Interim financial report

Transcription

1 Interim financial report as at and for the half year ended 30 th June 2018 Translation from the Italian original which remains the definitive version

2 Unione di Banche Italiane Joint Stock Company abbreviated to UBI Banca Head Office and General Management: Piazza Vittorio Veneto 8, Bergamo (Italy) Operating offices: Bergamo, Piazza Vittorio Veneto 8; Brescia, Via Cefalonia 74 Member of the Interbank Deposit Protection Fund and the National Guarantee Fund Tax Code, VAT No. and Bergamo Company Registration No ABI (Italian Banking Association) Register of Banks No Register of Banking Groups No Parent of the Unione di Banche Italiane Banking Group Share capital as at 30 th June 2018: Euro 2,843,177, fully paid up

3 Contents UBI Banca: company officers... 5 UBI Banca Group: main investments as at 30 th June UBI Banca Group: branch network as at 30 th June UBI Banca Group: key figures and performance indicators... 8 The rating TRANSITION TO THE NEW FINANCIAL REPORTING STANDARDS IFRS 9 AND IFRS 15 Introduction IFRS 9 Financial instruments The IFRS 9 transition project The three pillars of IFRS Summary of the impacts of First-Time Adoption as at 1 st January The transition to IFRS 9 in the UBI Banca Group Exemptions applied on First-Time Adoption (FTA) IFRS 15 Revenue from contracts with customers Scope The pillars of IFRS The IFRS 15 transition project The impacts of First-Time Adoption of IFRS 9 and IFRS Reconciliation statements and explanatory notes The main items of the financial statements INTERIM CONSOLIDATED MANAGEMENT REPORT AS AT AND FOR THE PERIOD ENDED 30 TH JUNE 2018 The macroeconomic scenario Significant events in the first half of Implementation of the Business Plan The annual update of the Strategic Non-Performing Loan Plan The Model Change Rationalisation of international presence abroad Resolutions approved by a Shareholders Meeting of UBI Banca Developments in Group Governance New commercial developments for the Chinese joint venture Zhong Ou Asset Management Developments in the regulatory framework The distribution network and market positioning Human resources Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules The consolidated income statement General banking business with customers: funding Total banking funding Direct banking funding Indirect banking funding and assets under management Direct insurance deposits and technical reserves General banking business with customers: lending Loans and advances to customers measured at fair value through profit or loss Loans and advances to customers measured at amortised cost Performance of the loan portfolio Riskiness The interbank market and the liquidity position Financial activities Equity and capital adequacy

4 Information on share capital, the share, dividends paid and earnings per share Information on risks and hedging policies The principal risks and uncertainties for the second half of the year Consolidated companies: the principal figures Transactions with related parties and with connected parties Other information Inspections Tax aspects Outlook for consolidated operations CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED 30 TH JUNE 2018 Mandatory interim consolidated financial statements as at and for the period ended 30 th June Consolidated Balance Sheet Consolidated Income Statement Consolidated statement of comprehensive income Statements of changes in consolidated equity Consolidated Statement of Cash Flows Explanatory notes Accounting policies Basis of preparation Other aspects Information on transfers between portfolios of financial assets Information on fair value Information on Day One Profit/Loss The scope of consolidation Information on the accounts Explanatory tables for the consolidated income statement Explanatory tables for the consolidated balance sheet Assets Liabilities Litigation Segment Reporting Transactions with related parties pursuant to IAS Events occurring after the end of the first half STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND OF THE SENIOR OFFICER RESPONSIBLE FOR PREPARING THE COMPANY ACCOUNTING DOCUMENTS INDEPENDENT AUDITORS REPORT CALENDAR OF CORPORATE EVENTS CONTACTS Key The following abbreviations are used in the tables: - dash (-): when the item does not exist; - not significant (n.s.): when the phenomenon is not significant; - not available (n.a.): when the information is not available; - a cross X : when no amount is to be given for the item (in compliance with Bank of Italy instructions). All figures are given in thousands of euros, unless otherwise stated. 4

5 UBI Banca: company officers Honorary Chairmen Gino Trombi Emilio Zanetti Supervisory Board (appointed by a Shareholders' meeting on 2 nd April 2016) Chairman Senior Deputy Chairman Deputy Chairman Deputy Chairman Andrea Moltrasio Mario Cera Pietro Gussalli Beretta Armando Santus Francesca Bazoli Letizia Bellini Cavalletti Pierpaolo Camadini Ferruccio Dardanello (*) Alessandra Del Boca Giovanni Fiori Patrizia Michela Giangualano Paola Giannotti Lorenzo Renato Guerini Giuseppe Lucchini Sergio Pivato Management Board (appointed by the Supervisory Board on 14 th April 2016) Chairwoman Letizia Maria Brichetto Arnaboldi Moratti Deputy Chairman Flavio Pizzini Chief Executive Officer Victor Massiah (**) Silvia Fidanza Osvaldo Ranica Elvio Sonnino Elisabetta Stegher General Management General Manager Victor Massiah (**) Senior Deputy General Manager Elvio Sonnino Deputy General Manager Frederik Geertman Deputy General Manager Rossella Leidi Senior Officer Responsible in accordance with Art. 154 bis of the Consolidated Finance Law Elisabetta Stegher Independent Auditors DELOITTE & TOUCHE Spa (*) Appointed by an Ordinary Shareholders Meeting held on 7 th April 2017 to fill a vacancy on the Supervisory Board. The Board Member will remain in office until the expiry of the term of office of the original board member replaced and that is until the Shareholders Meeting that will be held after the end of the financial year (**) Appointed Chief Executive Officer and General Manager by the Management Board on 15 th April * * * Reference is made with regard to the Corporate Governance system adopted by UBI Banca and to the roles, responsibilities, composition, functioning and powers of the governing bodies in particular, to the detailed illustration contained in the Report on Corporate Governance and Ownership Structure (in accordance with Art. 123-bis of the Consolidated Finance Law) attached to the 2017 Annual Report and also to the CorporateGgovernance section of the Group s corporate website 5

6 UBI Banca Group: main investments as at 30 th June 2018 UBI Banca Spa BANKS FINANCIAL COMPANIES INSURANCE ASSET MANAGEMENT AND TRUST SERVICES OTHER IW Bank Spa 100% UBI Leasing Spa 100% Aviva Vita Spa 20% UBI Pramerica SGR Spa 65% BPB Immobiliare Srl 100% UBI Factor Spa 100% Lombarda Vita Spa 40% UBI Management Co Sa Luxembourg 100% Kedomus Srl 100% Prestitalia Spa 100% BancAssurance Popolari Spa 89.53% UBI Trustee Sa Luxembourg 100% UBI Sistemi e Servizi SCpA 98.56% (1) BancAssurance Popolari Danni Spa 100% Zhong Ou Asset Management Co. Ltd China 25% UBI Academy SCRL 100% Fully consolidated companies Companies accounted for using the equity method (1) The remaining 1.44% is held by Cargeas Assicurazioni Spa (the former UBI Assicurazioni Spa). The percentages relate to the total interests held (directly or indirectly) by the Group in the entire share/quota capital.

7 UBI Banca Group: branch network as at 30 th June Trentino Alto Adige Lombardy (678) 1 Veneto 27 1 Valle d Aosta Friuli Venezia Giulia Piedmont (161) Emilia Romagna Liguria (36) Marches 244 Umbria Tuscany Abruzzo 2 65 (94) (67) Molise Latium (139) Apulia 86 1 (87) Basilicata 17 1 Sardinia 68 4 Campania (72) Calabria 76 Branches in Italy 1,812 UBI Banca Spa 4 UBI Banca Spa - North West Macro Geographical Area 193 Branches abroad 5 UBI Banca Spa Nizza, Mentone, Antibes (France), Munich (Germany), Madrid (Spain) UBI Banca Spa - Milan and Emilia Romagna Macro Geographical Area UBI Banca Spa - Bergamo and West Lombardy Macro Geographical Area UBI Banca Spa - Brescia and North East Macro Geographical Area UBI Banca Spa - Latium Tuscany Umbria Macro Geographical Area International presences UBI Factor Spa Krakow (Poland) UBI Management Co. Sa Luxembourg Zhong Ou Asset Management Co. Ltd Shanghai (China) UBI Banca Spa - Marches and Abruzzo Macro Geographical Area 309 UBI Banca Spa - South Macro Geographical Area 257 IW Bank Spa 21 UBI Trustee Sa Luxembourg Representative offices Russia (Moscow), Asia (Mumbai, Shanghai, Hong Kong and Dubai), North America (New York), South America (São Paolo) and Africa (Casablanca).

8 UBI Banca Group: key figures and performance indicators IFRS IFRS IFRS IAS 39 ALTERNATIVE PERFORMANCE MEASURES (1) STRUCTURAL INDICATORS Net loans and advances to customers at amortised cost/total assets 72,0% 72,4% 71,8% 72,5% Direct banking funding from customers/total liabilities 74,9% 74,4% 74,6% 74,2% Net loans and advances to customers at amortised cost/direct funding from customers 96,1% 97,2% 96,3% 97,8% Equity (inclusive of profit/loss) /total liabilities 7,1% 7,3% 7,2% 7,8% Assets under management/indirect funding from individual customers 69,7% 68,5% 67,8% Financial leverage ratio (total assets - intangible assets)/(equity inclusive of profit/loss + equity attributable to minority interests - intangible assets) 17,1 16,3 16,7 15,2 PROFIT INDICATORS ROE (net profit)/(equity inclusive of profit/loss) 4,7% 5,1% 7,0% ROTE [net profit/tangible equity (equity inclusive of profit/loss - intangible assets)] 5,8% 6,2% 8,4% ROA (net profit/total assets) 0,33% 0,37% 0,54% The cost:income ratio (operating expenses/operating income) 66,7% 67,4% 67,8% Staff costs/operating income 40,8% 40,6% 41,4% Net impairment losses on loans/net loans to customers at amortised cost (loan loss ratio) 0,57% 0,51% 0,79% Net interest income/operating income 48,8% 47,3% 45,5% Net fee and commission income/operating income 44,0% 44,0% 43,2% Net result on financial activities/operating income 2,8% 3,6% 7,1% RISK INDICATORS Net bad loans/net loans to customers at amortised cost 3,80% 3,82% 3,87% 4,37% Net impairment losses on non-performing loans / gross non-performing loans (coverage for non-performing loans) 51,71% 52,17% 52,06% 45,05% Coverage for bad loans, gross of write-offs of positions subject to bankruptcy proceedings and the relative impairment losses 63,90% 63,77% 63,67% 58,36% Net non-performing loans/net loans and advances to customers at amortised cost 7,82% 8,06% 8,19% 8,84% CAPITAL RATIOS Basel 3 phased-in Tier 1 ratio (Tier 1 capital after filters and deductions/rwas) 11,78% 12,00% 11,56% Common Equity Tier 1 ratio (CET1 capital after filters and deductions/rwas) 11,78% 12,00% 11,56% Total capital ratio (total own funds/rwas) 14,13% 14,47% 14,13% Total own funds (figures in thousands of euro) of which: Tier 1 capital after filters and deductions Risk weighted assets (RWAs) INCOME STATEMENT, BALANCE SHEET FIGURES (in thousands of euro), STRUCTURAL DATA (numbers) Profit for the period/year attributable to the shareholders of the Parent Profit for the period/year attributable to the shareholders of the Parent before the impact of the Business Plan Profit for the period/year attributable to the shareholders of the Parent normalised Operating income Operating expenses ( ) ( ) ( ) Net loans and advances to customers at amortised cost of which: net bad loans net non-performing loans Direct banking funding from customers Indirect funding from customers of which: assets under management Total banking funding from customers Equity attributable to the shareholders of the Parent (inclusive of profit/loss) Intangible assets Total assets Branches in Italy Total staff at the end of the period/year (actual employees in service + workers on agency leasing contracts) Average total staff (2) (actual employees in service + staff on agency leasing contracts) Financial advisors The notes to the table are reported on the following page. 8

9 (1) The indicators have been calculated using the reclassified figures contained in the section Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules in the Interim Consolidated Management Report. The profit indicators for the first six months of 2018 have been calculated by annualising the profit for the period relating to the Parent. The Alternative Performance Measures (APM) reported in this document (in the Interim Consolidated Management Report) take account of the ESMA guidelines issued on 5 th October 2015, which the Consob incorporated in its supervisory practices (Communication No of 3 rd December 2015). Those guidelines became applicable from 3 rd July In this respect, the Management Board approved the new UBI Banca Group guidelines on the identification of nonrecurring items on 18 th August Information on the share has been reported in a specific section of this interim report. (2) Part time employees have been calculated within average total staff according to convention on a 50% basis. The figures as at 31 st December 2017 relate to the UBI Banca Group inclusive of the New Banks that were included in the consolidation from 1 st April 2017, which is to say for a period of nine months only. 9

10 The rating The ratings assigned to the UBI Banca Group by the main international agencies are given below. MOODY'S Long-term Bank Deposits Rating (I) Short-term Bank Deposits Rating (II) Baseline Credit Assessment (BCA) (III) Long-term Issuer Rating (IV) Long-term Counterparty Risk Rating (V) Short-term Counterparty Risk Rating (V) Long-term Counterparty Risk Assessment (VI) Short-term Counterparty Risk Assessment (VI) Outlook (Long-term Bank Deposits Rating) Outlook (Long-term Issuer Rating /Senior unsecured debt) RATINGS ON ISSUES Senior unsecured debt Senior non-preferred debt Subordinated debt Covered Bonds (First Programme residential mortgages) Baa2 Prime-2 ba2 Baa3 Baa2 Prime-2 Baa2(cr) Prime-2(cr) Stable Negative Baa3 Ba3 Ba3 Aa2 (I) The ability to repay long-term deposits (with original maturity of one year or more). (Aaa: best rating C: default) (II) The ability to repay short-term deposits (with original maturity of 13 months or less). (Prime-1: highest quality Not prime: not classifiable within any of the prime categories) (III) The BCA is not a rating but an opinion on the intrinsic financial strength of the bank in the absence of external support (aaa: best rating c: default) (IV) Rating on the ability of the issuer to honour senior debt and bonds (Aaa: best rating C: default) (V) The Counterparty Risk Ratings (CRRs) are opinions of the ability of entities to honour the uncollateralized portion of non-debt counterparty financial liabilities (excluding those generated by a bank performing its essential operating functions) and they also reflect the expected financial losses in the event such liabilities are not honoured. (Aaa: best rating C: default) [P-1): best rating Not prime: not classifiable within any of the prime categories] (VI) The Counterparty Risk (CR) Assessment is not a rating but an opinion on the likelihood of a bank defaulting on payment obligations generated by it performing its essential customer-serving operating functions [Aaa(cr): best rating C (cr): Default] [P-1 (cr): best rating Not Prime (cr): not classifiable within any of the Prime categories] On 14 th May 2018, as part of its periodic review, Moody s confirmed its ratings assigned to UBI Banca and a Stable Outlook on its Long-term Bank Deposits Rating. The confirmation of the ratings and Outlook mentioned above reflects the resilience of the Bank s credit profile notwithstanding challenges resulting from the continuing high level of non-performing loans and modest profit levels. It also reflects the Agency s expectation that the financial fundamentals will show gradual improvements as progress is made with the implementation of the 2020 Business Plan, which was updated after the acquisition of the banks placed in resolution. On the other hand, the change in the Outlook on the Bank s Long-term senior debt indicates a reduction over a time horizon of 12 to 18 months in senior liabilities that may be subject to bail-in as consequence of the amount of retail bonds maturing. On 22 nd June the Agency announced the assignment of new Counterparty Risk Ratings to 18 Italian banks. These are opinions of the ability of entities to honour the uncollateralized portion of non-debt financial liabilities (excluding those generated by a bank performing its essential operating functions) which also reflect the expected financial losses in the event such liabilities are not honoured. The following ratings have been assigned to UBI Banca: a Long-term Counterparty Risk Rating of Baa2 (three notches above the maximum BCA) and a Short-term Counterparty Risk Rating of P-2. Finally, as will be recalled, in view of the new coalition government s programmes, on 25 th May Moody s placed its Italian government ratings (Baa2/P-2/Negative) under review for a possible downgrade in consideration of risks that the tax position of the country will deteriorate and that the structural growth reforms in progress will stall and past reforms (such as the 2011 pension reform) will be repealed. On the following 30 th May the agency placed 12 Italian Banking Groups under review for possible downgrade. This action did not involve the UBI Banca Group. 10

