Interim Financial Report. for the six months ended 30 June 2007 of the BPM Group

Transcription

1 2007 Interim Financial Report for the six months ended 30 June 2007 of the BPM Group

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4 Interim Financial Report for the six monthes ended 30 June 2007 of the BPM Group Cooperative bank founded in 1865 Parent bank of the BPM Banca Popolare di Milano Group Share capital at : Euro 1,660,136,924 Milan Company Register no National Board of Cooperatives no. A Head Office and General Management: Piazza F. Meda 4 - Milan e mail: bipiemme@bpm.it Member of the Interbank Guarantee Fund Registered Bank and parent Bank of the BPM Banca Popolare di Milano Banking Group Registered Banking Group

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6 Contents Directors and officers 7 Key figures and ratios of the BPM Group 9 Half-year report on the management of the BPM Group 19 Consolidated financial statements of the BPM Group 75 Explanatory Notes 85 Financial statements of the Banca Popolare di Milano 249 Attachments 257 Declaration by the Director charged with the preparation of company accounting documents 263 Report of the Board of Statutory Auditors 265

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8 Directors and officers Board of Directors Chairman Roberto Mazzotta Deputy Chairmen Mario Artali Marco Vitale Directors Enrico Airaghi Luca Caniato Emilio Castelnuovo Giuseppe Coppini Enrico Corali Rocco Corigliano Eugenio Crosta Roberto Fusilli Piero Lonardi Maria Martellini Michele Motterlini Gianfranco Pittatore Marcello Priori Jean Jacques Tamburini Graziano Tarantini Valerio Tavormina Michele Zefferino Board of Statutory Auditors Chairman Antonio Ortolani Statutory auditors Marco Baccani Enrico Castoldi Emilio Cherubini Paolo Troiano Alternates Salvatore Rino Messina Enrico Radice Giuseppe Zanzottera Giorgio Zoia Arbitration committee Statutory arbitrators Italo Ciancia Alfiero Fontana Sergio Serafini Probiviri supplenti Gianfranco Carugati Dario Mezgec General management General Manager Fabrizio Viola Co-General Manager Ernesto Tansini Deputy General Managers Antonio Colli Sergio Schieppati Head Office Managers Maurizio Biliotti Giovanni Damiani Aldo Fresu Roberto Frigerio (*) Angelo Pellegatta Joint-Head Office Managers Elio Canovi Giancarlo Chiesa Andrea Rovellini Stefano Stefani Vice Direttori Centrali Andrea Cardamone Paolo Croci Sergio Versienti (*) Executive entrusted with drawing up the company s accounts Directors and officers 7

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10 Key figures and ratios of the BPM Group 9

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12 BPM Group structure at 30 June 2007 (*) Banca Popolare di Milano S.c. ar.l. Milan 93.51% 55.16% Bipiemme Gestioni SGR S.p.A. Milan 40% 40% 56.89% Banca di Legnano S.p.A. Banca Akros S.p.A. Legnano (MI) Milan 30% 51% Bipiemme Private Banking SIM S.p.A. Milan 19% 51% Akros Alternative Investments SGR S.p.A. Milan 100% Akros Securities Inc. U.S.A. 100% BPM Capital I L.l.c. U.S.A. Cassa di Risparmio di Alessandria S.p.A. Alessandria 80% 99.99% BPM Ireland Plc. Dublin 100% BPM Fund Management Ltd. Dublin 100% Tirving Ltd. Dublin 99.99% We@Service S.p.A. 0.01% Milan Retail Banking Investment Banking 100% Ge.Se.So S.r.L. Milan Wealth Management 99% BPM Luxembourg S.A. 1% Luxembourg Corporate Center Other activities (*) Percentages refer to voting rights at Ordinary Shareholders Meetings. Key figures and ratios of the BPM Group 11

13 Key figures and ratios of the BPM Group Introduction The following tables provide the summary data and key financial, economic and profit ratios for the BPM Group, calculated by using the values in the reclassified formats used and described in this half-year report on operations. The balance sheet and profit and loss account have been reclassified in order to provide a clearer interpretation of the trends, in full compliance with standard market practice. The principal changes regard aggregations of accounting items or reclassifications of the same, which are the subject of extensive illustration in the footnotes to the reclassified statements, as well as in the Accounting Policies section of the notes to the financial statements. Furthermore, the figures at 30 June 2006 were calculated on a pro-forma basis in order to ensure greater comparability of data, in consideration of the changes that occurred in the scope of consolidation. More specifically, the companies Bipiemme Vita S.p.A. and Ultramediass S.r.l. which at 30 June 2006 were consolidated according to the line-by-line method were removed from said scope of consolidation starting from 31 December 2006, following: finalisation of the bancassurance agreement with the FonSai Group, which involved the transfer of 51% of the share capital of Bipiemme Vita to Milano Assicurazioni; the merger by incorporation of Ultramediass (company previously fully-owned by Bipiemme Vita) into Bipiemme Vita. Therefore, taking into consideration the above and in order to provide a uniform comparison of data, a pro-forma restatement was carried out for the aforementioned reclassified figures at 30 June Key figures and ratios of the BPM Group

