency collapse of Argentina s Government and of some major national companies such as Parmalat, Cirio and Giacomelli in the period led to a number of disputes, even lawsuits, filed by the customers that had bought the defaulted bonds. In this respect, Credito Valtellinese and the other Group banks have always been sensitive to fairness and inexpensiveness criteria, avoiding, whenever possible, sterile and costly lawsuits and taking account of the legal stance consolidated over time. In this context, Credito Valtellinese, as the Parent Bank, has often promoted, also with the other Group banks, settling logics either on the basis of complaints received or in Court. Conversely, some particular lawsuits were challenged up to the stage when the Court issued a decision. In any case, however, based on a preliminary analysis of the legal dispute and the type of defaulted bond concerned, the single banks make the necessary provisions for risks and charges. Legal dispute on bankruptcy claims The recent bankruptcy law later integrated by the so-called amending decree certainly weakened the scope of the action carried out by the receiverships pursuant to Art. 67 of the Finance Act. Some bankruptcy claims filed according to the legal regulations in force before the reform are still pending, as provided for by the new temporary regulations. In these cases, Credito Valtellinese, as the Parent Bank, promotes careful and well-pondered settlement logics according to an in-depth analysis of the grounds underpinning the action, that is the existence of both subjective and objective elements. More specifically, the Group banks normally perform ex-ante accounting verifications in order to quantify risk hence set up a provision out of prudence. OTHER RISKS The types of risks outlined in the previous Sections represent the main risks to which banking operations are exposed. On the other hand,, the "second pillar" of the supervisory legislation introduced by the New Basel capital accord requires banks to consider all risks they are exposed to when assessing their capital adequacy level. In this perspective, the group started the necessary activities to find out additional risks that, in the first analysis, may be traced back to strategic and reputational risk. This initiative will allow the Group to further refine the effectiveness of risk management as regards internal controls, as well as help in preparing ICAAP reports prescribed by the regulations of the second pillar which must be annually provided to the Supervisory Authorities. 235

236 Part F INFORMATION ON EQUITY SECTION 1 CONSOLIDATED EQUITY Qualitative information The equity policy adopted by the Credito Valtellinese banking group is based on the following three approaches: 1. full respect of the requirements dictated by supervisory regulations (regulatory approach); 2. adequate supervision of the risks connected to the banking activity (management approach); 3. support for corporate growth projects (strategic approach). Each approach indicated corresponds to the appropriate definition of equity, specific objectives and specific corporate functions. Under the regulatory profile, the configuration of equity used is that defined by the regulatory provisions for banking groups. Continuous compliance with minimum capital requirements, regularly monitored and adopted as a restriction during planning, represents an essential condition of corporate activities. The need to avail of an equity buffer compared to the minimum capital requirements and the objective of achieving the highest capital adequacy standards both at national and international level led the corporate bodies to establish as a strategic objective a total capital ratio of 10%. Under the risk management profile, which represents one of the fundamental functions of banking activities, equity is considered to be the leading defence against possible unexpected losses arising from the various risks to which banks are exposed (credit, market and operating). In light of this, the optimum capital size is the one that by allowing to absorb unexpected losses estimated with a particular confidence interval, guarantees business continuity over a specific time horizon. From the business point of view, equity is considered as the strategic productive factor that allows the bank to preserve its stability. Under this profile, evaluation of the capital adequacy refers to the financing of assets that generate long-term returns (property, plant and equipment, investments in associates and companies subject to joint control, goodwill), to strategic reorganisation transactions, to relaunching of activities and investment requirements and, finally, to Group rating and reputation. The actual availability of adequate equity, considered as a scarce and costly resource, is linked to the creation of value as the precondition for the expected return. In line with its cooperative bank status meaning paying attention to the development and growth of local economies in the areas in which the bank operates, the Group implements its own equity policy mainly through: - The gradual increase in size and territorial network; - The issue of financial instruments (ordinary shares and convertible bonds) that are not particularly complex; - The issue of instruments that are easily negotiable by having them listed on regulated markets; - The regular return of risk capital by distributing a hefty portion of the profits earned. As regards the equity development policy, attention is drawn to the fact that in 2007 the first stage of the equity strengthening operation resolved by the Extraordinary Shareholders resolution of 10 February 2007 was completed. The operation aims at guaranteeing the achievement, under the necessary economic, equity and financial balance conditions, of the objectives set in the Strategic Plan. Please also note that still in 2007 the last tranche of the Credito Valtellinese 2.80% 2004/2007 bond was converted. 236

237 B. Quantitative information The net consolidated shareholders equity comprises: 31/12/ /12/2006 item 140. Valuation reserves 73, ,929 item 150. Redeemable shares - - Item Equity instruments item 170. Reserves 118,084 93,432 item 180. Share premium reserve 738, ,023 item 190. Share capital 562, ,914 Item 200. Treasury shares(-) -1, Item 220. Net income (loss) for the period (+/-) 85,773 68,614 Total 1,576, ,859 SECTION 2 - EQUITY AND CAPITAL RATIOS 2.1 Scope of application of the regulations In accordance with the provisions of the supervisory instructions on the calculation of the capital for supervisory purposes at 31 December 2007, the composition and size of the capital for supervisory purposes differ from those of shareholders' equity. The main reasons for said differences are briefly summarised as follows: - as opposed to shareholders equity, capital for supervisory purposes does not include the portion of profits to be distributed as dividends; - Capital for supervisory purposes includes also minority interests, properly allocated between Tier 1 and Tier 2 capital; - Goodwill - which includes the positive differences on shareholders equity incorporated in the book value of investments in banks, financial and insurance companies subject to dominant influence and valued at equity and the other intangible assets must be deducted from Tier 1 capital; - Tier 2 capital can include subordinated loans provided that the requisites prescribed by prudential rules are complied with; - Net capital gains on securities classified under financial assets available for sale, recorded in item 140 Valuation reserves may be included as part of Tier 2 capital, but only for 50% of the amount, for the application of prudential filters; - Investments in banks and financial companies of 10% or more of the capital of the investee must be deducted as follows: 50% of the amount from Tier 1 capital and the remaining 50% from Tier 2 capital, as per the book value after deducting positive differences on shareholders equity; - also investments in insurance companies of 20% or more of the capital if the investee, acquired before 20 July 2006, must be deducted from the aggregate value of Tier 1 and Tier 2 capital. There are no restrictions or impediments to the transfer of equity elements among Group companies. 237