11 S&P GLOBAL RATINGS Long-term Issuer Credit Rating (i) BBB- Short-term Issuer Credit Rating (i) A-3 Long-term Resolution Counterparty Rating (ii) BBB Short-term Resolution Counterparty Rating (ii) A-2 Stand Alone Credit Profile (SACP) (iii) bbb- Outlook (Long-term Issuer Credit Rating) Stable RATINGS ON ISSUES Senior unsecured debt BBB- Senior non-preferred debt BB+ Subordinated debt BB (i) The Issuer Credit Rating reflects the agency s ability to meet its financial commitments. It is based on an assessment of its intrinsic creditworthiness, supplemented by an assessment of the potential extraordinary support (from government or from the group to which it belongs or alternatively from its additional ability to absorb losses) on which the bank could count if it ran into difficulties Short-term: ability to repay short-term debt with a maturity of less than one year (A-1: best rating D: default) Long-term: ability to pay interest and principal on debt with a maturity of longer than one year (AAA: best rating D: default) (ii) The Resolution Counterparty Rating is a forward-looking opinion on the risk of default by certain senior liabilities that may be protected from default within a bail-in process [Long-term AAA: best rating D: default; short-term A-1: best rating D: Default] (iii) The SACP is a rating of the intrinsic creditworthiness of the bank in the absence of external support (from government or from the group to which it belongs). It is calculated on the basis of an Anchor SACP, which summarises economic and industry risk for the Italian banking sector. This is then adjusted to take account of bank-specific factors such as capitalisation and profits, market positioning, exposure to risk and the funding and the liquidity situation, which are also assessed from a comparative viewpoint. When S&P Global Ratings carried out its annual review on 16 th April 2018, it confirmed its ratings for UBI Banca with a Stable Outlook. The confirmation reflects Agency s expectations that the Bank s rating will continue to benefit from its strong franchise (branch network) and its conservative strategy pursued by management. On the following 19 th April, the Agency published its methodology for assigning a new type of rating to those financial institutions (mainly banks) subject, in situations of difficulty, to an effective resolution regime. These are its Long-term Resolution Counterparty Rating (LTRCR) and its Short-term Resolution Counterparty Rating (STRCR), which are forward-looking opinions on the risk of default by certain senior liabilities that may be protected from default within a bail-in process. On 12 th June 2018 S&P assigned these ratings to 31 European Banking Groups, including UBI Banca. The new ratings assigned were BBB for the long-term and A-2 for the shortterm, incorporating an upgrade of one notch on the Issuer Credit Rating. FITCH RATINGS Short-term Issuer Default Rating (1) Long-term Issuer Default Rating (2) Viability Rating (3) F3 BBB- bbb- Support Rating (4) 5 Support Rating Floor (5) Outlook (Long-term Issuer Default Rating) RATINGS ON ISSUES Senior unsecured debt Senior non-preferred debt Subordinated debt NF (No Floor) Negative BBB- BBB- BB+ (1) The ability to repay debt in the short-term (less than 13 months) (F1+: best rating D: default) (2) The ability to promptly meet financial commitments in the long-term, independently of the maturity of individual obligations. This rating is an indicator of the probability that an issuer will default (AAA: best rating D: default) (3) An assessment of a bank s intrinsic strength in the event that it cannot rely on forms of extraordinary external support (aaa: best rating f: default) (4) A rating of the likelihood of possible extraordinary external support (from the state or large shareholders) if the bank runs into difficulty in honouring its senior obligations [1: high probability of external support 5: no reliance may be placed on any possible support (as is the case for European banks subject to the BRRD resolution regime)] (5) This rating gives additional information, closely linked to the Support Rating, in that for each level of the Support Rating it identifies the minimum level which the Issuer Default Rating could reach if negative events were to occur (No Floor for European banks subject to the BRRD resolution regime). When Fitch Ratings carried out its annual review on 2 nd February 2018, it confirmed its ratings for UBI Banca, maintaining a Negative Outlook. The confirmation reflects Agency s expectations that in the medium-term UBI Banca would accelerate its reduction of the stock of non-performing exposures compared with the targets set in its current Business Plan. 11

12 DBRS Long-term Issuer Rating (I) Short-term Issuer Rating (I) Long-term Senior Debt (II) Short-term Debt (II) Long-term Deposits (III) Short-term Deposits (III) Intrinsic Assessment (IV) Support Assessment (V) Long-Term Critical Obligations Rating (VI) Short-Term Critical Obligations Rating (VI) Trend (all ratings) RATINGS ON ISSUES Senior unsecured debt Senior non-preferred debt Subordinated debt Covered Bonds (First Programme residential mortgages) Covered Bonds (Second Programme commercial mortgages) BBB R-2 (high) BBB R-2 (high) BBB R-2 (high) BBB SA3 A (low) R-1 (low) Stable BBB BBB (low) BB (high) AA (low) A (I) The issuer rating is not a rating on issues but on the issuer, because it is an assessment of its creditworthiness. The rating is assigned on a long-term basis using the long-term rating scale and on a short-term basis using the relative scale. In the banking sector, the Issuer Rating represents the final rating on the credit worthiness of a bank which incorporates both the Intrinsic Assessment and possible considerations regarding external support LTIR AAA: best rating D: default STIR R-1 (high): best rating D: default (II) The ability to repay long-term debt (maturing in more than one year), or short-term debt LTSD AAA: best rating D: default STD R-1 (high): best rating D: default (III) The ability to repay long-term deposits (maturing in more than one year) and short-term deposits. LTD (AAA: highest credit quality C: very highly speculative) STD R-1 (high): best rating D: default (IV) The Intrinsic Assessment (IA) is a rating of the intrinsic financial strength of a bank in the absence of external support. It assesses a bank s intrinsic fundamentals in five areas: commercial network, earnings capacity, liquidity and funding, risk profile and capitalisation AAA: best rating CCC: worst rating (V) External support assessment (Group to which it belongs or government) in case of need. [SA1: internal support from the group to which it belongs; SA2: external support (government); SA3: no external support SA4: potential support to the group to which it belongs] (VI) The Critical Obligations Rating (COR) is a rating on default risks intrinsic to some classes of obligations/exposures considered critical that have a higher probability of being excluded from bail-in (such as those resulting from derivatives, payment services, covered bond issues, etc.) LTCOR AAA: best rating D: default STCOR R-1 (high): best rating D: default *** On 23 rd March 2018 S&P Global Ratings, Fitch Ratings and DBRS and, on 26 th March, Moody s assigned a rating to the new debt category senior non-preferred, as part of the types of issuances planned under the Group s EMTN Programme. As reported in the Interim Consolidated Management Report which may be consulted, the first issuance of the new instruments was concluded by UBI Banca on 5 th April. 12

13 TRANSITION TO THE NEW FINANCIAL REPORTING STANDARDS IFRS 9 AND IFRS 15

14 Introduction The IFRS 9 accounting standard Financial Instruments replaces the provisions of IAS 39 Financial Instruments: Recognition and Measurement as from 1 st January The process to replace IAS 39 was initiated by the IASB mainly in order to respond to concerns that arose during the financial crisis concerning the timeliness with which the impairment of financial assets is recognised. IFRS 9 was published by the IASB on 24 th July 2014 and its endorsement by the EU took place with the publication in the Official Journal of the European Union 1 of Regulation (EU) No. 2016/2067 of 22 nd November Accounting standard IFRS 15, Revenue from Contracts with Customers has superseded, effective from 1 st January 2018, standards IAS 18 Revenue and IAS 11 Construction Contracts, as well as interpretations IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC 31 Revenue - Barter Transactions Involving Advertising Services. IFRS 15 was published by the IASB on 28 th May 2014 and its endorsement by the EU took place with the publication in the Official Journal of the European Union 2 of Regulation (EU) No. 2016/1905 of 22 nd September The interim financial report for the period ended 31 st March 2018 therefore constituted the first accounting period prepared with the application of IFRS 9 and IFRS 15 accounting rules. This half-year financial report which has been prepared in accordance with IAS 34 Interim financial reporting reproduces the information first reported on the transition to the aforementioned standards in the quarterly financial report in question. The present report has been prepared with a view to progressively completing this information and provides a greater degree of detail and granularity than that which has already been published for the period ended 31 st March This information has been prepared to allow an adequate understanding of the process of the transition from the international reporting standards IAS 39 Financial instruments: recognition and measurement and IAS 18 Revenue Income, which were applied until 31 st December 2017 to the international reporting standard IFRS 9 Financial instruments and the international reporting standard IFRS 15 Revenues from contracts with customers respectively. It is composed of a summary overview of the most important aspects of the new standards, together with a description of the transition process in the UBI Banca Group and information on first time adoption of IFRS 9 and IFRS 15 in terms of qualitative and quantitative impacts. The reconciliation schedules and the relative explanatory notes have been subject to a voluntary accounting audit by the independent auditors Deloitte & Touche Spa. To complete the information, we underline that in accordance with an express provision of Legislative Decree No. 38/2005, at national level, having maintained its powers to define accounting statements and schedules and the contents of the notes of financial statements, on 22 nd December 2017 the Bank of Italy issued the 5 th update of Circular No. 262/05 Financial statements of banks, presentations and compilations 3. 1 Which took place on 29 th November Which took place on 29 th October The update, which consists of a full revision of the circular, is applicable to financial statements ending as at 31 st December 2018 or still open on that date. 14

15 1 IFRS 9 Financial instruments 1.1 The IFRS 9 transition project In view of the first time adoption of this new accounting standard IFRS 9, in the second half of 2015 the UBI Banca Group started a project, now concluded, which required considerable effort in terms of interpretation, application, administration, organisation and management on the basis of which a thorough knowledge of the provisions of the accounting standard was acquired. Given the importance of the changes required for IFRS 9, the Group took part in projects which were carried out by the Italian Banking Association. These projects were subject to a special Thematic Review, initiated by the ECB through the relative Joint Supervisory Team with the objective of assessing the proper oversight and direction of the thematic projects, in view of their complexity. The review was concluded on 31 st March 2017 and highlighted adequate involvement of the management in the implementation project and also room for improvement in the formalisation of the methodological and implementation choices, an aspect to which the Group paid careful attention as it continued with its own projects and in particular with regard to the formulation of company regulations. As already reported, the project, described in detail in previous financial reports, covered three main lines of activity, summarised below. a. Assessment Stage The Assessment stage commenced in the second half of 2015 and was concluded in the first half of The main aims of this stage were to: - identify the regulatory and accounting changes and, consequently, decide the preliminary accounting approaches for the necessary aspects; - identify the preliminary impacts in terms of business, risk models, organisation and IT systems; - define the criteria for the recognition and transfer of financial instruments and for loans in particular, among the three stages laid down by IFRS 9 on the basis of credit quality, with consequent different estimates of the respective carrying amounts (twelve month expected credit loss vs. lifetime expected credit loss). b. Design Stage The Design stage, which was carried out throughout 2016, involved performing the following activities: - detailed definition of accounting policies; - preparation of risk models; - definition of technical specifications for IT systems and processes; - management of regulatory updates and specifications requested by regulators; - definition of detailed specifications in organisational terms. c. Implementation Stage According to the architecture of the project, the final stage was the Implementation which began in 2017 and was concluded in the first quarter of Its aim was to execute the actions identified and defined during the previous stages. That stage was designed to carry out the following: - share the analysis and results that emerged from the Design stage with all operational units involved; - implement the choices and interpretations of the standard made during the Assessment and Design stages into company processes and procedures; - establish detailed accounting policies in accordance with the evidence that emerged and with the regulatory clarifications provided by the Supervisory Authorities; - carry out activities for the implementation of the First-Time Adoption (FTA) of the standard in question. 15

16 1.2 The three pillars of IFRS 9 IFRS 9 contains the following three main pillars: - Classification and measurement: the accounting categories provided for under IAS 39, relating to financial assets have been replaced by new categories in which financial assets are classified and measured on the basis of the business model employed for their management and also of their objective characteristics. Categories pursuant to IAS 39 Categories pursuant to IFRS 9 Fair Value Through Profit and Loss (FVTPL) Fair Value Through Profit and Loss (FVTPL) Available For Sale (AFS) Fair Value Other Comprehensive Income (FVOCI) Held To Maturity (HTM) Amortised Cost (AC) Loans and Receivables (L&R) - Impairment: the loss estimated model incurred loss has been replaced by a model based on the Expected Credit Loss (ECL). This represents a significant change and also the fundamental rationale behind the issuance of the new accounting standard. - Hedge Accounting: the general framework of IAS 39 has been replaced with a new framework where the objective is to provide a better view of the risk management policies adopted by management in financial reports. The benefits of this change are expected to be particularly useful for non-financial institutions. 1.3 Summary of the impacts of First-Time Adoption as at 1 st January 2018 Shareholders equity: the impact of the introduction of the new standard on equity (shareholders of the Parent and minorities) as at 1 st January 2018 amounted to million 4, net of tax, of which: million relating to the increase in provisions as result of the new impairment rules; million relating to the application of the new classification and measurement rules; million relating to the new modification accounting rules million relating to the tax impact. (figures in millions of euro) Shareholders equity pursuant to IAS 39 Classification and measurement Modification Impairment (ECL) Tax impact pursuant to IFRS 9 10, ,218.1 CET1 ratio: the UBI Banca Group has decided to opt for the transition rules pursuant to EU Regulation 2017/2395, which seeks to mitigate the impact of the introduction of IFRS 9 on own funds, especially with regard to higher provisions for estimated credit losses, including therefore a portion of these in the Common Equity Tier 1 (CET1) capital for the five-year transitional period. In the first five years since the introduction of IFRS 9, the transition rules progressively reduce the entire effect on the CET1 ratio by 95%, 85%, 70%, 50% and 25%. The introduction of IFRS 9 led to a slight increase in the phased-in CET1 ratio by a total of four basis points. The impact of the new rules governing classification and measurement which were positive by 39 basis points was offset by the negative impact of the rules governing modification accounting and impairment for a total of 35 basis points. 4 In this respect we report that, as mentioned in a press release dated 9 th February 2018, the pre-tax impact on Shareholders equity had previously been estimated at approximately 930 million. 16

17 CET1 ratio Transitional arrangement pursuant to IAS 39 Classification and measurement Modification Impairment (ECL) Tax impact pursuant to IFRS % +39 bp -29 bp -6 bp -0.5 bp 11.60% It is underlined that the IFRS 9 phased-in ratio as at 1 st January 2018 does not include the effects of the model change, authorised by the European Central Bank on 21 st March 2018 and used for regulatory reporting dated as at 31 st March The section entitled Shareholders equity and capital adequacy in this report may be consulted for further details. Expected Credit Loss: the increase recognised in provisions resulting from the transition as at 1 st January 2018, reported in the table below, is attributable to the new rules governing impairment of on- and off-balance sheet exposures to banking and ordinary customer counterparties. (figures in millions of euro) Impairment pursuant to IAS 39 Derecognition of provisions pursuant to IAS 39 Stages 1 and 2 Stage ECL pursuant to IFRS 9 4, , The transition to IFRS 9 in the UBI Banca Group Application choices This sub-section describes the application choices made by the Group on First-Time Adoption together with a brief prior consideration of the provisions of the new accounting standard in the Group context. Quantification of the impacts of First-Time Adoption of IFRS 9 was carried out on the basis of the findings of the project activity and the application of decisions made by the Group of which detailed information is provided below Classification and measurement Financial assets IFRS 9 lays down the following criteria for the classification of financial assets 5 : a) the Business Model adopted by the Bank to manage financial assets; b) the characteristics of the contractual cash flows from the financial assets. a) The Business Models pursuant to IFRS 9 The UBI Group has defined its Business Models by analysing and surveying the different ways in which financial instruments are managed in order to generate cash flows, thereby substantially confirming the portfolio management strategies conducted under IAS 39 rules. Given the strategic importance of Business Models pursuant to IFRS 9, the Group analysed its portfolios of financial instruments (debt instruments, equity instruments, loans and receivables and shares in funds) existing as at 31 st December 2017 and it formulated a special Policy for the definition of these. In compliance with the provisions of the Group s Risk Appetite Framework and consistent with the bank s approach to staff remuneration, the portfolio management strategy determined their association with the Business Models described below. 5 Financial assets are classified in their entirety, and therefore those that contain embedded derivatives are not subject to bifurcation rules. 17