14 BPM Group - Reclassified balance sheet (Euro/000) Compulsory format codes Asset items Pro forma (*) 10. Cash and balances with central banks Financial assets designated at fair value and hedging derivatives: Changes 30 June December 2006 Changes 30 June June 2006 in value in % in value in % 172, , ,639 27, , ,950,889 7,068,503 6,848, , , Financial assets held for 3,637,763 3,358,537 3,406, , , trading 30. Financial assets designated at 1,368,279 1,662,572 1,659, , , fair value 40. Financial assets available for 1,930,269 2,023,686 1,753,837 93, , sale 80. Hedging derivatives 14,578 23,708 28,319 9, , Loans and advances to banks 4,627,756 3,776,225 3,803, , , Loans and advances to 28,242,620 26,312,649 23,987,725 1,929, ,254, customers Fixed assets 1,529,261 1,479,917 1,478,129 49, , Non-current assets (or disposal groups) held for sale and discontinued operations 0 8,009 22,865 8, , Other assets 1,119,369 1,335,997 1,639, , , Total assets 42,642,395 40,181,057 37,944,617 2,461, ,697, Key figures and ratios of the BPM Group 13

15 BPM Group - Reclassified balance sheet (Euro/000) Compulsory format codes Equity and liabilities Pro forma (*) Changes 30 June December 2006 Changes 30 June June 2006 in value in % in value in % 10. Due to banks 4,095,424 4,640,052 5,103, , ,008, Due to customers 20,805,036 20,808,067 18,138,304 3, ,666, Debt securities in issue 8,059,761 5,624,722 5,825,638 2,435, ,234, Financial liabilities and 4,340,139 3,984,195 4,182, , , hedging derivatives: 40. Financial liabilities for 1,172,447 1,059,814 1,235, , , trading 50. Financial liabilities 3,166,005 2,921,610 2,944, , , designated at fair value 60. Hedging derivatives 1,687 2,771 2,301 1, Other liabilities 1,368,233 1,180,075 1,080, , , Provisions for specific use 435, , ,401 27, , Capital and reserves 3,186,622 2,960,312 2,894, , , Minority interests (+/ ) 116, ,504 36,703 5, , Net profit (loss) for the period (+ / ) 234, , , ,713 n.s. 3, Total equity and liabilities 42,642,395 40,181,057 37,944,617 2,461, ,697, (*) These figures have been valued on a pro-forma basis in order to guarantee better data comparability following the exit from the consolidation area of the companies Bipiemme Vita S.p.A. and Ultramediass S.r.l. from 31 December Key figures and ratios of the BPM Group

16 BPM Group - Reclassified profit and loss account (Euro/000) Compulsory format codes Profit and Loss Account Line Items First half-year 2007 First half-year 2006 (*) Changes in value in % Net interest income 500, ,691 71, Net fee and commission income 302, ,185 (8,959) 2.9 of wich 240. Share of profit (loss) of investments valued under the equity method 7,044 4,413 2, Dividends and similar income 138,989 45,389 93, Net financial assets (26,843) 17,203 (44,046) n,s, 220. Other operating charges/income 30,314 49,185 (18,871) 38.4 Operating income 952, ,066 96, Administrative expenses: (502,164) (467,520) 34, a) payroll (354,080) (331,247) 22, b) other (148,084) (136,273) 11, Net adjustments to property, plant and equipment and intangible assets (36,607) (45,858) (9,251) 20.2 Operating costs (538,771) (513,378) 25, Operating profit 413, ,688 70, Net adjustments for the impairment of loans and financial assets (49,844) (32,059) 17, Net charges to provisions for risks and charges (5,647) (16,114) (10,467) Profits (losses) from equity and other investments ,341 (72,624) Profit (loss) from current operations before tax 358, ,856 (9,006) Income taxes on current operations (117,879) (127,202) (9,323) Net profit (loss) for the period 240, , Minority interests (6,004) (2,684) 3, Net profit (loss) for the period pertaining to the Parent Bank 234, ,970 (3,003) 1.3 Earnings per share (Euro) Diluted earnings per share (Euro) (*) These figures have been valued on a pro-forma basis in order to guarantee better data comparability following the exit from the consolidation area of the companies Bipiemme Vita S.p.A. and Ultramediass S.r.l. from 31 December Method of preparing the reclassified profit and loss account For management reporting purposes the half-year results have been presented in a reclassified format, in which line items have been aggregated and reclassified in keeping with market practice in such a way as to provide a clearer picture of performance. For the purposes of easily reconciling the reclassified profit and loss account with the compulsory format, the code numbers from the compulsory format are shown beside each item in the reclassified statement; the following reclassifications have been made: 1. The share of profit (loss) of investments valued under the equity method (Euro 7,044 thousand as at 30 June 2007 and Euro 4,413 thousand as at 30 June 2006), recorded in line item 240 Share of profit (loss) of equity investments has been reported in a separate line forming part of Operating income in the reclassified format; 2. Other operating charges/income (Item 220) recorded as part of Operating costs in the official reporting format have been adjusted to exclude recoverable indirect taxes (Euro 30,018 thousand at 30 June 2007 and Euro 29,007 thousand at 30 June 2006) and to include depreciation of leasehold improvements (Euro 2,800 thousand at 30 June 2007 and Euro 2,971 thousand at 30 June 2006). Other operating charges/income thus adjusted have been reported as part of Operating income in the reclassified profit and loss account; 3. Other administrative expenses (line item 180 b) have been adjusted to exclude the amount corresponding to recoverable indirect taxes as discussed in point 2) above; 4. Net adjustments to property, plant and equipment and intangible assets have been increased in the reclassified statement by the corresponding amount of depreciation of leasehold improvements, discussed in point 2) above; 5. Net adjustments for the impairment of loans and financial assets (Euro 49,844 thousand at 30 June 2007 and Euro 32,059 thousand at 30 June 2006), reported in line item 130, have been reclassified below Operating profit in the reclassified profit and loss account. Key figures and ratios of the BPM Group 15