238 2.2 Capital for supervisory purposes Qualitative information 1. Tier 1 capital Tier 1 capital, before the elements described in paragraph 2.1 above, totals EUR 1,480.6 million. A comparison with the figure from the previous year shows that the aggregate increased by EUR million (+100.6%). This change is attributable to: - the conversion of the third and final tranche of the Credito Valtellinese 2.8% convertible bond in April; - the share capital increase, against payment, made by the Parent Bank in the 21 May 22 June 2007 period. No innovative equity instrument is comprised in Tier 1 capital. 2. Tier 2 capital Tier 2 capital (gross), after applying prudential filters, amounts to EUR million, of which EUR million are represented by subordinated liabilities which may be included in Tier 2 capital. A comparison with the figure from the previous year shows that Tier 2 capital increased by EUR 24 million (+4.1%). The increase is attributable to the issue of new subordinated liabilities, compensated by the theoretical amortisation of pre-existing loans, prescribed by legal regulations, which means that they may only be partly calculated in Tier 2 capital. More specifically, below is the list of subordinated liabilities issued by Credito Valtellinese and its subsidiaries: - "Credito Valtellinese 2003/2013 EMTN subordinato" of EUR 150 million. The issue, indexed to 3-month Euribor, may be recalled by the issuer starting from April 2008; - "Credito Valtellinese 2005/2015 EMTN subordinato" of EUR 150 million. The issue, indexed to 3-month Euribor, may be recalled by the issuer starting from March 2010; - "Credito Valtellinese 2003/2009 EMTN subordinato" of EUR 70 million. The issue is indexed to 6-moth Euribor; - "Credito Valtellinese 2006/2011 EMTN subordinato" of EUR 60 million. The issue is indexed to 6-moth Euribor. - "Credito Valtellinese 2007/2012 EMTN subordinato" of EUR 70 million. The issue is indexed to 6-moth Euribor. As prescribed by the law, the subordinated liabilities referred to above are included in Tier 2 capital up to 50% of the value of Tier 1 capital. No hybrid capitalization instruments are included in Tier 2 capital. 3. Tier 3 capital Credito Valtellinese and its subsidiaries did not issue financial instruments that may be included in Tier 3 capital and which may be admitted as market risk hedges. 238

239 B. Quantitative information 31/12/ /12/2006 A. Tier 1 capital before the application of prudential filters 1,480, ,905 B. Tier 1 capital - prudential filters: B.1 Positive IAS/IFRS prudential filters (+) - - B.2 Negative IAS/IFRS prudential filters (-) - - C. Tier 1 capital before any deductions allowed (A+B) 1,480, ,905 D. Elements to be deducted from Tier 1 capital 75,922 - E. Total Tier 1 capital (C-D) 1,404, ,905 F. Tier 2 capital before the application of prudential filters 557, ,513 G. Tier 2 capital - prudential filters: G.1 Positive IAS/IFRS prudential filters (+) - - G.2 Negative IAS/IFRS prudential filters (-) -5,790-4,259 H. Tier 2 capital before any deductions allowed (F+G) 551, ,254 I. Elements to be deducted from Tier 2 capital 75,922 - L. Total Tier 2 capital (H-I) 475, ,254 M. Items to be deducted from total Tier 1 and Tier 2 capital 3, ,234 N. Capital for supervisory purposes (E+L-M) 1,876,881 1,134,925 O. Tier 3 capital - - P. Capital for supervisory purposes including TIER 3 (N+O) 1,876,881 1,134,925 At 31 December 2006 the capital for supervisory purposes was calculated in accordance with the regulations in force at that date, therefore it excludes the amendments introduced through Circular no. 155 of 18 December 1991 Instructions for the preparation of supervisory reports on regulatory capital and prudential filters issued on 5 February Capital adequacy Qualitative information In terms of capital adequacy, the capital of Credito Valtellinese banking group for supervisory purposes is far higher prescribed by legal regulations. At 31 December 2007, the ratio Tier 1 capital to risk-weighed assets was around 10.28%, compared to 6.27% at the end of The ratio Capital for supervisory purposes to risk-weighed assets reached 13.73% (9.65% at the end of 2006). The improvement of prudential coefficients compared to the previous financial year shows that the Group was able to increase its capital by more than the trend experienced by the risk-weighed assets which, on the other hand, registered a rather marked increase (+16.1%). 239

240 B. Quantitative information 31/12/ /12/ /12/ /12/2006 Categories/Values Non-weighed amounts Weighed amounts/ requirements A. RISK ASSETS A.1 CREDIT RISK 16,145,402 14,117,776 13,547,319 11,646,245 STANDARD METHODOLOGY CASH ASSETS 1. Exposures (other than equity securities and other subordinated assets) towards (or secured by): 1.1 Governments and Central Banks 712,873 1,012, Public Entities 97,967 37,962 19,593 7, Banks 459, ,551 91,877 31, Other parties (other than mortgage loans on residential and non-residential properties) 10,781,964 9,372,383 10,781,964 9,372, Mortgages on residential properties 1,265,019 1,105, , , Mortgages on non-residential properties 738, , , , Shares, investments in associates and companies subject to joint control and subordinated assets 75,746 54,560 76,302 55, Other cash assets 721, , , ,289 OFF-BALANCE SHEET ASSETS 1. Guarantees and commitments with (or secured by): 1.1 Governments and Central Banks 16,537 12, Public Entities 5,423 7,278 1,084 1, Banks 197, ,227 36,072 33, Other parties 1,073, ,017 1,073, , Derivatives with (or secured by): 2.1 Governments and Central Banks Public Entities Banks Other parties B. SUPERVISORY CAPITAL REQUIREMENTS B.1 CREDIT RISK 1,083, ,700 B.2 MARKET RISK X X 9,496 9, STANDARD METHODOLOGY X X including: + position risk on debt securities X X 5,692 5,478 + position risk on equity securities X X 3,136 3,650 + exchange risk X X other risks X X INTERNAL MODELS X X including: + position risk on debt securities X X position risk on equity securities X X exchange risk X X - - B.3 OTHER PRUDENT REQUIREMENTS FOR SUPERVISORY PURPOSES X X - - B.4 TOTAL PRUDENT REQUIREMENTS (B1+B2+B3) X X 1,093, ,337 C. RISK ASSETS AND CAPITAL RATIOS 240