18 Hold to Collect (HTC) The objective of this Business Model is to hold assets with the objective of collecting contractual cash flows over the life of the instrument. Given the management strategy underlying the HTC Business Model, sales of portfolios associated with it must be appropriately assessed. According to the standard the following may nevertheless be deemed consistent with the HTC Business Model: - sales of determined assets due to an increase in the credit risk for those assets; - infrequent sales (even if the value is significant) or sales of insignificant value, both individually and in aggregate (even if frequent); - sales made close to the maturity date of the financial assets and when the proceeds from the sales approximate the collection of the remaining contractual cash flows. The Group has formulated criteria in a special internal Regulation, with specific reference to the significance of the sales, for considering sales carried out for reasons not explicitly specified by the standard as admissible, which is to say sales of financial instruments made close maturity, or due to a deterioration in related credit risk or in order to meet an unforeseen need for liquidity. The UBI Banca Group has associated the HTC Business Model to the following: debt instruments, which in view of the size of the banking book as planned under the Business Plan and the characteristics of the instruments themselves (e.g. in terms of residual life), may be subject to the management approach applied under this Business Model; almost all the portfolios of loans to customers and to banks considering that the UBI Banca Group conducts mainly conventional banking business and holds a portfolio of loans originated in order to finance households, individuals and companies in their business activities. Hold to Collect and Sell (HTC&S) The objective of the HTC&S Business Model is pursued both by the collection of the contractual cash flows and by the sale of the financial assets. By definition therefore the Business Model involves a number of sales, of greater significance and frequency than for the HTC Business Model, without nevertheless setting frequency or significance limits for them. The UBI Banca Group has associated the HTC&S Business Model to the following: debt instruments that may be subject to the management approaches of that Business Model such as for example portfolios of instruments held: - to manage current liquidity requirements; - to maintain a particular level of return; syndicated loans yet to be disbursed that the Group intends to sell to third parties and for which the relative loan approval decisions entail such a Business Model. Others (FVTPL) An entity adopts this Business Model when decisions are taken on the basis of the fair values of the financial assets and it manages them in order to realise these (typically by means of active buying and selling) or in any event when the objective of the Business Model cannot be classified among those described above (HTC&S and HTC). The sales associated with this Business Model are normally more frequent and more significant than for the HTC&S Business Model. The UBI Banca Group has associated the Business Model Others to the following: financial instruments held for trading; shares of investment funds, both open-ended or closed-ended, because the Group manages these assets with a view to realising increases in the assets fair values; equity instruments, in view of the characteristics of these instruments. 18

19 As concerns the measurement of equity instruments assigned to the Business Model Others, the Group has decided to opt for the OCI election, which is to say to measure equity instruments at fair value with recognition through other comprehensive income (i.e. in equity 6 ) for instruments held in the shareholdings portfolio which constitute long-term strategic equity investments 7, because it considers that this method of measurement is deemed most appropriate to reflect the aims and reasons for which the equity instruments have been subscribed. b) The objective characteristics of the financial assets The provisions of IFRS 9 state that only financial instruments the contractual terms of which give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding may be classified as financial assets measured at amortised cost or in other words as financial assets measured at fair value through Other Comprehensive Income. In order to ascertain whether financial instruments meet the aforementioned characteristics, they must be tested by using the Solely Payments of Principal and Interest Test (SPPI test) 8, as well as the Benchmark Test 9 in the presence of clauses involving the Modified Time Value of Money. Solely Payments of Principal and Interest (SPPI test) Steps were taken on first-time adoption to analyse the portfolios of debt and credit instruments existing as at 31 st December 2017 by taking a differentiated approach for the following aggregations identified: - for standard credit products, typically marketed through the distribution network, the test was carried out on the basis of uniform types of product and the terms and conditions that are applied; - for non-standard products, generally customised on the basis of specific borrower requirements, the test was normally carried out on the basis of a significant sample of selected transactions representative of specific products subject to analysis; - for debt instruments, the test was carried out on the basis of special clusters identified for instruments with same characteristics. To complete the information we report that the UBI Group envisages carrying out this test when the standard is fully phased in as follows: - for standard products, typically marketed through the distribution network, the test will be carried out in the product companies, with the result automatically displayed at the time of each single grant; - for non-standard products, generally customised on the basis of specific borrower requirements, the test is carried out for each single transaction; - for debt securities, the test is carried out for each single credit agreement. This division is also useful for identifying the most efficient solutions in terms of organisation and application. The tests are conducted by using lending tools, (structured questionnaires with a decision-making tree ), which on the basis of the answers given provides output on the possibility of measuring a financial asset held using an HTC approach at amortised cost or measuring a financial asset held using an HTC&S approach at FV through OCI. 6 The exercise of that option involves measurement at fair value of the financial instruments and subsequent recognition through other comprehensive income, with no recognition through profit or loss (neither for the recognition of impairment, nor for recognition of the result of the sale), unless it is for dividends paid on the shareholdings. 7 In addition to a limited number of equity instruments not acquired through conversions of loans. 8 That test, which is qualitative in nature and designed to verify whether a financial instrument involves payments consisting solely of principal and interest, is used in preparation for the classification of loans and receivables and debt instruments within the accounting category amortised cost and FVOCI. In other words, if the test result is negative, then the financial instrument is classified under the fair value through profit or loss category. 9 This quantitative test is an integral part of the SPPI whenever the financial instrument shows characteristics of the modified time value of money, that is, where there is an imperfect relationships between the reference interest rate (e.g. Euribor 3M) and the actual passage of time (e.g. monthly repayments). In this case, the goal of the test is to determine whether there is a significant difference in cash flow as compared to the cash flows of a benchmark instrument that does not involve a modified time value of money. If the test result is negative, then the financial instrument is classified under the fair value through profit or loss category. 19

20 With regard to the Benchmark Test, for all financial assets with contract clauses requiring such verification, it is carried out using essentially automatic methods, by building a grid that accounts for results in each possible case of inconsistency or mismatch between the contractual interest rate and the payment period. This grid is subject to periodic updates and can be consulted when the loan is disbursed. We report that only an extremely limited portion of debt and credit instruments did not pass the Solely Payments of Principal and Interest Test (SPPI test) on the basis of their objective characteristics and were therefore classified within assets at fair value through profit or loss. Financial assets are classified and measured as shown below on the basis of the business model and the objective characteristics mentioned above. Balance sheet items Pursuant to Bank of Italy Circ. No. 262/2005 Category Subjective/objective characteristics Type of financial instrument 20. Financial assets measured at fair value through profit or loss a) Financial assets held for trading b) Financial assets designated as at fair value c) Other financial assets mandatorily measured at fair value Financial assets measured at FVTPL" Financial assets are classified and measured according to that criterion, which - are managed for trading purposes; - by measuring them at fair value allows accounting mismatches to be eliminated; - while they are associated with HTC and HTC&S Business Models, the cash flows do NOT solely consist of payments of principal and interest; - they are managed with a view to increases in their fair value. All types of financial instrument may be recognised within this category. 30. Financial assets measured at fair value through other comprehensive income Financial assets measured at FVOCI" This category is for the classification of: a) debt securities and loans: - associated with the HTC&S Business Model; and - the contractual cash flows of which consist solely of payments of principal and interest. b) equity instruments for which an OCI election option has been taken. Debt instruments (securities and loans) and equity instruments may be recognised within this category. 40. Financial assets measured at amortised cost d) Loans and advances to banks e) Loans and advances to customers Financial assets measured at amortised cost Financial assets are classified and measured according to that criterion: - associated with the HTC Business Model; and - for which the contractual cash flows consist solely of the payment of principal and interest, held in order to receive the contractual cash flows. Only debt instruments (securities and loans) may be recognised within this category. Financial liabilities As concerns financial liabilities, the provisions of IAS 39 have been reproduced almost entirely in IFRS 9. The standard allows entities to opt (in continuity with IAS 39), if determined conditions are met, to measure financial liabilities on the basis of the fair value through profit or loss criterion (i.e. the fair value option ), but nevertheless recognising changes in the fair value of financial liabilities due to changes in the credit rating of the issuer through other comprehensive income and no longer through profit or loss, unless the accounting treatment would create or enlarge an accounting mismatch in profit or loss. In the latter case the changes in question would be recognised through profit or loss. 20

21 In this respect, the UBI Banca Group s insurance companies have all fair value changes in these same assets, connected in operational terms with the liabilities to which the fair value option applies, recognised through profit or loss and they also recognise changes in fair value related to credit ratings through profit or loss. Derivative financial instruments Lastly, to complete the information, we report that IFRS 9 does not have any impact on the classification of derivative financial instruments, which in line with IAS 39 accounting, continue to be measured at fair value through profit or loss 10. Modification As already reported, IFRS 9 rules continue in line with the provisions of IAS 39 with regard to derecognition. However, the new standard requires the accounting treatment summarised in the table below with regard to modifications to the contractual cash flows of financial assets. Renegotiation/modification of the contractual terms and conditions SUBSTANTIAL modification NON-SUBSTANTIAL modification Accounting treatment The entity must derecognise the financial instrument that has been modified and recognise a new financial asset on the basis of the new contractual terms and conditions. If the modification is not deemed substantial and does not therefore result in derecognition of the instrument, the entity shall calculate the present value of the renegotiated or modified cash flows 11 of the financial asset and recognise the difference between that value and the gross book value prior to the modification through profit or loss. The practice adopted by the UBI Banca Group regarding the interpretation of the term substantial is shown in the table below. Nature of the contractual modification Modification for counterparties in financial difficulty 12 Modification of a commercial nature 13 Quantitatively or quantitatively substantial The meaning given to the term substantial is essentially qualitative, because its objective is to maximise the recovery of the original exposure. The meaning given to the term substantial is both qualitative and quantitative because normally, and also on the basis of current Italian legislation (the Bersani Law) applicable to mortgage loans to individuals, the modification frequently regards revisions made to the interest rates in order to bring them into line with the current market rate. With specific regard to the quantitative aspect of the term, the UBI Banca Group assesses the magnitude of the contract modifications on the basis of percentage changes in the present value of the cash flows of the financial instrument before and after the modification Impairment The IFRS 9 impairment model, which has a forward-looking vision, requires immediate recognition of credit losses even if they are only forecast as opposed to IAS 39, according to which the measurement of credit losses is based solely on those resulting from past events and current conditions. Unlike in IAS 39, IFRS 9 contains a single impairment model that must be applied to all financial assets measured at amortised cost and to those measured at fair value through Other Comprehensive Income 14 (i.e. in equity) as well as to financial guarantees and loan commitments. 10 An exception is made for the measurement of derivatives used as cash flow hedges. 11 These cash flows must be discounted at the original effective interest rate of the financial asset. 12 The reference is to forbearance measures, both for performing or non-performing counterparties. 13 In other words, situations where the counterparty is not in financial difficulty 14 Except for equity instruments for which the entity decides to opt for the OCI election. 21

22 The most discretionary aspects of the standard identified during the project activities, relate to how to calculate the impairment of financial instruments (loans and receivables and debt instruments) classified and measured at amortised cost or as at fair value through other comprehensive income, relate to the following: - the stage allocation of financial instruments following the determination of a significant increase in credit risk; and - incorporation of forward-looking scenarios in the definition of both stage allocation and the expected credit loss (ECL) 15. Stage Allocation For financial assets that are not impaired at the time they are purchased (or originated), in accordance with IFRS 9 impairment rules, they are divided into three stages and the recognition of credit losses is determined on the basis of the stage to which they are assigned as summarised in the table below. Stage Stage 1 Stage 2 Performing/Non-performing Performing financial assets for which no significant increase in credit risk has been recorded since initial recognition for which the credit risk is considered low. Performing financial assets for which a significant increase in credit risk has been recorded since initial recognition. Calculation of the expected loss amount In proportion to the amount of the expected credit losses over the next 12 months (expected losses resulting from default events on the financial asset that are considered possible within 12 months of the reporting period). In proportion to the amount of the expected credit losses over the lifetime of the instrument (expected losses resulting from default events on financial assets considered possible over the lifetime of the financial asset). Stage 3 Non-performing financial assets. In proportion to the amount of the expected credit losses over the lifetime of the instrument (expected losses resulting from default events on financial assets considered possible over the lifetime of the financial asset). Given the above, we specify that the Group s stage allocation model, based on a case-by-case or tranche approach, in the case of debt securities (see the information given below), involves both qualitative and quantitative criteria in order to measure a significant increase in credit risk between the date of initial recognition of the financial instrument and the measurement date. More specifically, moving a financial instrument from stage 1 to stage 2 is caused by one of the following: - the counterparty becomes past due by more than 30 days, with a significance threshold; - a forbearance measure has been agreed; - lifetime probability of default (PD) changes with respect to a threshold value, specific for each transaction, calculated on the basis of the significant risk characteristics. 15 The standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring as the weights. Expected losses must be estimated by considering possible scenarios and therefore by considering the best available information on past events, current conditions and supportable forecasts of future events (known as a forward looking approach ). 22

23 More specifically, with regard to the quantitative indicator (change in lifetime PD), a significant increase in credit risk is normally determined by comparing the change in lifetime PD recorded between the date of initial recognition of an individual transaction, or tranche if it is a debt instrument, and that of the observation, with threshold values specific to each transaction which consider the relevant risk characteristics. The attribution of a lifetime PD to single transactions is carried out on the basis of the segment and rating class assigned to the debtor, or issuer of debt securities, both at the date of initial recognition and that of the observation. The PDs used to measure SICR are the same as those used to calculate expected credit losses, which include forecasts of future macroeconomic factors by applying special satellite models (see the information reported below). The relative changes in lifetime PD described above represent the quantitative indicators of changes in credit risk encountered in the reporting period. Special thresholds are defined as follows in order to establish whether an increase is considered significant and therefore requires allocation to a different stage: if the relative change in lifetime PD observed on a position is below the significance threshold, then the increase in credit risk is deemed not significant and the position is classified in stage 1 with measurement of the expected credit loss over the next 12 months; if the relative change in lifetime PD observed on a position is above the significance threshold, then the increase in credit risk is deemed significant and the position is classified in stage 2 with measurement of the expected credit loss over the lifetime of the instrument. That threshold is determined by using statistical models based on an analysis of the distribution of lifetime changes in PD in the portfolio. The calibration of the threshold is set at a level for which the significant increase in credit risk is set at least equal to the level of the long-term deterioration of the portfolio, which is observed by means of historical migration tables of the ratings. The thresholds are differentiated by counterparty segment and type of exposure and they are determined by the relevant risk characteristics: the risk of default for a financial instrument at initial recognition; the time the instrument has been in the portfolio; the remaining term of the instrument. Furthermore, the Group has decided to: - rebut the presumption according to which a position at least 30 days past due should automatically be classified in stage 2, though only with respect to loans relating to certain business areas; - exercise, both on first-time adoption and once fully operative, the low credit risk exemption 16 on the sovereign bond portfolio only, considering the characteristics of those securities in the portfolio; - use the first in, first out (FIFO) method to compare the tranche s original credit rating to its rating on the reporting date for each single tranche of debt securities acquired. For the purpose of allocating exposures to the various stages on first-time adoption of the accounting standard, performing exposures are classified in stages 1 and 2, whereas nonperforming exposures are allocated to stage 3. For the latter, we specify that the UBI Banca Group has adopted the definition provided in Bank of Italy Circular No. 262/2005, according to which non-performing exposures are the sum of all exposures considered non-performing: past due, unlikely to pay or bad, as defined under supervisory regulations in force. 16 In other words, instruments that as at the FTA date had a low credit risk, identified by an investment grade credit rating, were classified in stage 1. Thereafter, if those securities lose their investment grade rating, they are transferred to another stage only in the event of a significant increase in credit risk since the initial recognition date. 23