17 BPM Group Quarterly outlook of the reclassified profit and loss account (Euro/000) Compulsory format codes Profit and loss account Line Items FY 2007 FY 2006 (*) Second quarter 2007 First quarter 2007 Fourth quarter 2006 Third quarter 2006 Second quarter 2006 First quarter 2006 Quarterly average Net interest income 266, , , , , , , Net fee and commission income 148, , , , , , ,436 of wich 240. Share of profit (loss) of investments valued under the equity method 3,418 3,626 5,911 3,355 (1,414) 5,827 3, Dividends and similar income 138, , ,961 1,428 13, Net financial assets (83,649) 56,806 27,183 31,412 (27,975) 45,178 18, Other operating charges/income 15,080 15,234 16,620 25,184 32,330 16,855 22,747 Operating income 488, , , , , , , Administrative expenses: (263,342) (238,822) (278,169) (229,438) (242,856) (224,664) (243,782) a) payroll (186,073) (168,007) (197,260) (159,375) (170,647) (160,600) (171,971) b) other (77,269) (70,815) (80,909) (70,063) (72,209) (64,064) (71,811) Net adjustments to property, plant and equipment and intangible assets (18,214) (18,393) (25,187) (23,383) (23,534) (22,324) (23,607) Operating costs (281,556) (257,215) (303,356) (252,821) (266,390) (246,988) (267,389) Operating profit 206, , , , , , , Net adjustments for the impairment of loans and financial assets (35,869) (13,975) (58,865) (33,230) (20,217) (11,842) (31,039) 190. Net charges to provisions for risks and charges (1,719) (3,928) (15,859) (6,649) (7,599) (8,515) (9,656) Utili (Perdite) da partecipazioni ed investimenti (2,980) 34,697 73, , Profit (loss) from current operations before tax 169, , , , , , , Income taxes on current operations (44,581) (73,298) (49,492) (56,841) (63,232) (63,970) (58,384) 320. Net profit (loss) for the period 125, ,614 54, , ,805 97, , Minority interests (3,679) (2,325) (1,143) (1,360) (1,275) (1,409) (1,297) 340. Net profit (loss) for the period pertaining to the Parent Bank 121, ,289 53, , ,530 96,440 99,670 (*) These figures have been valued on a pro-forma basis in order to guarantee better data comparability following the exit from the consolidation area of the companies Bipiemme Vita S.p.A. and Ultramediass S.r.l. from 31 December Key figures and ratios of the BPM Group

18 BPM Group Key figures (Euro/000) Key balance sheet figures Pro-forma (*) Loans and advances to customers, net 28,242,620 23,987,725 26,312,649 of which: net non-performing loans 126, , ,125 Direct deposits (**) 32,030,802 26,908,199 29,354,399 Indirect customer deposits 41,521,407 38,450,001 39,613,673 of which: assets under management 20,929,883 20,501,318 20,729,355 Total assets 42,642,395 37,944,617 40,181,057 Regulatory capital (***) 3,376,190 3,194,135 3,289,200 of which: Tier 1 capital (***) 2,588,553 2,099,263 2,218,994 Equity (excluding net profit/loss for the period) 3,186,622 2,894,032 2,960,312 Key profit and loss figures Pro-forma (*) Operating income 952, ,066 Operating costs (538,771) (513,378) of which: payroll costs (354,080) (331,247) Operating profit 413, ,688 Net adjustments for the impairment of loans and financial assets (49,844) (32,059) Profit from current operations before taxes 358, ,856 Net profit for the period pertaining to the Parent Bank 234, ,970 Other information Pro-forma (*) Headcount (employees and other personnel) 8,615 8,510 8,391 Branches (*) The figures as at 30 June 2006 have been valued on a pro-forma basis in order to consider the changes occurred in the consolidation area from 31 December 2006 in relation to the companies Bipiemme Vita S.p.A. and Ultramediass S.r.l. (**) This item includes: amounts due to customers, debt securities in issue and financial liabilities designated at fair value through profit and loss. (***) For the purposes of uniform comparison, the Regulatory Capital at 31 December 2006 and 30 June 2006 has been recalculated based on the guidelines included in Bank of Italy Circular no. 263 of 27 December Key figures and ratios of the BPM Group 17