241 C.1 Risk weighted assets X X 13,666,012 11,766,708 C.2 Tier 1/Risk-weighted assets (Tier 1 capital ratio) X X 10.28% 6.27% C.3 Capital for supervisory purposes/risk-weighted assets (Total capital ratio) X X 13.73% 9.65% 241

242 PART G - BUSINESS COMBINATIONS INVOLVING BUSINESSES UNDERTAKINGS OR UNITS SECTION 1 OPERATIONS CARRIED OUT DURING THE YEAR In 2007 no business combinations were carried out with entities outside the banking group. SECTION 2 TRANSACTIONS CARRIED OUT AFTER THE BALANCE SHEET DATE On 21 February 2008 the contracts for the sale/purchase of 35 Intesa Sanpaolo branches, with effect as of 25 February 2008, were signed; these branches were sold in accordance with the regulations issued by the Antitrust Authority following the merger of Banca Intesa and Sanpaolo IMI, which were allocated to the territorial banks of the Credito Valtellinese Group as follows: 12 branches, in the province of Pavia, acquired by Credito Artigiano S.p.A.; 23 branches, in the provinces of Turin (19) and Alessandria (4), acquired by Credito Piemontese S.p.A. The price of the business unit, temporarily set at EUR million and already paid to the counterparty, will be adjusted if necessary, after 90 days of the signing of the final contract according to the contractual terms, if a significant difference should arise between total direct deposits estimated by ISP at the end of 2007 and actual direct deposits at the effective date of the contract. The sale consideration coincides with the goodwill of the business unit, equal to 16.2% of estimated direct deposits, a figure which is basically in line with the values of similar transactions recently carried out on the Italian banking market. The main data at 30 June 2007 relating to the branches purchased (in millions of EUR) are shown below: in millions of EUR Amount TOTAL DIRECT DEPOSITS 2,290 LOANS TO CUSTOMERS 551 CUSTOMERS 66,000 EMPLOYEES

243 PART H TRANSACTIONS WITH RELATED PARTIES 1. INFORMATION ON DIRECTORS AND EXECUTIVES REMUNERATION The following table summarises the remuneration paid to directors and managers with strategic responsibilities of the Parent company, also paid by the subsidiaries. REMUNERATION PAID 2007 a) short-term benefits in favour of employees (*) 5,429 b) Post-employment benefits 157 Total (*) The amount indicated includes payments to directors for EUR 3,055 thousand. In 2007 other payments were made to members of the Board of Statutory Auditors for a total of EUR 474 thousand. 5,586 2 INFORMATION ON TRANSACTIONS WITH RELATED PARTIES For the purpose of providing this information, transactions with related parties identified as such within each company included in the consolidation area have been aggregated. In accordance with IAS 24, related parties are: - subsidiaries, companies in which the entity directly or indirectly exercises control, as defined by IAS 27; - associated companies, companies in which the Parent bank directly or indirectly exercises significant influence, as defined by IAS 28; - companies subject to joint control, companies on which the Parent bank directly or indirectly exercises joint control, as defined by IAS 31; - directors with strategic responsibilities and supervisory authorities, namely Directors, Statutory auditors, the General Manager and the Vice General Managers of the entity and its parent company; - other related parties, which include: a) immediate family members partners, children, the partner s children and dependents of the individual or partner - of Directors, Statutory auditors, the General Manager and the Vice General Managers of the entity and its parent company; b) subsidiaries, subject to joint control or subject to significant influence by Directors, Statutory auditors, the General Manager and the Vice General Managers of the entity and its parent company, as well as their immediate family members, as defined above; c) pension funds established by companies of the Group. 243

244 ASSOCIATED COMPANIES COMPANIES SUBJECT TO JOINT CONTROL EXECUTIVES OTHER AND CONTROL RELATED BODIES PARTIES % INCIDENCE ON THE BALANCE SHEET ITEM TRANSACTIONS WITH RELATED PARTIES Due from banks ,0% Loans to customers ,9% TOTAL Due to banks ,7% Due to customers ,8% Securities issued ,2% TOTAL Guarantees given ,4% TOTAL COMPANIES EXECUTIVES OTHER % INCIDENCE ON ASSOCIATED SUBJECT TO AND CONTROL RELATED THE BALANCE TRANSACTIONS WITH RELATED PARTIES COMPANIES JOINT CONTROL BODIES PARTIES SHEET ITEM Interest margin ,4% Net fee and commission income ,7% Other income Administrative expenses ,7% Other expenses/income ,3% TOTAL Dealings and relations with the other Credito Valtellinese Group companies are established within the sphere of a consolidated network company organisational model, on the basis of which each member is focused exclusively on the creation of its core business, within a business context which permits an effective and efficient handling of the Group s overall resources. All the dealings entered into with the Group companies mainly concern correspondent transactions for services rendered, deposit and financing services within the sphere of ordinary inter-bank operations. Other contractual dealings entered into with specialised finance companies and service companies regard assistance and consulting services and specialised services supporting banking operations. The economic effects of inter bank transactions are regulated on the basis of primary market conditions, while other transactions are regulated on the basis of the specific contractual terms which - maintaining the principal objective of optimising the synergies and economies of scale and purpose at the Group level - refer to parameters that are objective and constant over time, marked by essential transparency and equity. The quantification of fees for services provided is defined and formalised according to tested parameters that take account of the effective utilisation by each user company. Dealings with related parties other than companies belonging to the Credito Valtellinese Group are part of normal banking activities and are generally regulated at market conditions for the specific operations, aligned to the most favourable measure that may have been agreed for employees. Bank dealings with groups headed by Directors of the company or by the parent company Credito Valtellinese and other companies of the Credito Valtellinese Group are resolved in compliance with the provisions of art. 136 of the Consolidated Bank Act and settled at normal market conditions established for the specific operations. The effects of transactions with related parties as defined above on the financial and operating situation and on the income statement for the year ended on 31 December 2007, as well as the weight of these transactions on the corresponding balance sheet items in percentage terms, are represented in the summary tables below. The effects of transactions concluded with Group companies have not been included as their line-by-line consolidation requires the netting of intragroup balances and transactions. 244