24 Estimating the expected credit loss (ECL) and incorporating forward-looking scenarios Stages 1 and 2 As concerns the model for the calculation of expected credit losses for the measurement of expected losses on instruments classified in stages 1 and 2, specific adjustments have been made to the estimated risk parameters for regulatory purposes in order to ensure full consistency, net of the different regulatory provisions, between the accounting and the regulatory treatments. The main adjustments developed are designed to: - introduce point-in-time components estimated using a through-the-cycle approach 17 in accordance with regulatory provisions; - introduce forward-looking scenarios; - extend credit risk parameters to cover a long-term horizon. With particular reference to the accounting standard s guidance to incorporate forward-looking scenarios, including macroeconomic scenarios, in expected loss estimates, the UBI Banca Group has decided to include these, as well as geo-sectoral trend forecasts (in sectors where the counterparty does business), in its internal models, which are already available, having been developed for stress tests on credit risk and adjusted as needed to make them compatible with the rules of the new standard. In compliance with IFRS 9, for which estimates of ECLs must be the result of a series of the probability-weighted possible forward-looking scenarios, these models consider the use of most likely scenarios combined with best and worst scenarios, each of which is assigned a percentage likelihood. These scenarios are consistent with those assumed for budget and capital allocation purposes. In order to draw up macroeconomic scenarios that include projections of national and international, macroeconomic and financial indicators, the UBI Banca Group uses an Integrated Forecast Model, which generates forecasts developed over a five-year time horizon that are updated periodically. The model is used to construct a baseline scenario (most likely) which is normally based exclusively on the output of its own equations. Following this, both a benchmarking analysis is carried out, which takes its benchmarks from major international institutions (e.g. IMF, ECB and OECD), and checks are made for the presence of external factors, such as international and monetary policies, exogenous to the model and which usually can neither be predicted nor analysed using statistical models, but which can nevertheless have a non-negligible impact on forecasts. As concerns the main variables (e.g. Italian GDP, Italian inflation, the Italian unemployment rate, residential and other domestic real estate prices, the euro-to-dollar exchange rate, the 3- month Euribor, the yield on 10-year BTPs), alternative (add-on) scenarios are constructed using special calculation software. These best and worst scenarios are constructed using statistical simulation techniques and then two extreme scenarios with the equal probabilities of occurring are selected. Use is also made of external scenarios which incorporate given assumptions or simulate the impact of shocks. Thresholds for the acceptability of the estimates are normally calculated for all variables contained in the model on the basis of five-year forecasts provided by a benchmark from at least two specialist international institutions. If the value generated by the model is beyond the threshold of acceptability then it is replaced by the benchmark value. Stage 3 With specific reference to the inclusion of forward-looking aspects in expected credit loss estimates, we note that for bad loans, the case-by-case measurement rules for these positions, carried out using a gone concern approach, include forward-looking elements for estimating the percentage impairment of real estate pledged as collateral (as estimated using up-to-date appraisals or based on the report of a court-appointed expert), along with, for the adoption of IFRS 9, the introduction of specific alternative exposure recovery scenarios, considering that the Group intends to sell, within a reasonable timeframe, a certain amount of its bad loans to 17 On the basis of that approach cyclical factors are removed from the estimate of risk parameters, by using the long-term component for the credit ratings of debtors independently of the state of the economy at the time of the measurement. On the other hand, a point-in-time approach produces risk parameters sensitive to short-term macroeconomic changes in the business cycle. 24

25 third parties, both in order to maximise cash flows and to pursue a specific non-performing loan management strategy. Consequently, the ECL estimates reflect not only the expected recovery amount through ordinary credit management activity, but also a sale scenario and therefore cash flows resulting from that transaction. The wish to include sale scenarios in the IFRS 9 impairment model is seen partly in the company s historically observed exposure recovery strategy, but mainly in its future plans, consistent with the UBI Banca Group s NPL Strategy submitted to the supervisory authority in April Purchased or Originated Credit Impaired ( POCI ) In accordance with IFRS 9 Purchased or Originated Credit Impaired assets (POCI) are defined as exposures that are non-performing at the purchase or origination date 18. IFRS 9 states the following with regard to these exposures: - the estimate of the expected credit loss should always be calculated on the basis of the lifetime expected loss of the financial instrument 19 ; - the interest recognised should be calculated by applying the credit adjusted effective interest rate, which is the interest rate which at the time of initial recognition discounts estimated future cash flows at amortised cost of the asset, with account taken in the estimate also of expected credit losses. The UBI Banca Group has classified the credit exposures acquired as part of the business combination operation pursuant to IFRS 3 relating to the former New Banks, in compliance, amongst other things, with the provisions of Bank of Italy Circular No. 262/ Hedge accounting IFRS 9 contains provisions relating to what is termed the General Hedge Accounting Model designed to better reflect risk management policies pursued by management in its financial reporting. To give examples, but not limited to these, the standard therefore broadens the range of risks for which hedge accounting may be applied to non-financial items. It eliminates the compulsory quantitative effectiveness test, it no longer requires retroactive assessment of the effectiveness of a hedge and it no longer allows hedge accounting to be voluntarily revoked once it has been designated. While more flexibility is introduced, the new standard requires even more detailed disclosure on risk management activities by management. The standard does not consider the accounting treatment for the collective hedging of loan portfolios, termed macro hedges. In this respect, in April 2014 the IASB published the discussion paper Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging which, in line with the dynamic procedures for the management of interest rate risk adopted by banks, sets out a possible accounting approach (a portfolio revaluation approach ) designed to better reflect the dynamic management of risk by management in the financial statements of an entity. Following the observations received during the consultation stage, in July 2015 the IASB decided to assign the macro hedging project to the relative research programme and it postponed publication of the Exposure Draft until after a further discussion paper had been prepared. As a consequence of this, pending completion of the accounting standard in relation to macro hedging, IFRS 9 allows those preparing financial statements to continue to apply IAS 39 rules governing hedging policies. 18 These exposures are not identified by any specific balance sheet item, but are classified on the basis of the business model with which they are managed along the same lines as other financial assets. 19 Therefore there is no possibility of these exposures transferring to 12-month expected credit losses should there be a significant improvement in the credit risk of the exposure. 25

26 With specific regard to new guidance on general hedge accounting, the UBI Banca Group, pending completion by the IASB of new macro hedging rules, has decided to take the opt-out option, that is, it has elected to continue applying IAS 39 (carve out) rules 20. On this basis and also that of the new IFRS 9 classification rules, which no longer contain a held-to-maturity investment (HTM) category, the Group has proceeded to apply hedge accounting treatment to government securities previously classified within HTM assets, which under IAS 39 classification rules could not be hedged for interest-rate risk. 1.5 Exemptions applied on First-Time Adoption (FTA) Subject Hedge accounting Comparative financial statements Adoption of IFRS 9 by the insurance companies Exemptions/options applied by the UBI Banca Group The UBI Banca Group has decided to take the opt-out option allowed by IFRS 9, and that is the option to continue to apply IAS 39 rules. The Group may continue to confirm that option until the entry into force of the macro hedging accounting standard. As of that future date the Group will mandatorily apply the IFRS 9 general hedge accounting rules. On First-Time Adoption, IFRS 9 does not mandatorily require the restatement of comparative figures relating to prior periods on a consistent basis. As a consequence, the UBI Banca Group has not taken steps to prepare these. In this respect, in the 5 th update of Bank of Italy Circular 262/2005 Banking financial statements: presentations and compilation rules, the supervisory authority has clearly stated that banks that do not produce consistent comparative figures must include a reconciliation statement in the first financial statements that they prepare on the basis of the aforementioned update, which shows the methodology used and provides a reconciliation between the figures of the last financial statements approved and the first financial statements prepared on the basis of the new rules. The form and content of that statement are also to be decided at the discretion of the competent governing bodies. In this respect, reference is made to the Reconciliation statements contained in the subsequent point 3.1 of this section. Because the Group does not constitute a financial conglomerate 21 in accordance with IFRS 4 Insurance contracts rules, the insurance companies that are subsidiaries of the Parent, UBI Banca, and which are therefore consolidated on a line-by-line basis, have not opted to apply an overlay approach in the preparation of their financial statements. That optional method allows the amount needed for the income statement result at the end of the year to be the same as it would have been had the company applied the provisions of IAS 39 in place of IFRS 9 to be reclassified from the income statement to the statement of OCI 22. As concerns the associate insurance companies, the UBI Banca takes advantage of the temporary exemption under IAS 28 provisions which allows the use of uniform accounting standards when the equity method is used. On this basis the figures for the companies in question are still determined according to IAS 39 rules. 20 Relating to IAS 39 rules on macro hedging. 21 In accordance with Art. 2 of Directive 2002/87/EC, a group or sub-group of a group constitutes a financial conglomerate when it satisfies the following conditions: a) a regulated entity is at the head of the group or at least one of the subsidiaries in the group is a regulated entity; b) where there is a regulated entity at the head of the group, this is either a parent undertaking of another entity in the financial sector, an entity which holds a participation in another entity in the financial sector, or an entity linked with an entity in the financial sector by a relationship which involves management on a unified basis pursuant to a contract concluded with that undertaking or provisions in the articles of association or in which the administrative, management or supervisory bodies consist for the major part of the same persons; c) where there is no regulated entity at the head of the group, the group's activities mainly occur in the financial sector; d) at least one of the entities in the group is within the insurance sector and at least one is within the banking or investment services sector; e) the consolidated and/or aggregated activities of the entities in the group within the insurance sector and the consolidated and/or aggregated activities of the entities within the banking and investment services sector are both significant; 22 I.e. in equity. 26

27 2 IFRS 15 Revenue from contracts with customers The accounting standard IFRS 15 Revenue from contracts with customers sets out the rules for the recognition of revenue resulting from contractual obligations towards customers. IFRS 15 shall only be applied if the counterparty is a customer. Customers are parties that have stipulated a contract with an entity in order to obtain goods or services in exchange for consideration as a result of the ordinary activities of the entity. 2.1 Scope An entity shall apply IFRS 15 to all contracts with customers, except the following: - lease contracts within the scope of IAS 17 Leases ; - insurance contracts within the scope of IFRS 4 Insurance contracts ; - financial instruments and other contractual rights or obligations within the scope of: IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures ; and - non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. 2.2 The pillars of IFRS 15 The new accounting standard requires revenues to be recognised by adopting an approach based on the following five steps: 1) identification of contracts with the customer: a contract is an agreement between two or more parties that creates enforceable rights and obligations. Contracts can be written, oral or implied by an entity's customary business practices. 2) identification of the performance obligations present in the contract: a single contract may contain a promise to deliver more than one good or service. At the time when the details of the contract are recognised, the entity estimates the goods or services explicitly or implicitly promised in the contract and identifies, as a performance obligation, each commitment to transfer a given good or service; 3) determination of the transaction price: the price is the amount expected to be received in return for the transfer of goods or services to a customer. The price set may be a fixed amount, include variable consideration or non-cash consideration. With regard to variable consideration, the standard introduces potential estimation procedures for determining the total transaction price; 4) allocation of the transaction price to the performance obligations: this allocation takes place in cases where a contract includes more than one performance obligation and the price must be allocated to each obligation on the basis of the stand-alone selling price for each single good or service stipulated in the contract. The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers; 5) recognition of revenue in the financial statements when an entity satisfies the performance obligations: revenue is only recognised when the customer obtains control over the good or service transferred. The amount of the revenue to be recognised is that allocated to the performance obligation which has been satisfied at a point in time or over time. Where performance obligations are satisfied over time, the entity recognises the revenue over the relative period of time using an appropriate method for measuring the progress made with respect to complete satisfaction of the obligation. 27

28 2.3 The IFRS 15 transition project The UBI Banca Group implemented a special project to analyse the provisions of the standard in question and also the main types of revenue generated by contracts with customers in order to identify the impacts of the introduction of IFRS 15. Consistent with the choices made regarding IFRS 9, the Group opted to recognise the possible impacts of the application of the standard retrospectively. The revenue analysed was that generated by contracts with customers recognised within the item Fee and commission income (with particular reference to asset management and payment card business and services provided in relation to current accounts) and the item Other operating income. This analysis found that the accounting treatment for these items was already compliant with the provisions of the new standard and as a consequence no impacts on Group equity were found following the introduction of IFRS 15. The only impacts identified following the introduction of the new standard were on the disclosures to be made in the financial statements relating to the aforementioned revenues. The impact analysis focused on the following matters: - recognition of placement commissions for asset management business: in view of the existence of a separate performance obligation carried out on behalf of the fund and remunerated by means of that type of commission, and considering that the placement activity ends at a point in time, it was considered that amounts for placement commissions could be recognised in the income statement at a point in time, in compliance with standards in use prior to the application of the standard; - consideration regarding current account and payment card activities and the treatment of the relative performance obligations: the analysis carried out confirmed that the current procedures for recognising these revenues are compliant with the provisions of IFRS 15. Separate information will be provided in the notes to the financial statements on single products or services which make up the various packages and stand-alone prices allocated to them solely for the purposes of satisfying the disclosure requirements set by the standard. 3 The impacts of First-Time Adoption of IFRS 9 and IFRS 15 The date of First-Time Adoption of IFRS 9 is 1 st January Consequently, the impacts of that standard on Shareholders equity will appear as at that date, because IAS 8, Accounting policies, changes in accounting estimates and errors, states that the impacts of the transition to a new standard should be recognised in separate reserves in equity. That provision is essentially designed to reconstruct the effects that would have occurred in the balance sheet if the provisions of the new standards had been applied continuously. In this respect, because the First-Time Adoption of IFRS 15 has had no impacts for the UBI Banca Group on Shareholders equity, the matters described in point 3.1 relate solely to the impacts of the first-time adoption of IFRS 9. 28

29 Having stated the above, in order to illustrate how the transition from IAS 39 rules to the new IFRS 9 standard affects the capital and financial position (also in accordance with the provisions of IFRS 7 Financial instruments: disclosures ), this section of this half-year financial report contains the following statements: - restated statement of balance sheet items as at 31 st December 2017 (pursuant to IAS 39) reclassified into the new balance sheet items (pursuant to IFRS 9) required under the 5 th update of Bank of Italy Circular No. 262/2005. On the basis of the amounts recognised under IAS 39 this statement will show the reclassifications made under IFRS 9 on the basis of the business models associated with the financial instruments and also of their objective characteristics 23 ; - reconciliation between balance sheet items as at 31 st December 2017 (pursuant to IAS 39) and the balance sheet items as at 1 st January 2018 (pursuant to IFRS9). This statement will show the impacts on balance sheet items resulting from the provisions of IFRS 9 regarding measurement and impairment. Similarly to the statement mentioned above, this reconciliation also divides financial instruments on the basis of the class to which they belong; - reconciliation between equity as at 31 st December 2017 (pursuant to IAS 39) and equity as at 1 st January 2018 (pursuant to IFRS 9). That reconciliation provides details of the impacts of First-Time Adoption of IFRS 9 on the book equity of the UBI Banca Group. 3.1 Reconciliation statements and explanatory notes Restated statement of balance sheet items as at 31 st December 2017 (pursuant to IAS 39) reclassified into the new balance sheet items (pursuant to IFRS 9) required under the 5 th update of Bank of Italy Circular No. 262/2005 This statement reconciles items in the assets and liabilities sections of the balance sheet published in the consolidated financial statements as at and for the period ended 31 st December 2017, with the items introduced by the 5 th update of Bank of Italy Circular No. 262/2005. It represents the results of the application of the provisions of the IFRS 9 financial reporting standard, in terms of the classification of financial instruments. The amounts for the assets and liabilities in the balance sheet, calculated by applying the measurement rules of IAS 39 are then restated in the new items in accordance with the business model defined by the UBI Group in accordance with the financial reporting standard IFRS 9. The results of the SPPI test, which constitutes an integral part of the classification process, are considered in that restatement. 23 As opposed to the information provided in the interim financial report for the period ended 31 st March 2018, this statement divides financial instruments on the basis of the class to which they belong: the class attribute has been reported in terms of the composition by type of the financial assets and liabilities. 29

30 Restated statement of balance sheet items as at 31 st December 2017 (pursuant to IAS 39) reclassified into the new balance sheet items (pursuant to IFRS 9) required under the 5 th update of Bank of Italy Circular No. 262/2005 Figures in thousands of euro Circular No 262/2005 5th update ASSETS Circular No. 262/2005 4th update ASSETS IAS Cash and cash equivalents 20. Financial assets measured at fair value through profit or loss a) financial assets held for trading b) financial assets designated as at fair value c) other financial assets mandatorily measured at fair value 30. Financial assets measured at fair value through other comprehensive income 40. Financial assets measured at amortised cost a) loans to banks b) loans to customers 50. Hedging derivatives 60. Fair value change in hedged financial assets (+/-) 70. Equity investments 80. Technical reserves of reinsurers 90. Property, plant and equipment 100. Intangible assets 110. Tax assets a) current b) deferred 120. Noncurrent assets and disposal groups held for sale 130. Other assets 10. Cash and cash equivalents 811, , Financial assets held for trading 924, ,153 37,322 Debt securities 482, ,256 33,793 Equity securities 17,784 17,784 - Shares of UCITS 3,529-3,529 Derivative instruments 421, , Financial assets designated at fair value 92,290 11,271 81,019 Debt securities 11,271 11,271 - Equity securities 9,592-9,592 Shares of UCITS 71,427-71, Available-for-sale financial assets 9,861, ,641 7,429,504 1,847,833 Debt securities 9,311,396 92,570 7,370,993 1,847,833 Equity securities 291, ,937 58,511 - Shares of UCITS 259, , Held-to-maturity investments 5,937,872 4,940, ,760 Debt securities 5,937,872 4,940, , Loans and advances to banks 7,836,002 14,870 7,821,132 Loans to central banks 5,799,045-5,799,045 Loans to banks: 2,036,957 14,870 2,022,087 Financing 2,036,746 14,870 2,021,876 Debt securities Loans and advances to customers 92,338, ,933 91,982,150 Financing: 92,331, ,676 91,976,748 Performing 84,171, ,855 83,947,080 Non-performing 8,159, ,821 8,029,668 Debt securities: 6,659 1,257 5,402 Performing 5, ,402 Non-performing 1,254 1, Hedging derivatives 169, , Fair value change in hedged financial assets (+/-) -2,035-2, Equity investments 243, , Technical reserves of reinsurers Property, plant and equipment 1,811,743 1,811, Intangible assets 1,728,328 1,728, Tax assets 4,170,387 1,497,551 2,672,836 a) current 1,497,551 1,497,551 b) deferred 2,672,836 2,672,836 Non-current assets and disposal groups held for 150. sale Other assets 1,451,059 1,451,059 Total assets 127,376, , ,153 11,271 1,073,785 12,369,616 7,821,132 94,827, ,907-2, , ,811,743 1,728,328 1,497,551 2,672, ,451,059 30