19 BPM Group - Key ratios Structural ratios (%) pro-forma (*) Loans and advances to customers / total assets Fixed assets / total assets Direct deposits / total assets Funds under management / indirect deposits Profitability ratios (%) (annualised six-month figures) % Net profit/(equity - net profit) (ROE) Net profit/total assets (ROA) Cost to income ratio Credit risk ratios (%) Net non-performing loans/loans and advances to customers, net Adjustments to non-performing loans/gross non-performing loans Adjustments to performing loans/gross performing loans Productivity ratios (thousands of Euro) (**) Direct deposits per employee 3,718 3,162 3,498 Loans and advances to customers per employee 3,278 2,819 3,136 Assets under management per employee 2,429 2,409 2,470 Assets under administration per employee 2,390 2,109 2,251 Capital adequacy ratios (%) (***) Tier 1 (Tier 1 capital/total risk-weighted assets) Total capital ratio (regulatory capital/total risk-weighted assets) (*) The figures as at 30 June 2006 have been valued on a pro-forma basis in order to consider the changes occurred in the consolidation area from 31 December 2006 in relation to the companies Bipiemme Vita S.p.A. and Ultramediass S.r.l. (**) Number of employees at the end of the period, including personnel with other types of contracts. (***) For the purposes of uniform comparison, the Regulatory Capital used in calculating the capital adequacy ratios at 31 December 2006 and 30 June 2006 has been recalculated based on the guidelines included in Bank of Italy Circular no. 263 of 27 December Key figures and ratios of the BPM Group

20 Half-year report on the management of the BPM Group 19

21 Macroeconomic scenario The international economy In the first half of 2007, the rhythm of global growth continued to develop, this also thanks to the contribution of China and India. International trade maintained a brisk pace, while prices were impacted by the fluctuations in raw materials and energy goods. The gradual rise in oil prices in June the average Brent price was $70.3 a barrel indicates rising inflation risks. Throughout the first six months of 2007 the status of the United States remained uncertain. The growth in real terms of the GDP was significantly sluggish in the first half of 2007 due to the negative impact of net exports, reserves and mortgage investments. Vice versa consumption held its ground and was the main support component for growth in the US. Inflation remained quite high exceeding by far the 2% threshold. The most recent data indicates however that there has been a gradual improvement in the prospects for growth and that pressure is slowly starting to lift from prices: the Department of Commerce has informed at first reading that in the second quarter of 2007 the GDP grew by 3.4%, up 0.7% from the first quarter At 30 June 2007 the FED maintained its official reference rate at 5.25%. The Japanese economy continued its constant rise, supported by high export and personal consumption, while inflation remained moderate. During its last meeting in June, the Bank of Japan maintained its reference rates unvaried at 0.50%. Throughout the entire first quarter 2007 the economic activity of most of the emerging countries was vibrant. In particular, China continued to enjoy exponential growth and in June recorded an annual GDP of 11.9%. Industrial output was up by 18.5% during the first half of 2007 led by exports, investments in fixed capital (up 25.9% year on year) and retail sales, which rose by 15.4%. Indian GDP continued to expand (up 9.1% in first quarter 2007 compared with first quarter 2006) with inflation slowing down. Although still solid, the growth of GDP in the EMU area has slowed down as a result of the sharp fall in exports caused by weak US demand and the appreciation of the euro. Expansion in imports has remained substantially unvaried. Corporate investment continues to grow while private spending is still weak. Industrial output has shown signs of increasing and the unemployment rate continues to fall. The first half of 2007 closed with an ECB reference rate of 4%. The Italian economy Against this backdrop, Italy continued to grow in the first six months of 2007, albeit at a slower rate than at the end of The Italian economy was affected by the slowdown of the German economy due to tax hikes at the start of the year and stagnant domestic demand. The rate of industrial output remained steady with respect to seasonally-adjusted figures, while inflation slowed progressively and continued to converge towards the levels of the EMU area. The Italian banking industry The growth rate of loans to personal customers and non finance-sector businesses has been falling since early 2007, with the latter, according to ECB harmonised statistics, recording a 10.9% rise in June 2007 (up 11.5% over December 2006). Loan growth continues to be backed by long-term loans (up 13%) thanks to the significant contribution of home loans to personal customers, which, although lower than in December, in June rose by 9.5% year on year. Furthermore, consumer and long-term credit granted to non-finance sector businesses performed well (up 15% in June 2007). Net non-performing loans from Italian banks increased slightly and were higher year-on-year in April The ratio of net non-performing loans to total loans amounted to 1.18% (1.27% in April 2006). 20 Half-year report on the management of the BPM Group