245 PART I SHARE-BASED PAYMENTS No share-based payments were made. 245

246 Guide to consultation This section of the financial statements includes the following documents: Statement by the delegated administrative body and the manager in charge of drafting corporate financial documents This document is prepared in accordance with Art. 81-ter of the Issuers Regulation adopted by CONSOB by resolution no of 14 May 1999 and subsequent amendments and additions, implementing Art.154-bis, paragraph 5, of Legislative Decree no. 58 of 24 February 1998, Consolidated Act on Financial Intermediation pursuant to articles 8 and 21 of Law no. 52 of 6 February ( TUF ). The sample statement form is shown in Annex 3C-ter of the aforesaid CONSOB Regulation. Auditors Report Through this document the external auditing company expresses its opinion on the consolidated financial statements pursuant to article 156 of the TUF. The report is signed by the auditor in charge of the audit, who must be a shareholder or a director of the auditing company enrolled in the register of auditors held by the Ministry of Justice. 246

247 OTHER DOCUMENTS 247

248 Consolidated Financial Statements disclosure pursuant to Art. 81 ter of CONSOB Regulation no of 14 May 1999, as amended 1. The undersigned Giovanni De Censi, as the Chairman of the Board of Directors and Enzo Rocca, as the Manager in charge of preparing the corporate financial documents of Credito Valtellinese S.c., also taking account of art. 154-bis, paragraphs 3 and 4, of Legislative Decree no. 58 of 24 February 1998, certify: - the adequacy, in relation to the business characteristics and - the effective application, Of the administrative and accounting procedures adopted for the preparation of the consolidated financial statements in The evaluation of the adequacy of administrative and accounting procedures adopted for the preparation of the consolidated financial statements at 31 December 2007 is based on a Model defined by Credito Valtellinese S.c. to be in line with the Internal Control Integrated Framework and the Cobit, which represent reference standards for internal control which are generally accepted at international level. 3. We also certify that the consolidated financial statements at 31 December 2007: a) agree with the accounting records; b) have been prepared in accordance with the IFRS endorsed by the European Union as well as the provisions issued to implement art. 9 of Legislative Decree no. 38/2005, and as they are, provide a true and fair view of the financial and economic situation of the issuer and of all the companies included in the consolidation area. Sondrio, 18 March 2008 The Chairman of the Board of Directors Giovanni De Censi The Manager in charge of preparing corporate financial documents Enzo Rocca 248

249 249

250 250

251 REPORT AND FINANCIAL STATEMENTS OF CREDITO VALTELLINESE 255

252 256

253 HIGHLIGHTS AND FINANCIAL STATEMENT RATIOS BALANCE SHEET FIGURES 31/12/ /12/2006 (in thousands of EUR) % change % Loans to customers 5,459,677 4,685, % Other financial assets and liabilities: 72, , % Investments in associates and companies subject to joint control 732, , % Total assets 7,924,317 6,999, % Direct deposits from customers 5,470,648 4,798, % Indirect deposits from customers 4,886,132 4,681, % including: - Managed savings 2,079,102 2,176, % Total deposits 10,356,780 9,480, % Shareholders equity 1,549, , % BALANCE SHEET RATIOS 31/12/ /12/2006 Indirect deposits from customers / Total deposits 47.2% 49.4% Managed savings / Indirect deposits from customers 42.6% 46.5% Direct deposits from customers / Total liabilities 69.0% 68.6% Customer loans / Direct deposits from customers 99.8% 97.6% Customer loans / Total assets 68.9% 66.9% LENDING RISK 31/12/ /12/2006 % change % Net doubtful loans (in thousands of EUR) ,95% Other net doubtful loans (in thousands of EUR) ,81% Net doubtful loans / Loans to customers 0,41% 0,54% Other net doubtful loans / Loans to customers 1,42% 1,54% Hedging of doubtful loans Hedging of other doubtful loans 65,13% 7,17% 67,99% 4,96% OTHER INFORMATION 31/12/ /12/2006 % change % Number of employees ,98% Number of branches ,66% Banc@perta line users 31,233 28,442 9,81% 257

254 INCOME STATEMENT FIGURES (in thousands of EUR) % change % Interest margin 157, , % Operating income 246, , % Operating costs -121, , % Net operating margin 125,843 90, % Income (loss) before tax from continuing operations 95,890 68, % Income (loss) after tax from continuing operations 63,603 45, % Net income (loss) 63,603 48, % 258

255 Guide to consultation This report accompanies the financial statements of Credito Valtellinese S.c. as at 31 December 2007 and aims to provide an outline of the management performance as a whole and in the various sectors in which it operates, and also of the main risks and uncertainties that it faces. The document has been drawn up in accordance with the provisions of Article 3 of Legislative Decree no. 87 dated 27 January 1992, and with the instructions issued by Bank of Italy with Circular no. 262 dated 22 December 2005, Bank Financial Statements: schedules and guidelines. (par ). The report also includes further information requested by other laws and regulations, even if not referred to in the aforesaid provisions. 259

