Sanpaolo IMI (EUR 8.54) 2 - Equal weight

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1 June 16, 2003 Sanpaolo IMI (EUR 8.54) 2 - Equal weight Company Update Positive seminar on credit risk and SME EQUITY RESEARCH ITALY European Banks - PLEASE SEE END OF DOCUMENT FOR IMPORTANT DISCLOSURES - Investment Conclusion GSanPaolo IMI hosted yesterday a seminar in Turin on credit risk management and its SME business. Overall, the tone of the presentation was positive, but no price sensitive information was provided. Summary GThe discussion on the SME business was concentrated on the SanPaolo IMI Banco di Napoli networks only. GPositive comments were made on the asset quality outlook of the Italian market... G...as well as on the capital adequacy impact of the new Basel II regulation. FY Dec 2002A 2003E 2004E 2005E Currency EUR Actual Old New Old New Old New Net Income (m) EPS (stated) EPS (adj) PE (adj) ROE (stated %) ROE (adj %) Price/ NAV Price/ NAV (adj) Market Data Financial Summary Market Cap (m) NAV/Share FY Shares Outstanding (m) NAV(adj)/Share FY Float (%) 59 Tier 1 BIS Ratio (%) 7.8 Net Div Yield (%) 4.35 Total BIS Ratio (%) - Convertible No Share per ADR 3:1 Company Rating Target (EUR) New: 2 - Equal weight New: 9.00 Old: 2 - Equal weight Old: 9.00 Sector View: 2 - Neutral Summary Stock Overview /6/03x J JASONDJFMAMJ JASONDJ FMAMJ SAN PAOLO IMI I:SPI/WIEXUKL(R.H.SCALE) Source: DATASTREAM Reuters SPI.MI Bloomberg SPI IM ADR - Performance 1M 3M 12M Absolute % Rel. Market % Rel. Sector % Week Range SanPaolo IMI hosted a seminar in Turin yesterday on credit risk management and the SME business. Overall, the tone of the presentation was positive, but no price sensitive information was provided. The discussion on the SME business was concentrated on the SanPaolo IMI Banco di Napoli networks only without reference to the contribution by Cardine. Speakers included Mr Iozzo (CEO), Mr Picca (Head of SanPaolo Banco di Napoli Network), Mr Firpo (Head of SME Division), and Mr Maino (Head of Risk assessment and management). PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 5 1

2 Targets for including: ROE 8.8% (2003); 14.8% (2005); Cost/Income 65.5% (2003); 54.6% (2005); Net Income EUR 935m (2003); EUR 1,764m (2005); Loan growth CAGR 4.5%. were confirmed. We reiterate our 2-Equal weight on the stock with a target price of EUR 9.0. Overview of the SME market and size of SanPaolo IMI s SME business SMEs are defined based on EU criteria, as businesses with total turnover up to EUR 40m, and total employees not exceeding 250 units. In the Italian market, 3.5m SMEs employ 71% of the total national workforce. SMEs are especially concentrated in northern Italy (50% of total); southern Italy and islands (29% of total) and central Italy (21% of total). SanPaolo IMI s SME division employs 3,100 people (6.8% of total workforce), covers 151 branches in 23 geographical areas, and is mainly concentrated in Lombardy (49 branches) and Italy s North West (39 branches). Despite the higher proportion of branches concentrated in the region, SanPaolo IMI has just a 6% market share of regional loans in Lombardy (compared with a 10% of domestic market share), which is one of Italy s most productive regions. SanPaolo IMI identified its potential SME market as 132,000 firms; its market share is 70% (including Cardine). At the end of 1Q 2003, the SMEs represented 50% of SanPaolo/Banco di Napoli s gross loans, which, by their definition, represented 40% (EUR 51.6bn) of the group s total. (Note that the numbers provided in the presentation focused on the SanPaolo/Banco di Napoli s network only. One would need to include the contribution of Cardine to analyse the group s overall exposure to the SME business). At the end of March 2003, the revenue contribution of the SME business to the SanPaolo/Banco di Napoli combined revenue base (once again, ex Cardine), was 27%, or EUR 232m. Private and retail businesses contributed the bulk of revenues generated by the SanPaolo/Banco di Napoli network (60% of total). No specific targets on the profitability of the SME business were given; however, according to the managers, the key strategic tool to increase the profitability level of its SME business is to increase the commissions based business, by offering the widest range possible of products, especially derivatives, forex and trade finance services. Credit risk: consideration on the system, on SanPaolo IMI and impact of Basel II on capital adequacy. According to the disclosure provided by San Paolo IMI, there is evidence of structural changes in default rates along the economic cycle. Annual defaults (sofferenze) have been falling steadily in the last cycle decreasing from 4% in 1993 to 1.3% in 2002 (the ratios are a % of names). Over the same timeframe, the annual defaults in the first five years have also been decreasing. As a percentage of values, defaults fell from 13% in 1991 to less than 8% in