22 In June 2007, deposits from personal customers and non finance-sector businesses were up by 7.2%, with a sharp rise in sale and repurchase agreements (up 37.9%) and bonds and subordinated loans (up 9.5%), with weaker growth in deposits in current accounts (+3.4% compared to +6.3% at 2006 year-end). In terms of rates, in line with the monetary policy of the ECB, the average rate of loans to personal customers and nonfinance sector businesses rose in June to 5.73%, with a growth of 77 basis points over the previous year, while the average deposit cost applied to customers grew by 62 basis points, amounting to 2.65%. As a result, the Italian banking system recorded an increase in the brokerage spread: the difference between the average rate of loans and the average cost of deposits rose over the previous year by 15 basis points, amounting to 3.07%. Financial and currency markets During the first six months of 2007, the share price list of the principal international markets, irrespective of the negative effect brought about by higher interest rates, maintained the upward trend underway for more than two years thereby benefiting from the consistent positive trend of profits of listed companies. In particular, in the second quarter, the indices of Dow Jones Euro Stoxx (index for the most important companies in the EMU area) and the US Standard & Poor s 500 rose by nearly 6%. June marked the start of growing uncertainties deriving from high oil prices and especially the decline of certain market segments (American mortgages first among them). As a result, international stock indices have grown weaker. The corrections made to the share markets initially in the US spread rapidly impacting in particular financial sector and banking companies at global level and the Asian market. The cash injections made by the FED and ECB contributed to limiting the panic. Returns from sovereign bonds rose in the second quarter throughout the industrialised nations, especially in the EMU area, thus reflecting a positive outlook for the economy. The euro continued to appreciate against the dollar during the first half of 2007 and during the tail end of June reached $1.38 per euro. Asset management The negative trend for mutual funds and open-end investment companies in Italy and abroad continued during the first half of the year. The fund industry produced less than excellent results for another half-year with negative net returns from the beginning of the year of around Euro 20 billion. Assets managed were on a slight rise and benefited once again from positive financial market trends reaching Euro billion. June saw a fall in balanced fund assets and bond fund assets while flexible products (up 54.3%) and equity products (up 7.21%) rose. Hedge funds performed well, with assets up 34.8% and positive returns of Euro 3.3 billion, while Italian fund assets fell by 8.6%, with a negative return of over Euro 30 billion against the positive flows of approximately Euro 7 billion of foreign funds. Half-year report on the management of the BPM Group 21

23 Significant events The following significant events took place during the first half of 2007: acquisition by BPM of an interest in Anima SGR S.p.A.; developments in the bancassurance agreement between Banca Popolare di Milano and Fondiaria SAI Group; conclusion of the asset management agreement between Banca Popolare dell Etruria e del Lazio and Bipiemme Gestioni SGR; the merger by incorporation of Bipiemme Immobili into BPM; amendments to the articles of association and share capital, resolved by the Extraordinary Shareholders Meeting of Banca Popolare di Milano on 15 February 2007; Acquisition by BPM of an interest in Anima SGR S.p.A. In March 2007, the Board of Directors of Banca Popolare di Milano resolved on the cash purchase of 29.9% of the share capital of Anima SGR S.p.A., for a total of approximately Euro 145 million financed entirely by available resources and through: the purchase in July of 23,205,000 shares, equal to 22.1% of the share capital, from Banco di Desio e della Brianza S.p.A. at a price of Euro 4.63 per share, for a total of about Euro 107 million; the purchase, also in July, of 8,190,000 shares, equal to 7.8% of the share capital, from Koinè S.p.A. (a company that includes several managers of Anima SGR S.p.A.), at a price of Euro 4.63 per share, for a total of about Euro 38 million. Furthermore, pursuant to Article 122 of the Consolidated Law on Finance, no shareholders agreements have been entered into between Anima SGR and Banco di Desio e della Brianza S.p.A. or Koinè S.p.A. Anima SGR, a company listed on the MTA since 2005, is the leading operator in Italy in terms of assets managed, as regards independent asset management companies, and is specialised in mutual funds, with a significant presence of its management in the shareholding structure. The company does not have its own distribution network, but makes use of numerous distribution agreements with banks and financial advisor networks. After acquiring the DWS business unit in July, the Company managed approximately Euro 11 billion in assets and in 2006 realised Euro 25.8 million in net profits. The transaction is part of the development strategy of the BPM Group, which focuses on playing an active role in the future of the mutual funds sector, expected to evolve towards increasingly marked separation of production and distribution. The innovative business model of Anima SGR and its corporate structure may be potential catalysts in the process of transformation of the asset management industry and may become a possible point of reference for other operators. For BPM, participating with an important role in this process, together with the shareholders of Anima SGR and its management, safeguarding its independence and market price and supporting the growth strategies of Anima SGR, takes on a strategic value. Developments in the bancassurance agreement between Banca Popolare di Milano and Fondiaria SAI Group Following the agreements concluded in December 2005, Milano Assicurazioni S.p.A., part of the Fondiaria SAI Group, in June 2007, opted to acquire a further 1% of the capital of Bipiemme Vita S.p.A. for 2.2 million, thereby increasing its total stake in the Company to 51%. 22 Half-year report on the management of the BPM Group