256 BOARD OF DIRECTORS REPORT ON OPERATIONS 260

257 261

258 CENTENARY OF THE PARENT BANK As stated in the Chairman s letter, 12 July 2008 marks the centenary of the Parent Bank Credito Valtellinese, established in 1908 with a view to extending the benefits of lending to farmers, landowners, business and professional people, workers and labourers in general ( ), to contributing to the development of small ownership and small business through mutuality ( ) and to promoting Catholic and social institutions that work to improve the moral, intellectual and economic conditions of the less privileged classes. Hence it appears fitting and proper to mention the centenary at the beginning of this report which accompanies the financial statements of the one hundredth year of the Bank s activity; activity which for a century has been performed in keeping with the values of cooperation and solidarity, the cornerstones of the Credito Valtellinese s origins as a community bank and which have always defined its identity and guided its actions. The celebrations linked to the centenary include a full calendar of events cultural, artistic, sporting, publishing and social scheduled from the second half of 2007 onwards in all the areas in which the Bank operates. These events are distinguished by an ad hoc logo, developed on the basis of the Bank s current brand. The main appointment will be the Centenary Day 12 July 2008 for which a series of events have been scheduled, the most important of which is a commemorative assembly, providing a special occasion to mark the importance of the community bank matrix that distinguishes the Parent Bank. At this point it is important to underline that the growth results achieved by Banca Piccolo Credito Valtellinese in its one hundred years of history are the direct consequence of the values that are genetically ingrained in the everyday operations of its employees. Hence even the satisfying performances posted in terms of income and equity in 2007 of which further details will be provided hereunder are the fruit of Creval s vision and its system of values, providing tangible proof of their validity and correctness. 262

259 MANAGEMENT PERFORMANCE DURING THE YEAR ANALYSIS OF THE MAIN BALANCE SHEET AGGREGATES RECLASSIFIED BALANCE SHEET (IN THOUSANDS OF EUR) ASSETS 31/12/ /12/2006 % change % Cash and cash equivalents 60,025 51, % Financial assets held for trading 14,686 88, % Financial assets available for sale 60,236 40, % Due from banks 1,233,620 1,142, % Loans to customers 5,459,677 4,685, % Investments in associates and companies subject to joint control 732, , % Property, plant and equipment and intangible assets (1) 184, , % Other asset items (2) 179, , % Total assets 7,924,317 6,999, % (1) Includes the items 110 Property, plant and equipment and 120 Intangible assets. (2) Includes the items 130 "Tax assets" and 150 "Other assets". LIABILITIES 31/12/ /12/2 006 % change % Due to banks 536,430 1,036, % Direct deposits from customers (1) 5,470,648 4,798, % Financial liabilities held for trading 2,785 5, % Other liability items 263, , % Provisions for specific purpose (2) 101,273 90, % Shareholders equity (3) 1,549, , % Total liabilities and shareholders equity 7,924,317 6,999, % (1) Includes the items 20 Due to customers" and 30 Securities issued". (2) Includes the items 80 "Tax liabilities ", 110 "Employee termination indemnities" and 120 "Provisions for risks and charges ". (3) Includes the items 130 "Valuation reserves ", 150 "Equity instruments ", 160 "Reserves", 170 "Share premium reserve ", 180 "Share capital", 190 "Treasury shares and 200 "Net income (loss) for the period ". 263

260 DEPOSITS Direct deposits As at 31 December 2007 direct deposits from customers 18 total EUR 5,470.6 million, up by 14% compared to the EUR 4,798.7 million of the previous year. A breakdown of the components shows an increase in amounts due to customers, equal to EUR 2,790.9 million, which record year-on-year growth of 4.7%, while securities issued, equal to EUR 2,547.5 million, and have posted a stronger increase, with a year-on-year percentage growth of 26.9%. In terms of breakdown by technical form, deposit repurchase agreements total EUR 625 million (+31%), while current accounts, slightly down on the previous year, stand at EUR 2,287.5 million. Direct deposits (in millions of EUR) % EUR/millions Indirect deposits As at 31 December 2007 indirect deposits stand at EUR 4,886.1 million, recording an increase of 4.4% compared to the EUR 4,681.6 million of last year. Managed savings, made up of mutual investment funds, customer portfolio management and insurance savings, total EUR 2,079.1 million, and post a 4.5% decrease reflecting the customers more cautious approach to their investment decisions with a tendency to favour highly liquid products. Administered savings, consisting of securities that the customers deposit at the Bank, have reached EUR 2,807 million, posting an increase of 12.1% on the previous year end figure. It should be noted that administered savings make up 42.6% and managed savings 57.4% of the total aggregate of indirect deposits Indirect deposits (in millions of EUR) +4,4% EUR/millions This figure comprises the items 20 "Due to Customers" and 30 "Securities issued". 264

261 Total deposits Total deposits from customers, equal to the sum of direct and indirect deposits, reached EUR 10,356.8 million, up by 9.3% compared to the EUR 9,480.3 million recorded at the end of December Total deposits (in millions of EUR) ,3% EUR/millions