3 According to SanPaolo IMI, such a structural change in the default rate is sustainable, reflecting the lower level of interest rates. Regarding its risk assessment and management, SanPaolo IMI separates between Risk Taking and Risk Control functions; control and management of credit and financial risks are made at a group level. For the corporate segment, internal ratings are the key for the credit approval process. With 74% of its loan book being investment grade (AAA to BBB), SanPaolo IMI calculated that the expected loss on the outstanding amount of its customer loans is c.50bp at the group level. The increase from the level of 40bp recorded in August 2002 is explained by the Cardine acquisition, as well as by the general economic downturn. More importantly, SanPaolo IMI reiterated that it is confident with the current coverage of 0.9% of its performing loan book, implying that it does not expect to increase the level of provisions; on the contrary, the existing level of generic provisions will be a cushion to the group s profitability should the economic environment enter a phase of more severe deterioration. Regarding the impact of Basel II on the group s capital requirements, management calculated that, should the bank s internal rating model (IRB advanced) be validated by regulators, the capital adequacy ratio would rise from 9.5% to 11% (or in other words, the capital requirement would fall by 11%). Valuation We reiterate our 2-Equal weight rating and target price of EUR 9.0 based on a sum-of-the parts valuation which offers 6% of potential upside. The mid-cycle year we use for the valuation purpose continues to be Considering the cyclical profitability recovery and the growth opportunities offered by divisions we use a value curve methodology to value the consumer finance, lending to public administration (Banca OPI), wealth management and personal financial services divisions while we use a linear valuation for investment banking, international activities and Banco di Napoli. Company description SanPaolo IMI is Italy's second-largest bank by assets, with a market share of 14% in domestic loans and 15% in domestic deposits. The group was formed as a result of the merger between SanPaolo and Banca IMI in The most recent significant acquisitions were Banco di Napoli (southern-based bank) in 2000 and Cardine (north-east based) at the end of The group is also the largest asset gatherer in the domestic market, with a market share of 19% in the mutual fund business. Company Name Disclosure(s)* Reuters Ticker Price( ) Rating Sanpaolo IMI D/E/F SPI.MI (EUR 8.54) 2 - Equal weight * PLEASE SEE DISCLOSURE LEGEND ON THE LAST PAGE 3

4 HISTOR Y OF R ECOMM ENDAT ION AND PRIC E T ARGET CH ANGES DATE CLOSING PRIC E REC OMMEND ATION CH ANGE PRIC E TAR GET 14-N ov N ov Aug Under weight 31-J ul J ul J ul MAR KET PERFORM 15-F eb F eb BU Y 13- Sep MAR KET PERF ORM 28-J un DR OPPED EQUITY RESEARCH Important Disclosures Rating and Price Target Chart: Sanpaolo IMI -FOR EXPLANATION OF RATINGS PLEASE REFER TO THE STOCK RATING KEYS LOCATED AT THE END OF THIS DOCUMENT- 4