31 Restated statement of balance sheet items as at 31 st December 2017 (pursuant to IAS 39) reclassified into the new balance sheet items (pursuant to IFRS 9) required under the 5 th update of Bank of Italy Circular No. 262/2005 Circular No.262/2005 5th update LIABILITIES Figures in thousands of euro Circular No. 262/2005 4th update LIABILITIES IAS Financial liabilities measured at amortised cost a) due to banks b) due to customers c) debt securities issued 20. Financial liabilities held for trading 30. Financial liabilities designated as at fair value 40. Hedging derivatives 60. Tax liabilities a) current b) deferred 80. Other liabilities 90. Provision for postemployment benefits 100. Provisions for risks and charges a) commitments and guarantees granted b) pension and similar obligations c) other provisions for risks and charges 110. Technical reserves 120. Valuation reserves 150. Reserves 160. Share premiums 170. Share capital 180. Treasury shares (-) 190. Minority interests (+/-) 200. Profit (loss) for the year (+/-) 10. Due to banks 16,733,006 16,733,006 Due to central banks 12,428,723 12,428,723 Due to banks 4,304,283 4,304, Due to customers 68,434,827 68,434,827 Current accounts and deposits 64,258,153 64,258,153 Term deposits 2,364,594 2,364,594 Financing 513, ,627 Other payables 1,298,453 1,298, Debt securities issued 26,014,943 26,014,943 Bonds 24,865,262 24,865,262 Other certificates 1,149,681 1,149, Financial liabilities held for trading 411, ,653 Derivative instruments 411, , Financial liabilities measured at fair value 43,021 43,021 Due to customers 43,021 43, Hedging derivatives 100, , Tax liabilities 223,397 68, ,832 a) current 68,565 68,565 - b) deferred 154, , Other liabilities 2,742,088 2,694,744 47, Provision for post-employment benefits 350, , Provisions for risks and charges 536, , ,052 a) pension and similar obligations 137, ,213 - b) other provisions 399, , Technical reserves 1,780,701 1,780, Valuation reserves -114,820-54,901-59, Reserves 3,209,460 3,209, Share premiums 3,306,627 3,306, Share capital 2,843,177 2,843, Treasury shares (-) -9,818-9, Minority interests (+/-) 79,688 79, Profit for the year (+/-) 690, ,557 Total liabilities and equity 127,376,141 16,733,006 68,434,827 26,014, ,653 43, ,590 68, ,832 2,694, ,779 47, , ,052 1,780,701-54,901 3,149,541 3,306,627 2,843,177-9,818 79, ,557 31

32 Item 20. Financial assets measured at fair value through profit or loss contains the following: - financial instruments held for trading purposes, recognised under the sub item a) financial assets held for trading (already present under IAS 39); - financial assets for which IFRS 9 allows a fair value option 24 recognised under sub-item b) financial assets designated as at fair value (already present under IAS 39); - financial assets, that are not financial assets held for trading, assigned to the business model Others and for which the objective contractual cash flow characteristics do not allow them to pass the Solely Payment of Principal and Interest test ( SPPI test), recognised under sub item c) other financial assets mandatorily measured at fair value. It is underlined that, since there has been no change in the management strategy for them, the financial instruments previously classified within Financial assets held for trading amounting to million have been entirely classified within the item 20. Financial assets measured at fair value through profit or loss a) financial assets held for trading. Furthermore, debt securities, held as part of insurance business, previously classified within the item Financial assets designated at fair value amounting to 11.3 million have been recognised within item 20. Financial assets measured at fair value through profit or loss b) financial assets designated as at fair value. At the First-Time Adoption stage the following were reclassified into the new item 20. Financial assets measured at fair value through profit or loss c) other financial assets mandatorily measured at fair value : million relating to debt instruments, equity instruments and UCITS shares for which there was no longer any intention to trade them; million relating to UCITS shares and equity instruments held for merchant banking and private equity purposes previously classified within Financial assets designated at fair value which no longer met the requirements for the exercise of the fair value option (FVO) 25 ; million relating to debt securities, equity securities and loans and receivables, to be mandatorily measured at fair value because they failed to pass the SPPI test or because the Group decided not to make an OCI election. Item 30. Financial assets measured at fair value through other comprehensive income contains the following: - financial instruments associated with the Hold to Collect and Sell Business Model for which the SPPI test has been passed; - equity instruments for which an OCI election has been made to present changes in the fair value in other comprehensive income 26. IFRS 9 establishes that financial instruments 27 measured at fair value through other comprehensive income are subject to the provisions that govern impairment. On First-Time Adoption, 4,940.1 million relating to debt instruments previously classified within Held-to-maturity investments was reclassified within Financial assets measured at fair value through other comprehensive income. Item 40. Financial assets measured at amortised cost contains financial assets associated with the Hold to Collect Business Model the contractual terms of which give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 24 A financial asset can only be designated as at fair value through profit or loss on initial recognition when that designation eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ), which otherwise would result in the measurement of assets or liabilities or recognition of profit or loss on a different basis. 25 In compliance with IFRS 9, the fair value option may only be used in order to reduce or eliminate an accounting mismatch. 26 In fact in compliance with the provisions of IFRS 9, an entity may make an irrevocable election at initial recognition for particular investments in equity instruments that would otherwise be measured at fair value through profit or loss to present subsequent changes in fair value in other comprehensive income. 27 Debt or credit instruments. 32

33 On First-Time Adoption, 1,847.8 million relating to debt instruments previously classified within Available-for-sale financial assets was reclassified within Financial assets measured at amortised cost. The liability item 100. Provisions for risks and charges a) commitments and guarantees granted contains reclassifications made on the basis of provisions relating to expected losses on financial guarantees and loan commitments amounting to 47.3 million. Reconciliation between balance sheet items as at 31 st December 2017 (pursuant to IAS 39) and the balance sheet items as at 1 st January 2018 (pursuant to IFRS 9). This statement shows the impact of the adoption of IFRS 9 on individual asset and liability items in the balance sheet according to the 5 th update of Bank of Italy Circular No. 262/2005 in terms of measurement and impairment and it also reports the tax impacts. More precisely: the column Measurement shows changes in value for individual balance sheet items arising from a different measurement criterion. This column also includes impacts relating to modifications made to the original contractual clauses of the financial instruments that are considered substantial ; the column Impairment shows changes in value for individual balance sheet items arising from the adoption of the new impairment model introduced by the reporting standard IFRS 9; the column FTA tax impacts shows the tax impacts of first-time adoption of IFRS 9, calculated according to procedures illustrated later in this document. The column IFRS 9 shows the new amounts for assets, liabilities and equity items for each balance sheet item resulting from the transition to IFRS 9, consisting of the algebraic sum of the amounts stated in the previous columns mentioned above. In compliance with IAS 8 Accounting policies, changes in accounting estimates and errors, the impacts of first-time adoption of the new accounting standard are recognised in equity. More specifically, the item 120. Valuation reserves mainly contains the impacts resulting from: - the recognition at fair value of debt instruments previously classified within HTM investments and which are therefore measured at amortised cost; - the reconstitution of the amount for the amortised cost of securities previously classified within AFS financial assets, reclassified on first-time adoption within assets measured at amortised cost, by means of the elimination of the previous AFS reserve. All other effects arising from the introduction of IFRS 9 are recognised within the item 150. Reserves. 33

34 Reconciliation between balance sheet items as at 31 st December 2017 (pursuant to IAS 39) and the balance sheet items as at 1 st January 2018 (pursuant to IFRS 9). Circular No 262/2005 5th update ASSETS IAS 39 Measurement Impairment Figures in thousands of euro FTA tax impacts IFRS Cash and cash equivalents 811, , Financial assets measured at fair value through profit or loss 1,972,209 7,593 1,979,802 a) financial assets held for trading 887, ,153 Debt securities 448, ,256 Equity securities 17,784 17,784 Shares of UCITS - - Financing - - Derivative instruments 421, ,113 b) financial assets designated as at fair value 11,271 11,271 Debt securities 11,271 11,271 Financing - - c) other financial assets mandatorily measured at fair value 1,073,785 7,593 1,081,378 Debt securities 127, ,579 Equity securities 242, ,529 Shares of UCITS 334, ,090 Financing 369,546 7, , Financial assets measured at fair value through other comprehensive income 12,369,616 65,691 12,435,307 Debt securities 12,311,105 65,448 12,376,553 Equity securities 58, ,754 Financing Financial assets measured at amortised cost 102,648,875-3, , ,833,189 a) loans to banks 7,821,132-6,110 7,815,022 Loans to central banks 5,799,045-5,799,045 Loans to banks: 2,022,087-6,110 2,015,977 Financing 2,021,876-6,106 2,015,770 Debt securities b) loans to customers 94,827,743-3, ,341 94,018,167 Financing: 91,976, , ,795 90,980,959 Stages one and two 83,947, , ,833 83,533,165 Stage three 8,029,668-10, ,962 7,447,794 Debt securities: 2,850, ,759-2,546 3,037,208 Stages one and two 2,850, ,759-2,546 3,037,208 Stage three Hedging derivatives 169, , Fair value change in hedged financial assets (+/-) -2,035-2, Equity investments 243, , Technical reserves of reinsurers Property, plant and equipment 1,811,743 1,811, Intangible assets 1,728,328 1,728, Tax assets 4,170,387 14,137 4,184,524 a) current 1,497,551 80,000 1,577,551 b) deferred 2,672,836-65,863 2,606, Non-current assets and disposal groups held for sale Other assets 1,451,059 1,451,059 Total assets 127,376,141 70, ,451 14, ,647,876 34

35 Circular No.262/2005 5th update LIABILITIES IAS 39 Measurement Impairment Figures in thousands of euro FTA tax impacts IFRS Financial liabilities measured at amortised cost 111,182, ,182,776 a) due to banks 16,733,006 16,733,006 Due to central banks 12,428,723 12,428,723 Due to banks 4,304,283 4,304,283 b) due to customers 68,434,827 68,434,827 Current accounts and deposits 64,258,153 64,258,153 Term deposits 2,364,594 2,364,594 Financing 513, ,627 Amounts due for commitments to repurchase own equity instruments - - Other payables 1,298,453 1,298,453 c) debt securities issued 26,014,943 26,014,943 Bonds 24,865,262 24,865,262 Other certificates 1,149,681 1,149, Financial liabilities held for trading 411, ,653 Due to banks - - Due to customers - - Debt securities - - Derivative instruments 411, , Financial liabilities designated as at fair value 43,021 43,021 Due to banks - - Due to customers 43,021 43,021 Debt securities Hedging derivatives 100, , Tax liabilities 223,397 17, ,908 a) current 68, ,647 b) deferred 154,832 17, , Other liabilities 2,694,744 2,694, Provision for post-employment benefits 350, , Provisions for risks and charges 583,609 41, ,612 a) commitments and guarantees granted 47,344 41,003 88,347 b) pension and similar obligations 137, ,213 c) other provisions for risks and charges 399, , Technical reserves 1,780,701 1,780, Valuation reserves -54,901 25,478 13,593-18,914-34, Reserves 3,149,541 44, ,047 15,540 2,342, Share premiums 3,306,627 3,306, Share capital 2,843,177 2,843, Treasury shares (-) -9,818-9, Minority interests (+/-) 79,688 79, Profit for the year (+/-) 690, ,557 Total liabilities and equity 127,376,141 70, ,451 14, ,647,876 Details of the impacts reported in the statement are given below: 1) Measurement. The total impact, amounting to + 70 million, was composed as follows: million due to the measurement of financial instruments: million due to the measurement at fair value of financial instruments reclassified within Financial assets measured at fair through profit or loss previously measured at amortised cost; million due to the measurement at fair value of debt instruments classified within Financial assets measured at fair value through other comprehensive income previously measured at amortised cost because they were classified within the item Held-to-maturity investments ; million due to the measurement at amortised cost of debt instruments classified within Financial assets measured at amortised cost previously measured at fair value because they were classified within the item Available-for-sale financial assets ; million due to the new modification accounting rules. 2) Impairment. The total impact, amounting to million, was composed as follows: million due to Financial assets measured at amortised cost of which: million due to greater impairment losses on performing positions classified according to the rules within stage 1 and stage 2; 35

36 million due to greater impairment losses on performing positions classified according to the rules within stage 3; - 41 million due to guarantees and commitments of which: million due to greater impairment losses on performing positions classified according to the rules within stage 1 and stage 2; million due to greater impairment losses on performing positions classified according to the rules within stage 3. Reference is made for greater details to the relative sub-section with specific reference to the reconciliation between impairment provisions (pursuant to IAS 39) as at 31 st December 2017 and impairment provisions (pursuant to IFRS 9) as at 1 st January ) FTA tax impacts. The tax impact of first-time adoption of IFRS 9, which was negative by 3.4 million, was the result of the following: the realignment of deferred tax assets and liabilities as a result of the impacts resulting from the attribution of the business models pursuant to IFRS 9 which involved the original IAS 39 portfolios ( Available-for-sale financial assets and Held-to-maturity investments in particular), amounting to million and million respectively, with a total negative impact of million on Shareholders equity; the recognition of current tax assets based on the deductible impacts of First-Time Adoption (on the basis of the provisions of the IFRS 9 Tax Decree) up to the amount of estimated consolidated taxable income for the year ending 31 st December 2018 and with account taken of the results of the probability test defined by the Group s accounting policies. That amount was calculated by a downwards adjustment to pre-tax consolidated profit for 2018 for the following impacts: a. the estimated profits of Group companies that do not form part of the tax consolidation which have not recognised first-time adoption impacts; b. deferred tax assets (not qualified) net of deferred tax liabilities, recognised in the balance sheet as at 31 st December 2017 for that part which it is considered will reverse during 2018; c. components of expected income, that are immaterial for tax purposes, such as for example dividends, profits of companies consolidated with the equity method and the results of the insurance companies. The estimated amount is + 80 million with a consequent positive impact on book equity by the same amount. As a result of the information reported above, the estimated tax impact of First-Time Adoption for 2018 is expected to be substantially zero. No further deferred tax assets were recognised on the basis of the negative difference resulting from the calculations illustrated in the second point 2018 estimated consolidated taxable income and of the deductible impacts of First-Time Adoption, because the probability test defined by the Group s accounting policies allows recognition of tax assets up to the amount of estimated taxable income over a limited time horizon. It is also underlined that the recognition of deferred tax assets not posted on first-time adoption has no time limits and therefore the relative positive tax impact will be recognised, if the conditions set by IAS 12 and by the Group s accounting policies are met, from time to time consistent with future observable taxable income over a defined time horizon. Reconciliation between equity as at 31 st December 2017 (pursuant to IAS 39) and equity as at 1 st January 2018 (pursuant to IFRS 9). This statement summarises the impacts on equity as a consequence of First-Time Adoption of the accounting standards IFRS 9, which totalled million, net of tax. Consolidated equity as at 1 st January 2018 (pursuant to IFRS 9) amounted to 9,218.1 million, down on equity as at 31st December 2017 (pursuant to IAS 39) amounting to 10,004.9 million. 36

37 In detail, the impact relating to measurement and impairment before tax (reported separately) is reported separately for each balance sheet item affected. Figures in thousands of euro Impact of transition to IFRS 9 Equity attributable to the shareholders of the Parent as at 31st December 2017 pursuant to IAS 39 10,004,871 - of which attributable to the shareholders of the Parent 9,925,183 - of which minority interests 79,688 Net impact 20. Financial assets measured at fair value through profit or loss 7,593 Measurement Measurement at fair value of the financial instruments measured at amortised cost pursuant to IAS 39 7, Financial assets measured at fair value through other comprehensive income 65,691 Measurement Measurement at fair value of the financial instruments measured at amortised cost pursuant to IAS 39 65,691 40, Financial assets measured at amortised cost -815,686 Measurement Measurement at amortised cost of the financial instruments measured at fair value through equity pursuant to IAS ,759 Modification accounting -191,994 Impairment Stage 1 and Stage 2-241,489 Stage 3-570,962 Financial guarantees and commitments -41,003 Impairment Stage 1 and Stage 2-20,111 Stage 3-20,892 Impacts on equity -783,405 Impacts on minority interests - Tax impact on FTA -3,374 Total transition impacts -786,779 Equity attributable to the shareholders of the Parent as at 1st January 2018 pursuant to IFRS 9 9,218,092 - of which attributable to the shareholders of the Parent 9,138,404 - of which minority interests 79,688 Reconciliations between impairment provisions (pursuant to IAS 39) and provisions for guarantees and commitments (pursuant to IAS 37) as at 31 st December 2017 and ECLs (pursuant to IFRS 9) as at 1 st January 2018 These reconciliations show the impacts of the application of IFRS 9 on the determination of estimated expected credit losses relating to: - Financial assets measured at fair value through other comprehensive income ; - Financial assets measured at amortised cost ; and - Financial guarantees and loan commitments. The impacts in question are divided by allocation stage, gross amounts and the relative provisions for impairment. 37