262 LOANS Lending At the end of December 2007, loans to customers reached EUR 5,459.7 million, up by 16.5% compared to the EUR 4,685.7 million of year end Customer loans (in millions of EUR) ,5% EUR/millions A breakdown of the loans portfolio by technical form shows considerable growth in mortgages, up by 15% to reach EUR 1,655.3 million at year end, and an increase in the short term component represented by current accounts which have risen by 22.1% compared the previous year, standing at EUR 2,189.0 million. Technical form (EUR/1,000) 31/12/ /12/2006 % change Current accounts 2,189,046 1,792, % Repurchase agreements % Mortgages 1,655,305 1,439, % Credit cards, personal loans and salary-backed loans 60,464 53, % Financial leases 481, , % Other transactions 971, , % Securities 1,811 1, % Impaired assets 99,757 96, % Total 5,459,677 4,685, % Financing operations were specifically aimed at retail customers (households, small and medium-sized enterprises, trades), which are the primary customers of Credito Valtellinese in the areas in which it operates. A breakdown of loans by business segment and goods type, according to the classification of Bank of Italy, demonstrates that lending is mainly focused on companies manufacturing goods or providing services (non-financial businesses and personal businesses), to which the majority of total loans to customers are disbursed. The economic categories with the highest representation are services (50.8%), followed by construction, with a percentage of 11.1%. Nonetheless, loans disbursed to consumer households and to non-profit organisations also account for an important portion, representing over 15% of total loans to customers. This segmentation clearly demonstrates the Bank s vocation towards retail customers and the real economy. 266

263 non-financial businesses and personal businesses 83.68% foreign operators and other operators 0.57% financial companies 0.74% consumer households 15.01% Loans by sector Sectors economic categories Financial businesses 0.74% 0.81% Non-financial businesses and personal businesses 83.68% 83.83% Other services for sale 33.61% 30.64% Commerce 17.15% 18.53% Construction 11.12% 10.15% Textiles, footwear, clothing 4.66% 5.59% Metal products excluding machines 4.85% 4.98% Other groups 28.61% 30.10% Consumer households and non-profit organisations 15.01% 14.92% Foreign operators and other operators 0.57% 0.45% Total 100% 100% other services 3361% commerce 17.15% metal products excluding machines 4.85% construction 11.12% textile, footwear, clothing 4.66% other groups 28.61% 267

264 Loan quality Loans by economic category Net doubtful loans to customers total EUR 22.7 million, down compared to the 24.9 million of the previous year. The net doubtful loans to net loans to customers ratio is equal to 0.4%, recording a decrease compared to the year end 2006 figure. IN THIS REGARD, ATTENTION IS DRAWN TO THE TRANSACTION TO ASSIGN NON-PERFORMING LOANS TO FINANZIARIA SAN GIACOMO S.P.A., A COMPANY OF THE CREDITO VALTELLINESE GROUP SPECIALISING IN THE MANAGEMENT OF PROBLEMS LOANS, EXECUTED IN NOVEMBER 2007 BY CREDITO VALTELLINESE FOR A TOTAL AMOUNT EQUAL TO EUR 11.7 MILLION. The total net non-performing loans to net loans ratio, which stands at 1.8% in 2007, also fell, posting a decrease of 2.1% compared to year end Impaired loans other than doubtful loans (substandard loans, restructured and past due/overdue loans), net of value adjustments, totalled EUR 77.1 million at year end 2007, and account for 1.4% of net loans to customers. This figure is down on the figure reported in the previous year.. (in millions of EUR) Gross exposure Value adjustmen ts Net exposure Gross exposure Value adjustments Net exposure as at 31/12/2007 as at 31/12/2006 A. Impaired loans 148,376-48,600 99, ,010-56,591 96,419 Doubtful loans 64,968-42,313 22,655 77,740-52,859 24,881 Substandard loans 54,776-5,656 49,120 34,338-2,888 31,450 Restructured exposures 4, , Past-due exposures 24, ,846 40, ,074 Country risks B. Performing loans 5,387,981-28,080 5,359,901 4,559,160-24,538 4,589,234 Total 5,536,357-76,680 5,459,677 4,712,170-81,129 4,685,653 FINANCIAL ASSETS AND LIABILITIES Financial assets and liabilities held for trading The management of securities held for trading and cash and cash equivalents has been assigned, through specific mandate, to Bancaperta, a specialised company of the Credito Valtellinese Group. In exercising this mandate, the company works closely with the Bank s General Management, which is entrusted with global supervision of operational aspects and with taking specific decisions within the framework of the instructions issued by the Board of Directors. Periodic reporting ensures constant monitoring of performance, risk profile, results and development strategies of financial asset management. At year end, the financial assets held for trading, mainly consisting of debt securities, total EUR 14.7 million, compared to the EUR 88.5 million of the previous year. During the year the quotas of SICAV bonds held in the portfolio were unfrozen, in accordance with the instructions issued by the Board of Directors. The table below provides a breakdown of financial assets and liabilities held for trading. Financial assets/liabilities held for trading (EUR/1.000) 31/12/ /12/2006 % change Bonds and other debt securities 11,404 12, % Equity securities and UCI quotas - 67, % Trading securities 11,404 79, % Net value of financial derivatives 497 3, % Assets and liabilities held for trading 11,901 83, % 268

265 269

266 Financial assets available for sale Financial assets available for sale total EUR 60.2 million, compared to the 40.1 million of the end of December The increase is mainly due to the acquisition of 3.66% of the share capital of Banca Tercas Cassa di Risparmio della provincia di Teramo S.p.A.. The net inter-bank position The net inter-bank position features a positive balance of EUR million, compared to the positive balance of EUR million recorded at the end of the previous year. Investments in associates and companies subject to joint control This item classifies investments held in companies subject to control including joint control or subject to considerable influence. The table below provides a breakdown of the Bank s investments as at 31 December Company name % ownership Book value as at 31/12/2007 Increases/ decreases Book value as at 31/12/2006 Credito Artigiano S.p.A % 294, ,742 Credito Siciliano S.p.A % 115, ,265 Credito Piemontese S.p.A % 19, ,262 Bancaperta S.p.A % 63,921-63,921 Mediocreval S.p.A % 42,056 8,272 33,784 Banca dell'artigianato e dell'industria S.p.A % 36, ,609 Bankadati Servizi Informatici S.p.A % 2, ,066 Stelline Servizi Immobiliari S.p.A % 10,066-10,066 Deltas S.p.A % Crypto S.p.A Creset S.p.A % 3,100-1,600 4,700 Rajna Immobiliare S.r.l % Banca della Ciociaria S.p.A % 27,494 27,494 - Global Assistance S.p.A % 2,066-2,066 Banca di Cividale S.p.A % 89,102-89,102 Istituto Centrale delle Banche Popolari 22.50% 25,398-25,398 Italiane S.p.A. Politec Soc.Coop. del Polo dell Innovazione 20.52% della Valtellina p.a. Total investments 732,146 35, ,860 The main changes relate to investments in Mediocreval and Banca della Ciociaria as a result of the transactions described in the report on Group operations. Notice is also given of the merger of Crypto into Bankadati Servizi Informatici, executed on 30 April 2007, and the write-down of the investment held in Creset. Shareholders equity and Earning per share (EPS) At year end 2007 the Bank s shareholders equity is equal to EUR 1,549.2 million, compared to the EUR million of the previous year (+78%). The increase has been mainly caused by the capital increase transaction implemented in June 2007, of which details will be provided hereunder. Capital for supervisory purposes As at 31 December 2007, the capital for supervisory purposes, which is broken down in detail in Part F of the Notes to the Financial Statements, together with other Equity information totals EUR 1,638.5 million, compared to EUR 1,006.3 million of the previous year, calculated according to supervisory regulations in force as at 31 December The increase is essentially linked to the aforementioned increase in the Bank s share capital. 270