5 Analyst Certification: I, Paola Biraschi, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Important Disclosures: The analysts responsible for preparing this report have received compensation based upon various factors including the Firm's total revenues, a portion of which is generated by investment banking activities. D - Lehman Brothers Inc. and/or an affiliate has received compensation for investment banking services from the subject company in the past 12 months. E - Lehman Brothers Inc. and/or an affiliate expects to receive or intends to seek compensation for investment banking services from the subject company within the next 3 months. F - Lehman Brothers Inc. and/or an affiliate beneficially own 1% or more of any class of common equity securities of the subject company. Risk Disclosure: Sanpaolo Imi revenues are geared to the market performance. Poor equity market performance could therefore result in trading losses and outflows of managed assets, thus leading to pressure in commissions. This would make us question our forecasts and target price. Key to Investment Opinions: Stock Rating 1 - Overweight - The stock is expected to outperform the unweighted expected total return of the industry sector over a 12-month investment horizon. 2 - Equal weight - The stock is expected to perform in line with the unweighted expected total return of the industry sector over a 12-month investment horizon. 3 - Underweight - The stock is expected to underperform the unweighted expected total return of the industry sector over a 12- month investment horizon. RS - Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity in a merger or strategic transaction involving the company. Sector View 1 - Positive - sector fundamentals/valuations are improving 2 - Neutral - sector fundamentals/valuations are steady, neither improving nor deteriorating 3 - Negative - sector fundamentals/valuations are deteriorating Stock Ratings From February 2001 to August 5, 2002 (sector view did not exist): This is a guide to expected total return (price performance plus dividend) relative to the total return of the stock s local market over the next 12 months. 1=Strong Buy - expected to outperform the market by 15 or more percentage point. 2=Buy - expected to outperform the market by 5-15 percentage points 3=Market Perform - expected to perform in line with the market, plus or minus 5 percentage points 4=Market Underperform - expected to underperform the market by 5-15 percentage points 5=Sell - expected to underperform the market by 15 or more percentage points. Stock Ratings Prior to February 2001 (sector view did not exist): 1=Buy - expected to outperform the market by 15 or more percentage point 2=Outperform - expected to outperform the market by 5-15 percentage points 3=Neutral - expected to perform in line with the market, plus or minus 5 percentage points 4=Underperform - expected to underperform the market by 5-15 percentage points 5=Sell - expected to underperform the market by 15 or more percentage points 5

6 V=Venture - return over multiyear timeframe consistent with venture capital; should only be held in a well diversified portfolio Distribution of Ratings: Lehman Brothers Equity Research has 1506 companies under coverage. 34% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating. 40% of companies with this rating are investment banking clients of the Firm. 43% have been assigned a 2-Equal weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating, 14% of companies with this rating are investment banking clients of the Firm. 23% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating, 53% of companies with this rating are investment banking clients of the Firm. This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates ("Lehman Brothers") and has been approved by Lehman Brothers International (Europe), regulated by the Financial Services Authority, in connection with its distribution in the European Economic Area. This material is distributed in Japan by Lehman Brothers Japan Inc., and in Hong Kong by Lehman Brothers Asia Limited. This material is distributed in Australia by Lehman Brothers Australia Pty Limited, and in Singapore by Lehman Brothers Inc., Singapore Branch. This material is distributed in Korea by Lehman Brothers International (Europe) Seoul Branch. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. No part of this document may be reproduced in any manner without the written permission of Lehman Brothers. We do not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Lehman Brothers is not acting in a fiduciary capacity. Opinions expressed herein reflect the opinion of Lehman Brothers and are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. If an investor has any doubts about product suitability, he should consult his Lehman Brothers representative. The value of and the income produced by products may fluctuate, so that an investor may get back less than he invested. Value and income may be adversely affected by exchange rates, interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product is income producing, part of the capital invested may be used to pay that income. Lehman Brothers may, from time to time, perform investment banking or other services for, or solicit investment banking or other business from any company mentioned in this document Lehman Brothers. All rights reserved. Additional information is available on request. Please contact a Lehman Brothers entity in your home jurisdiction. Complete disclosure information on companies covered by Lehman Brothers Equity Research is available at 6