24 The move follows the acquisition already made in 2006 (see the Directors Report accompanying the financial statements as at 31 December 2006 under Significant events ) whereby Milano Assicurazioni on the whole acquired 50% of the capital of Bipiemme Vita for a total of 98.4 million. The partnership will allow Bipiemme Vita to benefit from the technical and business know-how of one of the leading insurance providers and thus favour the creation of new policies, while in turn BPM Group will be able to improve its offerings to its distribution network and at the same time achieve greater product penetration with its customers. The conclusion of the asset management agreement between Banca Popolare dell Etruria e del Lazio and Bipiemme Gestioni SGR In June 2007, Bipiemme Gestioni SGR, an asset management company within BPM Group, and Banca Popolare dell Etruria e del Lazio entered into a business partnership agreement whereby: Banca Etruria becomes a part of the shareholding structure of Bipiemme Gestioni SGR with a 5% stake in the share capital and is granted the option to appoint a member of the Board of Directors of Bipiemme Gestioni SGR; Banca Etruria transfers to Bipiemme Gestioni SGR the business unit made up of individual assets managed; BancAssurance Popolari S.p.A (BAP) contributes to Bipiemme Gestioni SGR the power to manage insurance assets; Banca Etruria distributes Bipiemme Gestioni SGR funds. Goodwill, as linked to the sale of the business unit from Banca Etruria to Bipiemme Gestioni SGR, amounted to around Euro 11.1 million against assets for roughly Euro 911 million, of which Euro 520 million pertained to retail customers of assets placed in portfolio management schemes and Euro 391 million to management mandates for institutional clients, including BancAssurance Popolari (BAP), an insurance company controlled by Banca Etruria; the same valuation was made for the 5% stake transferred from Bipiemme Gestioni SGR to Banca Etruria. The agreement aims to increase non-captive assets managed by the SGR of BPM Group, as per the development strategies of the strategy plan, thereby forging high-profile partnerships and reiterating the commitment to promote the highest standards in asset management services. The merger by incorporation of Bipiemme Immobili into BPM In April 2007, the Extraordinary Shareholders Meeting of Bipiemme Immobili approved the plan for the merger by incorporation of said company into Banca Popolare di Milano. A corresponding resolution was submitted for approval to the Shareholders Meeting of BPM, held on 21 April 2007, which, in its extraordinary session, approved the plan for the merger by incorporation, pursuant to article 2505 of the Civil Code, of the subsidiary Bipiemme Immobili S.p.A. into BPM based on the economic and financial positions at 31 December To aid the conclusion of the operation, BPM became sole shareholder of the company in February by purchasing from the subsidiary Banca di Legnano the residual share of 9.11%, equal to 4,578,085 shares, for 22.4 million. The merger by incorporation was concluded in June with tax and accounting effects from 1 January This structure change is in line with the organisational simplifications policies laid down in the strategic plan and will allow sole and direct management of the real estate, thus maximising efficiency and economy in terms of management. The operation is the final step in the rationalisation and appreciation process of the real estate of the Parent Bank and the Group as envisaged in the aforementioned strategic plan and confirmed in the current three-year plan. These plans have enabled the optimisation of functional space reserved to the internal structures or the companies of the Group and in this way have allowed the remaining available property to be upgraded completely. Said property has been recorded Half-year report on the management of the BPM Group 23

25 as income as it has been leased and this has not only greatly enhanced the value of the assets themselves but has also significantly increased the proceeds connected thereto. Amendments to the articles of association and share capital IThe Extraordinary Shareholders Meeting of Banca Popolare di Milano was held on 15 February 2007, with the following Agenda: amendment to article 47 of the articles of association regarding the allocation of profit and subsequent amendment to article 10, paragraph 1; bonus increase in share capital, pursuant to article 2442 of the Italian Civil Code, through an increase in the nominal value of shares from Euro 3.00 (three) to Euro 4.00 (four) and subsequent amendment to articles 8 and 17 of the articles of association. Regarding the two items on the agenda, the Shareholders Meeting of BPM resolved: the amendment to article 47 of the articles of association regarding the allocation of the Parent Bank s profit for the year. The new wording of the foregoing article establishes a new criterion for calculation of the portion of profit reserved for personnel (which was previously equal to 20% of the net profit, after deducting provisions to the legal and statutory reserves). According to this new criterion, personnel is reserved 5% of the Bank s net profit from current operations before taxes (calculated before the amount to be granted to the employees) starting from the financial statements as at 31 December In this way it is possible to tightly link the profitability of the company and the benefits granted to its employees and to determine the dividends to be allocated to independent shareholders as opposed to the amounts given to personnel. The methods used in calculating the quota of profits to be allocated to the Board of Directors (0.25% of the net profit from current operations before taxes) were also changed through the same resolution, whereas the Board of Directors may allocate a maximum of 2% of the previous year s net profit to charity. the bonus increase in share capital, through an increase in the nominal value of shares from Euro 3.00 (three) to Euro 4.00 (four) of 415,034,231 shares issued (with the subsequent amendment to articles 8 and 17 of the articles of association) to be carried out by allocating to share capital the entire amount of revaluation reserves from special revaluation laws, established during transition to the IAS (equal to approximately Euro million) and part of the share premium reserve (equal to approximately Euro million). Therefore, the share capital of the bank at 30 June 2007 was equal to Euro 1,660.1 million. We point out moreover that: **** as already described in the report on the financial statements as at 31 December 2006 in the section Significant events occurred after year-end, in February 2007, Parmalat S.p.A. and BPM settled the dispute regarding the revocatory actions against BPM and Cassa di Risparmio di Alessandria and the compensation action against Banca Akros, both brought by Parmalat, as well as the appeal action against Parmalat s dismissal of liabilities, brought by Banca Akros. in relation to the exclusive negotiations with Banca Popolare dell Emilia Romagna aimed at finalising a merger operation between BPM and BPER the developments of which were made public through specific press releases the Board of Directors of BPM met on 26 June 2007 and with the favourable vote of the majority resolved not to approve the amendments made to the articles of association and therefore, the operation was not concluded. 24 Half-year report on the management of the BPM Group