267 It is reported that with the 12th update of Circular no. 155 dated 18 December 1991 Instructions for preparing reports on capital for supervisory purposes and on prudential ratios issued on 5 February 2008, new individual and consolidated prudential reporting schedules have been set up, associated with assimilation of EU directives on the matter of capital adequacy (Basel II). As far as the information on the capital for supervisory purposes is concerned, entry into effect of the new reporting schedules has been set as 31 December With regard to said date the capital for supervisory purposes has already been determined according to the new procedures in the financial statements as at 31 December 2007 and appropriate information has also been provided in the financial statements (Part F Information on Shareholders Equity: table on capital for supervisory purposes). The extent of capital for supervisory purposes more than ensures compliance with the capital requirements of current regulations, and offers adequate support for plans to increase the size of the bank. EARNING PER SHARE (EPS) THE TABLE BELOW SHOWS TRENDS IN THE BASE EPS, CALCULATED AS THE RATIO BETWEEN NET INCOME AFTER DEDUCTION OF THE SUM ALLOCATED TO THE CHARITY FUND AND THE NUMBER OF WEIGHTED AVERAGE SHARES OUTSTANDING IN THE YEAR. IN 2007 THE BANK S EARNING PER SHARE STOOD AT EUR Earning per share (EPS) Attributable income (in thousand of EUR) 61,303 46,221 Weighted average number of ordinary shares 130,347,319 87,226,387 Basic earnings per share Property In compliance with the provisions of Article 10 of Law 72/1983 a statement of the monetary revaluations performed is attached to the financial statements. 271

268 MANAGEMENT PERFORMANCE DURING THE YEAR ANALYSIS OF THE MAIN INCOME STATEMENT AGGREGATES RECLASSIFIED INCOME STATEMENT (IN THOUSANDS OF EUR) INCOME STATEMENT % change % Interest margin 157, , % Net fee and commission income 53,403 52, % Dividend and similar income 29,499 24, % Profit (loss) on trading, hedging and disposals/repurchases 2,303 6, % Other operating expenses/income (3) 3,915 3, % Operating income 246, , % Personnel expenses -59,506-58, % Other administrative expenses (1) -53,855-50, % Net adjustments to property, plant and equipment and intangible assets (2) -7,745-7, % Operating costs -121, , % Net operating margin 125,843 90, % Net adjustments for impairment of loans and other financial assets -25,399-21, % Net provisions for risks and charges -3,095-1, % Profit (loss) on disposal of investments and investments in associates and companies subject to joint control -1, % Income (loss) before tax from continuing operations 95,890 68, % Taxes on income from continuing operations: -32,287-22, % Income (loss) after tax from continuing operations 63,603 45, % Income from discontinued operations - 2, % Net income (loss) for the year 63,603 48, % (1) Other administrative expenses include recoveries of taxes and other recoveries recognised in item 190 "Other operating expenses/income" (EUR 12,490 thousand in 2007 and EUR 11,434 thousand in 2006); (2) Net adjustments to property, plant and equipment and intangible assets include the item 170 "Net adjustments to property, plant and equipment " and the depreciation of costs incurred for improvements to third party assets included in the item 190 "Other operating expenses/income " (EUR 998 thousand in 2007 and EUR 927 thousand in 2006). (3) Other income and charges correspond to item 190 "Other operating expenses/income" net of the above reclassifications. 272

269 INCOME STATEMENT FIGURES Operating income The constant, balanced growth in volumes intermediated, together with the widening of the differential between lending and borrowing rates, brought the interest margin to EUR million, posting an increase of 30.9% compared to EUR million of the previous year. Interest income reached EUR million (+37.1%), while interest expense stands at EUR million (+42.6%). Net fee and commission income stands at EUR 53.4 million, recording a slight increase on the EUR 52.9 million reported in Dividends, mainly collected from Group companies, stand at EUR 29.5 million, up by 19.9% compared to the figure relating to Profit (loss) on trading, hedging, disposals and repurchases is equal to EUR 2.3 million, down by 63.2% compared to the EUR 6.3 million of last year, chiefly due to full divestment of the trading portfolio made up of SICAV bond units during the year. Other operating expenses/income stands at EUR 3.9 million, up by 5.4% compared to the previous year. Hence operating income is equal to EUR million, up by 18.7% compared to the EUR million of Operating income (in millions of EUR) ,7% EUR/millions Net operating margin In 2007, operating costs, made up of personnel expenses, other administrative expenses and net value adjustments to property, plant and equipment and intangible assets, stand at EUR million, recording a modest increase compared to 2006 (+3.3%), thanks to a strict cost control policy despite the greater expenses attributable to the considerable expansion of the territorial network. A breakdown shows that personnel expenses have risen from EUR 58.6 million to EUR 59.5 million (+1.6%), other administrative expenses are equal to EUR 53.9 million, up by 5.9% compared to the 2006 figure, while net value adjustments to property, plant and equipment and intangible assets have instead decreased (- 1.6%). The cost / income ratio ratio between operating expenses and operating income therefore stands at 49%, down considerably on the 56.4% reported in As a result of the above, the net operating margin stands at EUR million, compared to the EUR 90.8 million of the previous year, posting an increase of 38.5%. 273