38 Figures in thousands of euro Items Gross exposure IAS 39 Reclassifications and FTA adjustments IFRS 9 Impairment losses Net exposure Coverage Reclassifications Reclassifications value adjustments FTA value adjustments (gross) FTA value adjustments (provisions) Gross exposure Impairment losses Net exposure Coverage - Bad loans 7,343,564 3,307,950 4,035, % -1, , ,717 7,340,234 3,821,113 3,519, % - Unlikely-to-pay loans 5,141,450 1,172,769 3,968, % -223,134-95,755-8,242 52,012 4,910,074 1,129,026 3,781, % - Past-due loans 165,736 10, , % -1, , ,304 15, , % Non-performing exposures (stage three) 12,650,750 4,491,261 8,159, % -226,226-96,405-10, ,962 12,413,612 4,965,818 7,447, % Performing loans (stages one and two) 84,582, ,023 84,171, % -226,367-1, , ,833 84,175, ,344 83,533, % of which: stage 1 70,753, ,137 70,549,558 of which: stage 2 13,421, ,207 12,983,607 Other financial assets 6,659-6, % 2,844, ,759 2,546 3,039,754 2,546 3,037, % of which former L&R 6,659-6,659-1,257 5 of which former AFS 1,847,833 1,650 of which former HTM 997, Loans and advances to customers 97,240,367 4,902,284 92,338, % 2,391,743-97,917-3, ,341 99,628,875 5,610,708 94,018, % Loans and advances to banks 7,835,791-7,835, % -14,870 6,106 7,820,921 6,106 7,814, % of which: stage 1 6,769,446 1,586 6,767,860 of which: stage 2 1,051,475 4,520 1,046,955 Securities (L&R-Banks) % % Loans and advances to banks 7,836,002-7,836, % -14,870 6,110 7,821,132 6,110 7,815, % Financial assets measured at fair value through profit or loss - Mandatorily measured at fair value 1,171,702 97,917 7,593 1,081,378 of which non-performing loans to customers 226,226 96, ,226 96, ,821 of which performing loans to customers 226,367 1,512 7, ,604 of which loans to banks 14, ,755 of which securities (former L&R) 1, ,216 of which former HFT 37,322 37,322 of which former FVO 81,019 81,019 of which former AFS 584, ,641 Other financial assets 16,816,615-16,816,615-3,548,575 65,691 13,333,731 13,333,731 Financial assets held for trading 924, ,475-37, , ,153 Financial assets designated as at fair value (former FVO) 92,290-92,290-92,290 Available-for-sale financial assets (former AFS) 9,861,978-9,861,978-9,861,978 Held to maturity investments (former HTM) 5,937,872-5,937,872-5,937,872 Financial assets designated as at fair value 11,271 11,271 11,271 Financial assets at fair value through other comprehensive income 12,369,616 (*) 65,691 12,435,307 12,435,307 (*) The relative expected credit loss was recognised in valuation reserves and amounted to 13,593 thousand euro. 38

39 Figures in thousands of euro FTA Adjustments Items Gross exposure Impairment losses Net exposure Coverage FTA value adjustments (gross) FTA value adjustments (provisions) FTA adjustments Gross exposure Impairment losses Net exposure Coverage - Bad loans 44,808 5,975 38, % - 3,014 3,014 44,808 8,989 35, % - Unlikely-to-pay loans 318,623 9, , % - 17,785 17, ,623 27, , % - Past-due loans 2, , % , , % Non-performing unsecured guarantees (Stage three) 366,266 15, , % - 20,892 20, ,266 36, , % - Guarantees granted 5,234,632 28,490 5,206, % - 12,518 12,518 5,234,632 41,008 5,193, % - Irrevocable commitments and other 5,684,137 3,315 5,680, % - 3,977 3,977 5,684,137 7,292 5,676, % - Revocable commitments 31,752,501 3,616 31,756,117 31,752,501 3,616 31,748, % Performing unsecured guarantees and commitments (Stages one and tw o) 10,918,769 31,805 10,886, % 31,752,501 20,111 31,772,612 42,671,270 51,916 42,619, % of which: stage 1 32,988,631 26,222 32,962, % of which: stage 2 9,682,639 25,694 9,656, % Total unsecured guarantees and commitments 11,285,035 47,344 11,237,691 31,752,501 41,003 31,793,504 43,037,536 88,347 42,949,189 39

40 3.2 The main items of the financial statements The new accounting criteria adopted as of 1 st January 2018 with regard to the recognition, classification, measurement and derecognition of the various items in the financial statements are illustrated in the Explanatory notes to the condensed consolidated financial statements, in the section Other aspects. 40

41 INTERIM CONSOLIDATED MANAGEMENT REPORT AS AT AND FOR THE PERIOD ENDED 30 th JUNE 2018

42 The macroeconomic scenario 1 During the first half of the year, the global scenario benefited from consolidated economic growth, despite unexpected signs of a slowdown in Europe and greater economic and political risks. The tensions brought about by the protectionist measures introduced by the United States and the threats of retaliations from its trading partners 2 led to a slowdown in trade and growing volatility on the financial markets, which may have negative repercussions on world growth. The overall macroeconomic scenario is still being overshadowed by variables of a geopolitical nature, such as: the delicate diplomatic relations between the US and North Korea 3 ; the equally delicate relations between Russia and the US, the leaders of which met on 16 th July in Helsinki at a summit, the outcome of which was not easy to interpret; the exit of the US from the 2015 nuclear agreement with Iran and imposition of new sanctions against the Islamic Republic; the difficult economic and social situation in Venezuela and Argentina 4 ; the uncertainties surrounding the outcome of the Brexit negotiations 5. In Europe, in addition to further delays to completion of the Banking Union 6, internal political risks have emerged relating to the change of the executive in Spain 7 and tensions in Germany 8 due to the difficulties within the government in agreeing on the immigration agreement signed 1 Prepared on the basis of data available as at 20 th July In the first few months of the year the protectionist trade policies of the United States were further tightened against China first and foremost, but also against Canada and the European Union. Since 1 st June tariffs were placed on steel and aluminium exports from the EU, which in turn applied duty to imports of some US products worth $3.3 billion from 22 nd June. The adoption of such countermeasures could mean the EU is at risk of further actions on the part of the US administration on European car imports. The sanctions against Canada on the other hand have led to the stalling of the NAFTA negotiations (the trade agreement between Mexico, Canada in the US reached in 1994), increasing the likelihood of the US leaving the treaty in order to be able to enter into bilateral agreements. 3 On 12 th June on the Singapore island of Sentosa the leader of North Korea and the president of the United States met in order to end the dispute on North Korea's nuclear programme, one of the main causes of instability and tension over the last few years. The meeting ended with the signing of a document that, despite still being a statement of intent, hinged on several crucial points: the creation of a stable and durable peace in the region and the complete denuclearisation of the entire peninsula. Trump also guaranteed the end of annual military exercises with South Korea. however, US sanctions against North Korea will remain in place until the denuclearisation of the peninsula is complete, a process that will be supervised by US and international bodies. 4 At the end of June the International Monetary Fund approved the granting of a three-year line of credit worth a total of $50 billion to Argentina. 5 On 15 th December the European Council established that the first phase of the negotiations concerning the UK's separation from the EU had made sufficient progress and therefore began negotiations on future bilateral relations and, as requested by the UK government, also on a possible transition period following the UK's exit. In March the European and British negotiators reached an agreement on some parts of the draft withdrawal agreement concerning, among other things, citizens' rights, the financial settlement and the transition period, whereas so far no agreement has been reached on the issue of the Irish border. During the transition period, set to begin on 30 th March 2019 and to finish at the end of 2020, the UK would not take part in the decision-making processes of the EU, as it would no longer be a member state, but it would enjoy the benefits of belonging to the single market and would be required to comply with European laws. However, there will only be certainty about the transition period when the whole withdrawal agreement has been ratified by both parties. While it often seemed uncertain as to whether an agreement could be reached on the first phase of the negotiations, the second phase on the configuration of relations between the two economies appears even more complex and the outcome even more difficult to predict. 6 At the end of June a summit on the Banking Union and reform of the European Stability Mechanism (ESM) took place, which approved the reinforcement of the ESM, also in order to provide support to the Single Resolution Mechanism, although without establishing operational details or timescales. The meeting also dealt with the European Deposit Insurance Scheme, which still looks to be a long way off due to the level of political resistance from countries that want there to be a focus on reducing risks before sharing them. 7 The Spanish internal political crisis led to a vote of no confidence in the prime minister Rajoy, who was replaced by the socialist Pedro Sanchez. The new head of the government formed a government on the Portuguese model, relying on the extreme left, with women taking the majority of the top ministerial roles. At the end of 2017 Spain had been a delicate political risk for the Union due to the events that took place after the Catalonian independence referendum in October. 8 The elections in September 2017 gave German Chancellor Angela Merkel her fourth mandate, albeit with less consensus than in the past, to the benefit of the extreme-right anti-eu AFD coalition. After the failure of various attempts at forming a coalition, in January an agreement was reached between Schulz's social-democrat party and Angela Merkel's Christian Democrats, which allowed the government to be formed in spring. At the end of June the Minister of the Interior threatened to resign and to withdraw the support of his party, the Bavarian CSU, from the government, because he considered the agreement on managing migration flows signed in Brussels was unsatisfactory and ineffective. Despite a slight reduction in the risks in early July, the leadership of Chancellor Merkel seems to have been compromised to the extent that it is not unlikely that the government will fall before the end of the legislature. 42

43 by the EU; there are still profound differences of opinion between EU countries on the migrant issue 9. As for Italy, at the end of May over two months after the elections the uncertainty generated by the proclamations of the majority government in the process of being formed on budget policy and relations with Europe brought about serious tensions on the Italian government bond market and a fall in the domestic banking share prices. The statements of some representatives of the new government that came into power at the beginning of June indicating the intention to manage the public accounts prudently and in line with European regulations provided reassurance about the country's prospects, without totally sweeping aside uncertainties about the feasibility of the government's manifesto. The spread between Italian ten-year BTPs (long-term treasury bonds) and equivalent German Bunds saw increasing fluctuations from mid-may onwards, reflecting the uncertainties surrounding the Italian political situation. After reaching its highest level (285 basis points) since July 2013, the spread reduced slightly to settle at 238 basis points at the end of the first half, thanks to reassurances from the Italian government, but also to the expansive policy of the ECB. 600 Ten-year BTP-Bund spread Basis points GFMAMGLASONDGFMAMGL ASONDGFMAMGLASONDGFMAMGL ASONDGFMAMGLASONDGFMAMGLA SONDGFMAMG Source: Thomson Financial Reuters As the recovery has consolidated, the major central banks have continued with accommodative monetary policies, albeit accompanied by many signs that stimuli will be gradually reduced. As far as the European Central Bank is concerned: on 14 th June the Governing Council announced the extension of the Quantitative Easing programme from September to December 2018, at the same time reducing the monthly amount of purchases from the current level of 30 billion to 15 billion from October. From January 2019, subject to inflation remaining in line with the monetary policy target, the asset purchase programme (APP) should come to an end 10 ; the main refinancing operation (MRO) rate was maintained at its record low of 0%, while the rate on bank deposits with the ECB remained at -0.40%. These levels will remain unchanged at least until the end of summer 2019 and in any case as long as it is necessary to ensure the inflation target is reached and maintained. In June and March the Federal Reserve raised reference rates by 25 basis points, bringing them to 1.75%- 2.00%, with another two hikes expected during the year, showing its confidence in the consolidation of the 9 At the end of June a European summit was held on the subject of immigration, which ended with an agreement that was on the whole rather vague. The only result was the establishment of common centres for assessing asylum requests and restriction on the movement of migrants inside the Union. 10 As at 6 th July 2018, a total of 2,014 billion in government securities, 255 billion in covered bonds, 27 billion in ABS and 163 billion in corporate bonds had been purchased. 43

44 US economy and the stronger labour market. At the same time, it continued the process of reducing its asset portfolio that began in October 2017, by not reinvesting the income from securities reaching maturity, which will be gradually increased (from $10 billion to $50 billion over twelve months). The reduction will therefore be $450 billion. The Bank of Japan kept its reference rate unchanged at below zero (-0.10%), continuing with its expansionist strategy focused on controlling rates on the various maturities, instead of on a monetary-based target, which could vary according to control of the yield curve (Qualitative and Quantitative Easing, QQE). The Bank of England confirmed its official rate at 0.50%, but at the same time changed its guidelines on the timing of reducing its assets, announcing that it could begin selling the securities purchased under QE once the cost of money has reached 1.5% (previously 2%). In the main emerging countries, with the exception of China, monetary policy has tended to remain accomodative 11. On foreign exchange markets, the first half of 2018 seemed to see an end to the growth in the value of the euro against the main international currencies. The euro-dollar exchange rate had strengthened in the first quarter on the back of stronger growth in the euro area and the continued expansionary support of the The main exchange rates and oil (Brent) and commodities prices ECB. In the subsequent months it weakened in the wake of the unexpected signs of a slowdown in the recovery, and fears linked to an escalation of the trade conflict, divergences between the monetary policies of the respective central banks and political instability in the EU, with the difficult situation in Italy in the foreground. As the table shows, the second quarter saw a weakening in the yuan against the dollar, due to exacerbation in the trade disagreement between the two economies, while sterling continued to reflect the limited progress in the Brexit negotiations. The commodities price index rose by 5.7% over the six months, affected by the recovery in energy prices. In the second quarter, in fact, Brent oil prices rose by 14% to over 79 dollars a barrel at the end of June, the highest level since November The development was mainly affected by strong global demand along with a marked fall in stocks, despite the increase in US production and a decision by OPEC and Russia to revise the agreement on production cuts in order to offset the many supply emergencies: from US sanctions against Iran to the Venezuelan disaster, as well as the renewed conflict in Libya. The above dynamics have driven up inflation in the leading industrialised countries, albeit to moderate levels and closer to the targets of the respective central banks, with the exception of Japan; conversely, in the emerging countries in the BRIC area except for China and Russia prices continued to vary considerably. Jun-18 A Mar-18 B Dec-17 C % change A/C Sep-17 D Jun-17 E Euro/Dollar % Euro/Yen % Euro/Yuan % Euro/Franc CH % Euro/Sterling % Dollar/Yen % Dollar/Yuan % Futures - Brent (in $) % CRB Index (commodities) % Source: Thomson Financial Reuters * * * According to the International Monetary Fund s latest forecasts 12 the world economy will grow 3.9% in 2018, slightly faster than a year before (up 3.7%), remaining uneven across different geographical areas (up 4.9% in emerging areas and 2.4% in advanced countries). Despite signs of a slowdown in Europe, on the whole the global economic cycle is consolidating, backed by the US economy and the fact that the Chinese economy is essentially holding firm. When 11 In the first half of 2018 the Central Bank of Brazil reduced the official rate twice [25 basis points (BPS) in January and March] to 6.50%, while the Central Bank of Russia also cut the reference rate twice (25 bps in February and March) to 7.25%. In India the monetary authorities brought the repo rate up from 6% to 6.25% in June, while in China the People s Bank of China maintained the current reference interest rate of 4.35%, while gradually easing monetary conditions, reducing the required reserve ratio by 150 bps. 12 July 2018 update. 44