26 Development strategies Set out below and divided into the different areas of operation are the main results achieved and the most important projects underway within the ambit of activity of BPM Group that have characterised the first quarter of implementation of the new three-year strategic plan of the BPM Group. Commercial banking area During the first quarter, the Company s objective to develop commercial banking activity by acquiring new customers and making the most of the current customer base was achieved through business initiatives, products and promotional activities centred in particular on credit cards and bank insurance. Within the credit card segment, the Cartimpronta, the first credit card issued directly by BMP, was marketed in January The launch went hand in hand with a specific marketing process targeted towards clients with expiring cards and resulted in the placement of roughly 40,000 new cards within the first six months of With the new product customers not only received a card fitted with a microchip, text alert service and innovative insurance coverage, but were also entitled to significantly lower costs and an additional line of credit for small loans. Parallel to the marketing and migration phase, the planning process for new products remains active and includes a BPM loyalty programme whereby customers are rewarded with points for purchasing and using the cards. At the end of the project BPM will be the direct issuer for itself and for the commercial banks of the Group. Within the bank insurance segment, a trade agreement was entered into between BPM and Fondiaria SAI Group for the distribution of non-life policies through the BPM Group network without exclusivity restrictions. In March, the first jointly-developed Group product was marketed within the BPM network. The product is MP5, a modular multiguarantee policy offering five types of guarantees. Distribution was subsequently extended also to the network of Banca di Legnano. Plans are underway to begin marketing products for the automobile segment in the second half of BPM also aims to enrich the overall offering of non-life insurance products and gradually extend the agreements to the entire Group network. BPM also continued taking steps to develop specific emerging market segments such as immigrants, young couples, customers, atypical employees and non-profit organisations, with positive effects on cross-selling. In particular, we recall the positive performance of the Extraordinario product line targeted towards immigrants and supported by a multilingual call centre, the updating of the Linea Valore Soci granting more convenient prices and non-banking benefits to BPM customers, as well as the updating of the website a point of junction between the third sector and potential supporters of the same. Also noteworthy during the first half of 2007 was the growth of direct internet banking channels, which, also due to the new regulations introduced by the Bersani decree, saw strong development in terms of new customers and business. Indeed, as it is now mandatory for VAT code holders to make their tax payments online (through the F24 Form), business has risen (up 15% over 30 June 2006) enabling more than 375,000 payment forms to flow through the internet banking channels thereby shifting business from the physical branch to the internet channel. In organisational terms, the activities linked to the R.A.C.E. (Re-engineering and Commercial Excellence) project, involving the introduction of a new sales model for the retail network with the goal of improving the standard of service and involving a heavy emphasis on customer segmentation and development of management and advisory services are continuing. As the new organisational processes at all the branches have been introduced, the layout of the new branches and those in the process of refurbishment has now begun. Half-year report on the management of the BPM Group 25

27 Lastly, improvements to the customer loyalty and relations process have been achieved through: a specific project called Loyalty, aimed at creating a point system entitling personal current account holders of the bank to choose prizes from a catalogue with the aim of making BPM their bank of choice. The initiative was launched in March and at the end of June counted roughly 70,000 members; two initiatives put forth by the Patti Chiari Consortium. The first, involving branch information for the sale of financial instruments, entailed providing clients with clear and simple information on the features and risks of their investments, while the second initiative, geared towards providing further information on closing accounts and transferring services onto new current accounts, is in the analysis phase preliminary to certification. Corporate banking area For the corporate segment, during the course of the first half of 2007, close attention was paid to the selective growth of loans and the increase in the level of penetration with current customers (so-called share of wallet). Loans grew significantly and exceeded objectives. This growth was backed by special sales campaigns aimed at supporting managers in identifying target customers. The increase in loans occurred in a selective manner and constant attention was placed on the customers risk profile. In terms of the initiatives supporting small and medium-sized enterprises (SMEs), we point out that the commercial banks of the BPM Group and Banca Akros, respectively as sponsors and specialists, have been involved in the ACM initiative (Alternative Capital Market) which is based on simplifying access to risk capital and strengthening the financial structure of Italian SMEs by offering a series of new solutions to SMEs wanting to open their capital to new investors. Investment banking area In this area focus was placed on increasing profitability and maintaining the current low levels of risk by implementing control and risk management systems as well as capital allocation tools. With reference to bond issues, the Parent Bank increased the amount of the EMTN (Euro Medium Term Notes) programme from Euro 4 billion to Euro 8 billion and within the programme made two sizeable public issues: the first in January for Euro 1 billion (variable rate, maturing on 31 January 2014) and the second in March for Euro 1.5 billion (variable rate, maturing on 6 April 2009). The integration process of the financial activity of Cassa di Risparmio di Alessandria at the Parent Bank and Banca Akros has been almost completed and an Asset & Liability Management system has been launched to manage the mismatches of the banking book. 26 Half-year report on the management of the BPM Group