270 Net operating margin (in millions of EUR) ,5% EUR/millions Net income (loss) for the year Net adjustments for impairment of loans and other financial assets, mainly referring to the customer loans portfolio, total EUR 25.4 million, compared to the EUR 21 million of the previous year. Net provisions for risks and charges, equal to EUR 3.1 million, and profit (loss) from disposals of investments and investments in associates and companies subject to joint control, negative by EUR 1.5 million, bring the income (loss) before tax from continuing operations to EUR 95.9 million, up by 40.6% compared to the EUR 68.2 million reported in Tax charges for the year, equal to EUR 32.3 million (+43.4% compared to the 2006 figure), also include the extraordinary effects ensuing from amendment to the IRES and IRAP rates, introduced by the 2008 Finance Bill, which led to an increase in expenses of EUR 2.2 million. Hence net income (loss) stands at EUR 63.6 million, up by 32.2% compared to the 48.1 million reported in Net income (loss) for the year (in millions of EUR) ,2% EUR/millions ,1 63,

271 MANAGEMENT AND INSTITUTIONAL ASPECTS INCREASE OF THE SHARE CAPITAL OF CREDITO VALTELLINESE AND INSTITUTIONAL ASPECTS An important aspect of the activity of Credito Valtellinese during 2007 was the implementation of the capital strengthening programme, approved by the Bank s Extraordinary Shareholders Meeting on 10 February The purpose of the programme was to support, in accordance with the guidelines set forth in the Strategic Plan, the growth plans for the internal lines, the progressive widening of current strategic partnerships, and to ensure an adequate level of free capital to allow the Bank to take advantage of any acquisition opportunities. The programme consisted in the following phases: - free increase of the par value of outstanding shares from EUR 3.00 to EUR 3.50 with effect from 21 May 2007 in accordance with Board resolution passed on 16 May for a total value of approximately EUR 53.6 million; - capital increase against payment, launched on 21 May, with offer under option to shareholders of 53,529,588 ordinary shares. At the end of the option period (22 June 2007) 53,416,567 shares had been subscribed, equal to 99.79% of those offered, matched to 21,352, warrants and 21,352, warrants provided free of charge. The 226,042 rights that were not exercised in the offer period were offered on the stock exchange through UniCredit Markets & Investment Banking (HVB - Milan Branch), in the meetings held on 2, 3, 4, 5 and 6 July With full subscription of the aforesaid unexercised option rights, the share capital transaction was concluded with full subscription of the 53,529,588 ordinary shares, for a countervalue of EUR 535,295,880, matched to 21,397, warrants and 21,397, warrants provided free of charge. It is reminded that the regulations governing 2008 and 2009 warrants warrants that can be exercised in April 2008 and April provide that the exercise price is determined by applying a discount of 20% to the official average market price of Credito Valtellinese shares weighted by the related quantities handled calculated in the first three months of trading of 2008 and 2009 respectively. It is also stated that, as part of the 2007 capital increase transaction, bonus shares were assigned to shareholders subscribing to shares against payment who will retain the shares until 12 July 2008 the date marking Credito Valtellinese s centenary on the basis of one new free share for each 10 shares subscribed as part of the capital increase against payment. April saw conclusion of the redemption period of the third and final tranche of the Credito Valtellinese 2,8% convertible bond loan, the issue of which was approved by Extraordinary Shareholders Meeting on 15 November The bond holders were entitled to request, instead of redemption of the matured share, conversion of the amount into 55 Credito Valtellinese shares, equal to a conversion value of EUR 7.27 per share, of which EUR 3 as nominal value and approximately EUR 4.27 as share premium. The transaction was concluded with bond holders opting for almost full (99.7%) conversion into shares and the consequent issue of 16,087,885 new ordinary shares and subsequent increase of the Parent Bank s equity by approximately EUR 117 million. After the Extraordinary Shareholders Meeting of 21 April assimilated the amendments to the by-laws to ensure full compliance of the Articles of Association with the Law on protection of savings with particular regard to the provisions on independent directors, procedures for appointment of the directors and of the board of statutory auditors by list vote and appointment of the chairman of said board the Board of Directors appointed Enzo Rocca to the office of Executive entrusted with drawing up the company accounts. TERRITORIAL STRUCTURE As at 31 December 2007 Credito Valtellinese s territorial network is made up of 112 branches. During the year 6 new branches were opened: Dalmine, Clusone, Lovere and Calcinate in the province of Bergamo, Alzate Brianza in the Como area and Verbania on Lake Maggiore. 275

272 Number of branches and related provincial shares calculated on the basis of the number of branches as at 31/12/2007 -Credito Valtellinese also has a branch in Piedmont in Verbania - DISTRIBUTION CHANNELS In addition to the branch network, Credito Valtellinese uses other distribution channels for its banking and financial services, and specifically, ATM, internet banking and POS, which as at 31 December 2007 broke down as follows: DISTRIBUTION CHANNELS 31/12/ /12/2006 Change % Number of ATM % Number of internet users 31,233 28, % Number of POS 4,373 4, % BANK WORKFORCE At year end 2007 the workforce of Credito Valtellinese totalled 938 staff, with an increase of 36 resources compared to 31 December 2006 and an average growth rate (Compound Annual Growth Rate, CAGR) in the period equal to approximately 4%. During 2007 there were 29 leavers, 1 intragroup transfer and 66 new recruits