45 confirming its growth forecasts for 2018, the IMF highlighted the risk that the global recovery could be held back by trade issues and growing political uncertainty in the EU. Actual and forecast data: industrialised countries Percentages Gross domestic product Consumer prices Unemployment Deficit (+) Surplus (-) Public sector (% of GDP) Reference interest rates (1) 2019 (1) 2017 (2) Jun-18 (3) 2018 (1) (2) 2017 (2) Jun-18 (3) 2018 (1) (2) (1) 2019 (1) Dec-17 Jul-18 United States ,25-1,50 1,75-2,00 Japan , ,10-0 Euro Area Italy Germany France Portugal Ireland Greece Spain United Kingdom (1) Forecasts source: Prometeia and official statistics (2) Average annual rate (3) The latest available information has been used, w here data had not been published as at the 30th June 2018 The United States economy has continued to grow, albeit at a slower rate than previously reported: in the first quarter GDP increased by 2% quarter-on-quarter (compared with 2.9% in the last quarter of 2017), mainly due to weaker consumption and an increase in non-residential fixed investments. The quarter-onquarter data for the second quarter appears to confirm that there has been an acceleration in growth, also thanks to the tax incentives introduced with the tax reform that are mainly expected to benefit companies and to encourage investment 13. The labour market continues to show encouraging signs, while in the next few months the focus will be strongly on the White House s trade measures and their potential impact on net exports and the economy in general. The trade disputes with the country's main trading partners could in fact cancel out the benefits to US businesses of the tax reform. In China, the annual change in GDP was +6.7% in the second quarter (+6.8% in the first quarter), showing that this economy is essentially stable, despite being in the midst of a difficult transition from an investment-based to a consumer-based development model. However, in recent months there have been signs of a moderate slowdown: the most recent shortterm indicators show a fall both in retail sales and in investments, the latter particularly affected by the government's squeeze aimed at resolving economic and financial imbalances. Actual and forecast data: the principal emerging countries (BRIC) Gross domestic product Consumer prices Reference interest rates Percentage s (1) 2019 (1) 2017 (2) Jun-18 (3) Dec-17 Jul-18 China India Brazil Russia (1) Forecasts Source: Prometeia, IMF and official statistics (2) Average annual rate (3) The latest available information has been used, where data had not been published as at the 30th June 2018 In Japan the economy has weakened, with a 0.2% quarter-on-quarter fall in GDP in the first quarter (+0.3% in the fourth quarter) and inflation under 1% since April. However, initial data for the second quarter seems to indicate stronger growth. In the euro area the recovery has continued, albeit at a slower rate than in 2017, while the differences between the various countries have gradually reduced. In the first quarter the quarter-on-quarter change in GDP was +0.4% (+0.7% in the last quarter of 2017), due to a reduction in investments and net exports, despite a rise in the accumulation of inventories and stronger private consumption. These trends were influenced both by temporary factors, such as poor weather, and external factors, such as the rise in value of the euro, higher oil prices and the risks of restrictions on trade 14 following on from the 13 In December, the US President managed to have his promised fiscal law approved by the House of Representatives and the Senate. The law contains a package of reforms to support growth such as a reduction in corporate income tax, including on income earned abroad by American multinationals. 14 Bucking the trend of American isolationism, in July the European Union and Japan signed an economic and strategic partnership framework agreement called the EPA (Economic Partnership Agreement), involving on the one hand the elimination of duty by Japan on more than 90% of imports from the EU (especially in the food and agriculture sector) and on the other the cancellation of duty on almost all Japanese goods, as well as greater openness towards the Japanese car market in seven years time. A Strategic Partnership Agreement was also signed at the same time. This provides a legal framework for extensive cooperation between the two parties in promoting strategies based on shared values also internationally. 45

46 protectionist direction taken by the US government. The available data would seem to indicate that expansion has continued at a moderate rate also in the second quarter. In June the -coin indicator developed by the Bank of Italy which represents an estimate of the underlying dynamics of the European GDP fell to its lowest level since November 2016, marking a worsening in consumer expectations and a weakening of the industrial cycle. The Italian economy also lost a little of its vigour: in the first quarter the quarter-on-quarter change in GDP was +0.3%, slightly down since the end of 2017 (+0.4%), as a result of positive figures for consumption and inventories against negative results for net exports and fixed investments. According to the latest information, in the spring growth could slow further. Industrial production is also struggling to consolidate its foothold. In the first five months the seasonally adjusted index showed a fluctuating short-term trend, against positive year-on-year changes, although these varied in intensity: in May the annual change was +2.1%, due to conflicting trends in the various sectors. The most significant increases affected mineral extraction activities (+24.8%), electrical equipment (+7.3%) and the manufacture of pharmaceutical products (+6.6%), while the main falls were in computer and electronic product manufacturing (-1.6%), metallurgy (-1%) and the provision of electricity (-0.5%). The unemployment rate, which stood at 10.7% in May, was slightly down on December (10.9%), while unemployment among years old fell to 31.9% (32.9% at the end of 2017) 15. The overall figure continues to be mitigated by state income benefit redundancy schemes, which saw a year-on-year reduction in the Wage Integration Fund between January and June: The hours authorised totalled 125 million against million in the same period in 2017 (- 34.4%), the effect of significant falls in extraordinary benefits (-40.7%) and exceptional benefits (-89.3%) against essential stability in the ordinary fund (-1.9%). Inflation, according to the Harmonised Index of Consumer Prices, remained lower than in the euro area, but rose to 1.4% in June (1% in December), mainly as an effect of the increases in energy costs due to higher oil prices. The surplus on the balance of trade totalled 13.9 billion in the first five months of the year ( 14.6 billion in the same period of 2017) due to a substantial increase in the surplus on nonenergy products, approximately two thirds of which is stably attributable to plant and equipment, which more than offset the energy deficit ( billion). The overall surplus was driven by higher volumes of trade, with imports growing 3.7% and exports 3.0% year-on-year, with more marked progress in markets inside the EU. * * * After an unfavourable start to the year in which share prices were penalised by fears of a rapid clampdown on monetary conditions in the United States, fears gradually retreated and prices rose again in the second quarter, albeit not uniformly in geographical terms. Despite the confirmation of robust growth in the global economy albeit with a slight loss of momentum in Europe and a generally accomodative stance on the part of the main central banks, in the last weeks of June the financial markets were affected by a The principal share indices in local currency new phase of volatility in the wake of growing trade concerns at a global level and political uncertainty in the EU. As the table shows, in any case some US share prices reached new record highs, driven by the positive trend in corporate profits that benefited in particular from the tax cuts introduced by Trump. In Italy, the uncertainties surrounding the formation of the new government and the feasibility of its manifesto led to a fall in share prices from mid-may, Jun-18 A Mar-18 B Dec-17 C % change A/C Sep-17 D Jun-17 E Ftse Mib (Milan) 21,626 22,411 21, % 22,696 20,584 Ftse Italia All Share (Milan) 23,827 24,661 24, % 25,025 22,746 Xetra Dax (Frankfurt) 12,306 12,097 12, % 12,829 12,325 Cac 40 (Paris) 5,324 5,167 5, % 5,330 5,121 Ftse 100 (London) 7,637 7,057 7, % 7,373 7,313 S&P 500 (New York) 2,718 2,641 2, % 2,519 2,423 DJ Industrial (New York) 24,271 24,103 24, % 22,405 21,350 Nasdaq Composite (New York) 7,510 7,063 6, % 6,496 6,140 Nikkei 225 (Tokyo) 21,812 21,159 22, % 20,401 20,033 Topix (Tokyo) 1,695 1,704 1, % 1,675 1,612 MSCI emerging markets 1,070 1,169 1, % 1,082 1,011 Source: Thomson Financial Reuters 15 This figure gives young people unemployed as a percentage of total young people in employment and seeking employment. 46

47 especially of banking shares, which effectively wiped out the progress made in previous months thanks to the continued reduction in bad loans and improvements in the economy. The MSCI index which shows the trend in emerging countries showed a fall of 7.3% in the six months, mainly due to the growing risks of protectionism, the stronger dollar and the increase in interest rates by the FED. * * * The positive economic scenario allowed the banking system to consolidate the signs of recovery in lending and of improvements in credit quality, and funding picked up once again. On the basis of the initial estimates published by the Italian Banking Association 16, at the end of June the year-on-year rate of change in direct funding (deposits of residents and bonds) grew by 1.80% (-0.01% in December 2015). The abundant and competitive liquidity injected into the banking system by the ECB by means of TLTROs and short-term lending facilities has continued to affect the trend for bond funding (down 18.3% compared with a fall of 17% at the end of ). The constant fall in the latter caused also by the tendency of customers to opt for liquidity and/or to reinvest securities maturing in asset management products contrasts with the increase in other types of funding (up 6.3% compared with a rise of 4.1% in December 18 ). As shown by detailed Bank of Italy data for May 19, other types of funding benefited mainly from a strong increase in current account deposits (up 9.1% compared with May 2017), against a progressive reduction in term deposits with maturities of up to two years (down 24.7%). Data for May published by the Bank of Italy 20 shows that loans to residents belonging to the private sector increased year-on-year by 2.5% (up 1.8% in December), in terms of borrowers showing a continuation of the positive trend for households and signs of a recovery for nonfinancial companies, with increasingly more attractive terms. The growth in lending to households picked up (up 2.8%, unchanged since December), and mainly concerned consumer credit and to a lesser extent mortgages for home purchases, while for companies the situation improved (up 1.2% from a rise of 0.2% at the end of 2017), despite being conditioned by investments and the slow pace of recovery in the economy. According to Italian Banking Association reports, the annual growth in loans to private sector residents was +2.5% also in June 21. In terms of risk, asset quality has continued to improve, boosted by consolidation of the recovery and a reduction in the flow of new non-performing exposures. In May private sector bad loans gross of impairment 19 fell to billion, a reversal of the long-term and shortterm trends (down 19.3% and 2.6% respectively). Total outstanding stock consisted of 45.8 billion to households (down 15.7% and 3.7% respectively) and of billion to businesses (down 20.4% and 2.1% respectively). The ratio of gross private sector bad loans to private sector loans therefore fell to 10.27% (10.60% in December). Net bad loans, totalling 49.3 billion the lowest level since April 2012 fell by 35.6% yearon-year and by more than 23% since the end of 2017 (they previously stood at 64.1 billion). The ratio of net bad loans to total loans fell as a consequence to 2.84% (3.70% at the end of 2017). On the basis of the Financial Stability Report published by the Bank of Italy in April, gross non-performing exposures for the sector (bad loans, unlikely-to-pay loans and past-due loans) stood at 285 billion in December 2017, accounting for 14.5% of total gross loans to customers 16 Italian Banking Association, Monthly Outlook, Economia e Mercati Finanziari-Creditizi, July The changes were calculated by excluding the portion included within securities portfolio investments from bond funding. 18 The changes were calculated by excluding amounts relating to disposals of loans and transactions with central counterparties from deposits. 19 Supplement to the Statistics Bulletin Banche e moneta: serie nazionali, July Supplement to the Statistics Bulletin Banche e moneta: serie nazionali, July Growth rates of loans are adjusted by the Bank of Italy to take into account securitisations and other loans transferred and derecognised from the books of banks. 21 The change was calculated by the Italian Banking Association in line with the criterion used by Bank of Italy mentioned in the previous note. 47

48 ( 1,965 billion) 22. Net of impairment losses, total non-performing loans amounted to 135 billion, accounting for 7.5% of total net exposures ( 1,807 billion). Coverage, measured as the ratio of impairment losses to gross non-performing loans, stood at 52.7%, while that for bad loans was 64.4% compared with 33.9% for unlikely-to-pay loans and 21.4% for past-due exposures. Securities issued by residents in Italy held in the portfolios of Italian banks amounted to billion in May, down by 25.2% over twelve months ( billion), but up on December (+3.5%). The trend mainly reflects the performance of Other certificates ( billion), which fell from the previous year, particularly in the bank bonds sector ( billion), which fell to 34.7%. Conversely, investments in Italian government bonds ( billion), against a year-on-year fall ( billion) essentially due to medium-to-long-term securities (nominal floating-rate bonds CCT and BTP; billion) rose in the five months (up 29.1 billion, by 9%), also mainly due to longer-term securities. As concerns business with households and non-financial companies, in June the average interest rate on bank funding from customers calculated by the Italian Banking Association 16 (which includes the yield on deposits, bonds and repurchase agreements in euro) fell to 0.73% (0.76% at the end of 2017), while the weighted average interest rate on loans in euro reached a record low of 2.60% (2.69% in December). 22 Customer loans also include non-current assets and disposal groups held for sale. 48

49 Significant events in the first half of 2018 Implementation of the Business Plan Completion of the integration of the New Banks with the third step of the merger As already reported in detail in the last financial report, to which reference is made, the integration project for the New Banks involved the merger both at IT system and business model level into the Parent of the three banks acquired Banca Adriatica (the former Nuova Banca delle Marche), Banca Tirrenica (the former Nuova Banca dell Etruria e del Lazio) and Banca Teatina (the former Nuova Cassa di Risparmio di Chieti) as well as the two subsidiary Banks held by these (CARILO - Cassa di Risparmio di Loreto and Banca Federico del Vecchio), in accordance with the Single Bank model adopted by the UBI Banca Group. The three-step integration process began in the fourth quarter of 2017 and came to completion in February In detail: the first step involved Banca Adriatica and Cassa di Risparmio di Loreto (CARILO) and was concluded on 23rd October 2017; the second step, which concerned Banca Tirrenica and Banca Federico del Vecchio, was concluded on 27th November 2017; the third step, which involved Banca Teatina, was concluded on 26 th February On 20 th February 2018 a deed for the merger of Banca Teatina into the Parent was signed and filed on the following 22 nd February with the competent Company Registrar of Bergamo in accordance with Art of the Italian Civil Code. It took effect with regard to third parties from 26 th February and for accounting and tax purposes from 1 st January Because Banca Teatina was 100% controlled by the Parent, the merger had no effect on the number of shares and the share capital, nor more generally did any change in the Articles of Association of UBI Banca occur. The migration of the bank onto UBI Banca s IT system was successfully completed over the weekend of 24th-25th February. It regarded a total of 58 branches and operating facilities, over 682 thousand registered customers, more than 73 thousand current accounts and around 31 thousand securities deposits with a total of approximately 1,100 employees involved in the preparatory and post migration stages. When the operation was performed, 12 Banca Teatina branches 1 were closed and another 12 were transformed into mini-branches, while 8 UBI Banca branches were merged with units of the merged bank and transferred to their premises. The transfer of a line of business originating from Banca Teatina to UBI Sistemi e Servizi by UBI Banca was finally concluded with a deed dated 27 th February 2018 and with effect from 1 st March. It related to IT and Back Office activities (mainly IT, administrative support and supplies, logistics and real estate management). Changes to the organisational structure of UBI Banca Once the project to integrate the New Banks was completed, a new District Headquarters was created at Chieti, under the Chief Commercial Officer and within the Marches and Abruzzo Macro Geographical, in accordance with the Group s distribution model. The Parent s organisation chart was also affected mainly by the following changes: 1 Details of the closures carried out on 26 th February 2018 are as follows: Perugia Via Pietro Soriano, 69; Rome Via Parioli, 45, Via Leone IV, 119/123; Teramo Piazza Sant Agostino, 9; Giulianova Via Galileo Galilei, 83/91 (Teramo); Pescara Via Chieti, Via D Avalos, 61, Via Gobetti, 102/108, Viale Bovio, 77; Vasto Corso Mazzini, 194/196 (Chieti); Chieti Piazza Garibaldi, 1 and Loc. Selva Piana Ss. 84 c/o Frenatana Snc. 49

50 the upgrade of the Compliance Area Manager to Chief Compliance Officer in order to further increase the visibility and importance of Compliance, both within and outside the Group, on a par with UBI Banca s other supervisory functions. This also increased the importance of compliance in a context of continuous regulatory changes; another consideration was findings reported by the Supervisory Authority; reinforcing the unit responsible for the Recovery and Resolution Plan under the Chief Financial Officer. The other projects The other initiatives included in the Transformation Plan of the Business Plan are proceeding and they are regularly monitored and reported on to the top management in order to constantly assess the achievement of the expected results and that these initiatives comply with the goals set. With regard to the New Distribution Model in particular, the branch restructuring plan to be carried out in 2018 was defined during the first half of the year, and work continued on implementation of their new physical and technological layout, with an initial set of branches being completed based on the three layouts as follows: Flagship: large branches in high-visibility areas featuring an innovative design and layout, with branch operations being highly automated, with the support of dedicated staff, in order to promote customer migration to digital services; Full: branches that serve all customer segments with at least one employee dedicated to each role; branches feature an innovative design and layout, with branch operations being highly automated, with the support of dedicated staff, in order to promote customer migration to digital services; Traditional: small and mid-sized branches that include itinerant staff responsible for assisting customers and promoting the use of digital channels. Finally, in order to further simplify the Group s organisational structure, a programme was begun in the quarter to merge Etruria Informatica Srl into UBI Sistemi e Servizi with the drafting on 7 th February 2018 of a merger project pursuant to Art ter of the Italian Civil Code by the two companies Boards of Directors. On 9 th May, the deed of merger was signed and was then filed with the competent Company Registrars on 16 th May. The effects of the merger for third parties began on 1 st June 2018 (1 st January 2018 for accounting and tax purpposes). UBI Welfare The UBI Welfare project falls within the scope of the development strategies of the Group s Business Plan, and the project s objective is to meet the needs of supplemental social welfare and to create a protective network for people throughout our markets, while also activating the tax benefits defined by applicable legislation. During the first year from the launch, agreements were signed with numerous major employer associations in many sectors and areas throughout Italy, which will make it possible to reach a total of some 17 thousand enterprises, including small and medium-sized businesses. Thus far, in addition to UBI Banca, there are more than 200 companies that provide forms of company welfare to their employees by way of solutions provided by UBI Welfare, a large part of which are the result of work conducted in the first half of UBI Banca has earned prestigious recognition nationally for this project, including the Premio MF Innovazione, the Premio ABI Innovazione per i client corporate: la banca per le imprese, and the Italy Protection Awards as a pioneer and innovator in SME welfare. A permanent observatory has also been created to monitor and support the development of company and community welfare in partnership with ADAPT, the school of higher education in labour relations established by Marco Biagi, the efforts of which have led to the publication of Italy s first report on company and employment welfare based on observations conducted in 50