28 Wealth management area In terms of asset management, steps were continued to be taken to improve offerings particularly through the launch of new products and the strengthening of the distribution channels. In addition, still with the view to strengthen direct and third-party distribution channels, during the first half of 2007, distribution and partnership agreements were concluded, including for BPM s acquisition of a stake in Anima SGR S.p.A. and the asset management agreement between Banca Etruria and Bipiemme Gestioni SGR, as already fully illustrated in the significant events section of this half-year report on operations. Corporate center area A series of organisational initiatives have been taken and are currently in the pipeline to render the Group structure more efficient, rationalise back office activities and consolidate action taken to reduce ICT costs. With regard to the steps taken to rationalise and streamline the Group structure, we point out the following projects: the Cassa di Risparmio di Alessandria integration project to be completed by the end of 2007 for the complete operational integration of Cassa di Risparmio di Alessandria into the BPM Group with the adoption of BPM s information system, the standardisation of CRA operational procedures with those of the Parent Bank, alignment of its organisational model and structures, and the full integration of CRA and BPM products and services. During the first half of 2007, operational differences and products were examined so that the necessary technical support systems could be set up, solutions for the migration of the information system were prepared, possible solutions for centralising activities with the Parent Bank were analysed and finally an operational task force was put into place; the Centralisation and rationalisation of the back office project has been designed to improve efficiency and effectiveness of operating procedures by seeking to simplify and reduce the workforce in back office structures; the Multichannel Banca di Legnano project, with the goal of standardising the BdL technological platform with the multi-channel one of BPM, this being a necessary condition for extending to BdL the new services already available to the Parent Bank. During the first six months of 2007, the services were issued to the central offices and territorial areas. The project will be complete with the issue of the CRM service with a consequent centralisation of certain marketing activities with the Parent Bank The consolidation of action to reduce ICT costs are continuing within the IT Transformation project aimed at a structural reduction in costs and streamlining internal processes. More specifically, we point out that the IP Telephony project is continuing in its efforts and seeks to reduce telecommunications costs. The project aims to replace by the end of 2007 all of the telephone systems of all branches and install IP telephones linked to a data network as is the case today for most offices. Also with reference to ICT, we point out the following initiatives supporting sales channels: the conclusion of the Various Collections project, which completes the offer for institutions, with the collection of predetermined amounts (automatic transfers, notified payments, payment slips FRECCIA) and spontaneous payments (municipal property tax) by activating a tax portal with anonymous access targeted to the public for the payment by means of a virtual POS of payment requests; the continuation of the Microcircuit project looks to counter the growing number of counterfeiting and cloning frauds involving credit cards (Europay, Mastercard, Visa) thanks to the introduction of a microchip. An infrastructure to issue credit cards with microchips was realised in 2006, while the microchip migration plan for ATM machines will be completed during the course of Half-year report on the management of the BPM Group 27

29 Among the activities geared towards service continuity are the successful conclusion in May 2007 of the disaster recovery test, a part of the Business Continuity project, as well as the activation of certain projects within the Strategic Security Plan, which will reinforce the protection mechanisms of the information system. The activities linked to the Basel 2 regulation and more generally risk management processes (see the section on risks contained in the notes to the financial statements) have continued. Lastly, we recall below the organisation projects put in place to ensure application of and compliance with EC rules: the Market Abuse project hopes to discourage market and privileged information abuse and instead foster greater responsibility among banks with a view to protect investors and market integrity. Currently in the realisation phase, the project s operational solution will be issued during the second half of 2007; the Market in Financial Instrument Directive (MiFID) project lays down a framework of rules to ensure investor protection, strengthen integrity and market transparency, regulate stock market transactions, and stimulate competition between traditional stock markets and other trading systems. Currently, a preliminary impact analysis is the completion phase and implementation is expected by the end of 2007; the launch of the Sepa project, with the objective of ensuring easy and secure payments in euro within Italy and across borders relying on standard conditions and basic rights and obligations. 28 Half-year report on the management of the BPM Group

30 Distribution structure Distribution network At 30 June 2007, the BPM Group distribution network boasted 741 points of contact with customers, represented by 710 retail branches plus the virtual outlet of the 4 new Large Corporate offices and the 10 new SME units belonging to the Parent Bank s structure, as well as 16 Private Centres of which 14 belonging to Bipiemme Private Banking Sim and 2 to Banca Akros. The number of traditional branches, located throughout 13 regions in Italy, remained the same as at the end of December 2006, holding steady at 710 units up by 7 units compared with the previous year. During the first half of 2007 branches were opened in Rome, Ponte di Nona and Fiumicino (Rm), by BPM and in Loano (Sv) by Cassa di Risparmio di Alessandria, while other branches were closed in Rome - Eur and Rome - Mica, by BPM and in Mornese (Al) by Cassa di Risparmio di Alessandria. As provided for in the three-year plan, additional branches will be opened during the second half of The 10 SME units, which are part of the organisational structure of the Parent Bank (one for each territorial area), are assigned to manage companies with a turnover of up to 50 million, while the 4 Large Corporate offices, also a part of the organisational structure of the Parent Bank, manage companies with a turnover higher than 50 million. The distribution network is completed by the 16 Private Centres, which belong within the structure of Bipiemme Private Banking SIM and Banca Akros, that provide personalised financial and non-financial advisory services Half-year report on the management of the BPM Group 29