51 the local areas in which the UBI Banca Group operates. This report was presented on 14 th March 2018 in Milan. Also involved in the observatory are the various local employee-representation bodies, which are key to the dissemination and orderly development of supplemental community welfare in a consistent manner that also features the ability to select specific social projects and other local initiatives to be supported. Trade union relations Based on the Memorandum of Intent of 11 th December 2016, which confirmed the desire and commitment of the parties to standardise the labour agreements for all companies of the UBI Banca Group, on 11 th January 2018 an agreement was signed with the trade unions concerning the supplementary company agreements for IW Bank, Prestitalia, UBI Factor, UBI Leasing, and UBI Pramerica SGR. These new provisions have been applied starting from 1 st March 2018 with the exception of Prestitalia, which adopted the new provisions as of 1 st July 2018 in conjunction with adoption of the new collective bargaining agreement for the banking industry. Based on the Framework Agreement reached on 26 th October 2017, which stipulated that the second-level contract terms currently in force at UBI Banca would be applied to employees of the newly acquired Banks, with the methods and timeframe to be determined through an agreement with the trade unions, a specific memo was signed on 1 st February 2018 establishing that gradual harmonisation of company regulations will take place by Following the merger of the new Banks into the Parent, an agreement was signed on 13 th June 2018 concerning supplementary pensions in relation to the transfer, by October 2018, of the individual positions of current and former employees with contributions to the pension funds of the former CARILO - Cassa di Risparmio di Loreto and the former Banca Teatina into one of two funds within the Group. The annual update of the Strategic Non-Performing Loans Plan On the basis of the results of a public consultation conducted in the period September-November 2016, on 20 th March 2017 the European Central Bank published the final version of its guidelines on non-performing loans (NPLs). The document contains measures, processes and best practices that banks are urged to apply in their treatment of non-performing positions and which will form part of continuous dialogue with the supervisory authority. In compliance with the provisions of ECB documents, starting in 2017 the UBI Banca Group formulated guidelines for the management of problem loans set out in the document entitled RAF - Credit risk management policy, with which it also introduced risk-based monitoring and a Strategic NPL Plan which was submitted to the Supervisory Authority for the first time on 17 th March The targets set in the document were initially reviewed as part of the update of the Business Plan in order to include the New Banks acquired, but this could not be considered an update of the plan submitted to the ECB partly because of the different time frame involved. The annual update of the strategic NPL plan required by the guidelines and relating to the new perimeter of the Group, was submitted to the supervisory authorities in April The new NPL plan confirms the priority of the internal credit recovery management strategy, but it also envisages the disposal of non-performing exposures with the goal of bringing the level of total gross non-performing loans below 10% between 2019 and On 1 st August 2018, we announced the securitisation of a significant portfolio of bad loans and the preparation of a second portfolio of bad loans to be disposed without recourse to 51

52 securitisation in accordance with potential disposal scenarios considered for the estimate of the expected losses calculated in the First-Time Adoption of the new IFRS 9. With regard to the securitisation transaction: we completed the disposal of a portfolio of bad loans to the independent securitisation vehicle Maior SPV Srl for a gross book value as at 1st January 2018 of 2,748.8 million (recognised gross exposure of 1,615 million). The transfer price is essentially in line with the carrying value of the net loans sold and meets the requirements of applicable legislation for the release of the guarantee on the securitisation of bad loans in accordance with Law Decree no. 18/2016 (the so called GACS ). Consistent with the Group s management strategy, focused primarily on direct credit recovery, the portfolio was composed mainly of unsecured loans (53.4%, while secured loans accounted for 46.6% of the portfolio); the securitisation vehicle Maior SPV S.r.l. issued senior, mezzanine and junior notes which were subscribed by UBI Banca Spa as follows: - Senior investment-grade securities in the amount of million, equal to 22.86% of the gross book value and 38.9% of the recognised gross exposure. These percentages are high, notwithstanding the large presence of unsecured loans, which confirms the high quality of the loans. The ratings of the agencies Scope Ratings GmbH and DBRS are of BBBsf and BBB (low)(sf), respectively 2 ; - Mezzanine securities in the amount of 60 million (with no rating); - Junior securities in the amount of 26.9 million (with no rating). The senior notes will be fully maintained in UBI Banca Spa s portfolio and they will bear interest equal to the 6M Euribor + 0.5%. For the senior securities, a request for the release by the Italian government of the guarantee in accordance with Law Decree 18/2016 will be issued in the near future. The mezzanine and junior notes will be sold my UBI Banca to third-party investors. The deconsolidation of the bad loans underlying the securitisation transaction is expected to be seen in the financial results for the third quarter of Following the deconsolidation, the ratio of gross non-performing loans to total gross loans is expected to decrease on a pro-forma 3 basis in June 2018 from 12.41% to around 11%. Currently, as a result of this disposal: - no negative impacts on capital ratios are expected; - a significant reduction, in the order of 10 percentage points, is expected in the Texas ratio. In addition to the transaction described above, we are currently defining another portfolio of bad loans, around 90% of which are expected to be unsecured, for a total less than the securitised portfolio discussed above. This portfolio is to be sold by around late 2018 or early 2019 and will not be subject to securitisation. This transaction will make it possible to reach a ratio of gross non-performing loans to total gross loans of below 10% ahead of the schedule set in the strategy plan. * * * At same time, UBI Banca is carefully monitoring regulatory changes in progress made by the ECB, European Commission and the European Banking Authority (EBA) (see in this respect the information given in the sub-section that follows on developments in the regulatory framework). Any estimate of the possible impact of these for the Group still remains premature. 2 The press releases concerning the ratings assigned by Scope Ratings GmbH and DBRS are available on their respective websites. 3 Net of the gross exposure of 1,615 million involved in the disposal. 52

53 The Model Change On 21 st March 2018 UBI Banca reported that it had received authorisation from the European Central Bank for the implementation of a Model Change, which will modify the Bank s internal models for credit risk for compliance with the new regulatory framework, with the introduction, amongst other things, of a capital requirement for default positions. Supervisory reports based on the new models have been prepared as of 31 st March Rationalisation of international presence abroad Following the sale of UBI Banca International, effective as of 1 st November 2017, the process of rationalising the Group s presence internationally is now affecting the branches in Madrid and Munich, which were originally held by the former Luxembourg subsidiary. The plan of all the preparatory work for the closure of these branches, which is expected to be completed by the end of this year, was defined and launched during the first half of the year. As of the date of this report, the procedures for reporting to the supervisory authorities and for notifying the customers, as well as the trade-union procedures required by local laws and regulations, have already been completed. Resolutions approved by the Shareholders Meeting of UBI Banca A General Meeting of the Shareholders of UBI Banca held on 6 th April 2018 under the chairmanship of Andrea Moltrasio, the Chairman of the Supervisory Board, convened in ordinary session to resolve on the items on the agenda. The Shareholders Meeting acted with regard to the items on the agenda as follows: 1. with the vote in favour of 99.89% of the share capital present, it approved a proposal to distribute a dividend of 0.11 per share drawn from the extraordinary reserve, after first replenishing the losses for the year 4 as proposed by the Management Board in consideration of the adequate capitalisation of the Group according to the parameters established by Basel 3 rules and in compliance with a communication from the European Central Bank dated 27 th December 2017 on dividend distribution policies. The dividend was paid on the 1,140,137,686 ordinary shares outstanding (net of treasury shares held in portfolio) for a total dividend payout of million with ex dividend date, record date and payment dates of 21st, 22nd and 23rd May 2018, against coupon no. 21; 2. with regard to the election of the Board of Arbitrators, the meeting appointed the candidates proposed by the Supervisory Board. On the basis of the votes cast for each candidate, the Board of Arbitrators is composed as follows for the three-year period : Giuseppe Onofri Chairman Attilio Rota Full arbitrator Rodolfo Luzzana Full arbitrator Pierluigi Tirale Alternate arbitrator Giampiero Donati Alternate arbitrator 3. it approved the first section of the Remuneration Report, prepared for public disclosure purposes, in compliance with regulations in force and made available to the public in accordance with the law. That first section illustrates the Group s remuneration and incentive policies and contains the main information on the following: the decision-making processes for remuneration schemes, the main features, the means by which remuneration 4 The Group s consolidated financial statements for the year ended 31 st December 2017 showed a net profit of million, while the separate company financial statements on the other hand recorded a loss of 12 million. 53

54 is linked to results, the main performance indicators employed, the reasons behind the choice of variable remuneration schemes and the other non-monetary schemes; 4. it adopted remuneration and incentive policies for members of the Supervisory Board and members of the Management Board; 5. it approved the remuneration schemes based on financial instruments, in order to pay a quota of the short-term (annual) variable component of remuneration for identified staff and as a consequence approved the relative proposal to authorise the purchase of treasury shares at the service of those schemes; 6. it approved a proposal to authorise the purchase of treasury shares to service the /2020 long-term (multi-year) incentive scheme; 7. again on the subject of remuneration, having acknowledged a proposal submitted by the Supervisory Board, it approved terms for setting the criteria and maximum limits on the number of years of remuneration and the relative payment procedures to be agreed in the event of the early termination of an employment relationship or early retirement from corporate office; 8. lastly, having taken note of the proposal by the Supervisory Board and in consideration of the current legislation on the matter, it approved the determination of the ratio of variable to fixed remuneration up to a maximum of 2:1 for Identified Staff belonging to the Investments Area and the Commercial Area of the asset management company UBI Pramerica SGR Spa, the application of which for 2018 is planned for up to a maximum of 11 positions. Developments in Group governance As already reported in the last financial report, on 12 th December 2017 the Supervisory Board approved guidelines for the revision of governance which involves the adoption of a single tier governance model because it would be: (i) more easily recognisable in consideration of its widespread use internationally; (ii) more efficient from an organisational viewpoint; and (iii) able to maintain a strong focus within the board on the control function, with its consequent participation in strategic decision-making and in the management of the bank. In this respect we report that the text of the new articles of association has already been approved by the Management Board and the Supervisory Board, for those matters that concern them, and, subject to the issue of the required authorisations by the supervisory authorities, it will be submitted to an Extraordinary Shareholders Meeting for approval. The process, which will also involve a revision of policies and internal procedures, should be concluded by the time of the 2019 Annual General Meeting, which will be called upon to appoint board members for the following three-year term of office. New commercial developments for the Chinese joint venture Zhong Ou Asset Management A commercial agreement has been operational since 4 th May 2018 between Zhong Ou Asset Management, the Chinese joint venture in which the UBI Banca Group has a 25% interest, and Ant Financial Services Group, the financial and online-payment services company of the Alibaba Group, a global e-commerce company. 54

55 Zhong Ou was selected for one of the four money market fund offerings proposed on the Yu e Bau platform of Ant Financial Services, which uses money market funds to manage customer deposits (for more than 400 million users) for online payments and purchases. During the first two months of operations of the new fund, Zhong Ou posted inflows of some 8 billion from more than 4 million customers. Developments in the regulatory framework Again in the first half of the year, the general national and European regulatory framework in which Italian banks operate was in a state of change, placing the burden of a wide variety of monitoring and compliance activities on those banks. The main interventions regarded the areas listed below. GOVERNANCE On 14 th March 2018 the Bank of Italy put amendments to Part One, Title IV, Chapter 2 of Circular No. 285 dated 17 th December 2013 out for public consultation. These regarded remuneration and incentive policies in banks and banking groups in order to bring the Italian regulatory framework into line with European Banking Authority guidelines on the matter, issued on 27 th June 2016 to implement Directive 2013/36/EU ( CRD IV ). The amendments concerned several aspects, including: random checks on transactions in financial instruments executed by identified staff (IS); the adoption of policies concerning the selection of IS; the perimeter of IS to which to apply a minimum deferment of 5 years for the variable payout; guaranteed variable remuneration; multi-year incentive plans; and the golden parachutes agreed upon for early termination of employment or of a position held. The consultation period ended in May, but the document containing the outcome of the consultation process has yet to be published. In May, the European Central Bank (ECB) updated its guide to fit and proper assessments of senior officers (issued in May 2017) with the goal of providing greater detail concerning the policies, practices and processes for assessing the suitability of members of the corporate bodies of major credit institutions. In Italy, the legislative framework concerning the requirements of suitability of senior officials cannot yet be implemented because we are still awaiting the related decree by the Ministry of the Economy and Finance (MEF). INVESTMENT PRODUCTS AND SERVICES AND THE STABILITY OF FINANCIAL MARKETS The Consob (Italian securities market authority) approved new regulations with Resolution No of 15 th February The previous Regulation No of 29 th October 2007 and subsequent modifications on intermediaries was repealed as were some provisions of the joint Consob-Bank of Italy Regulation as a result of the new regulatory powers conferred on the Consob. This provision forms part of the implementation in Italian law of Directive 2014/65/EU (Markets in Financial Instruments Directive - MiFID II) and Regulation (EU) No. 600/2014 (MiFIR) and it contains following: a) provisions for the protection of investors, including knowledge and expertise requirements for the staff of intermediaries who provide information or advice to customers of the intermediaries; b) product governance rules extended without distinction to all those authorised to provide investment services; c) new rules governing the activities of financial advisors and also new supervisory and sanctioning powers for the Supervisory and administrative body of the single association of financial advisors, in accordance with the 2016 Legge di stabilità ( Stability Law Annual Finance Law); d) authorisation procedures for stock brokerage companies and the introduction to Italy of Community and third-country investment firms and MiFID II derived rules applicable to operators. Furthermore, an addition to the previous 2007 memorandum of understanding was agreed by the Consob and the Bank of Italy for the co-ordination of their respective regulatory and supervisory functions concerning the management of potentially harmful conflicts of interest. On 28 th May 2018, the European Securities and Markets Authority (ESMA) published the final version of its guidance on certain aspects of the MiFID II adequacy requirements. This document is of particular importance in assessing the adequacy of the financial instruments, advisory services, and other products issued to customers. As we await the necessary amendments to the 55

56 legal framework, based on the sustainable finance action plan published by the European Commission 5, the ESMA included in the final version of this guidance a good practice for investment companies with the goal of increasing focus on and awareness of these issues among the companies themselves and the various supervisory bodies. BANKING PRODUCTS AND SERVICES AND SOUND AND PRUDENT MANAGEMENT With regard to this legislative framework, in the first half of 2018, a series of changes were made that concerned the following issues in particular: non-performing loans, real estate investments, the transparency of banking and financial services and operations, and salary or pension-backed loans. Non-performing loans On 14 th March 2018, the European Commission proposed an ambitious and full package of measures for a speedier reduction in non-performing loans in the banking sector. These measures integrate work on the Capital Markets Union and they represent further progress towards the completion of the Banking Union which is one of the immediate priorities indicated by EU leaders to strengthen the Economic and Monetary Union. These proposals, which will not take effect until after their approval by the European Parliament and Council, lay down a global approach involving combined complementary action on four key aspects: 1 Ensuring that banks have sufficient funds to cover future losses on non-performing loans Common levels of minimum coverage are introduced for loans granted from 14 th March 2018 that become non-performing by means of an amendment to the Capital Requirement Regulation (CRR). If a bank does not comply with the applicable minimum level, then deductions are made to its own funds. 2 Allowing fast track out-of-court enforcement for loans backed by collateral These proposals allow banks and debtors to agree fast track procedures beforehand for the recovery of loans backed by collateral. If a debtor defaults, the bank or another guaranteed creditor can rapidly recover the loan collateral without undertaking legal action. Out-of-court enforcement of the guarantee is limited exclusively to loans to businesses and is protected by safeguards, while consumer loans are excluded. 3 Further development of secondary markets for non-performing loans This proposal encourages the development of secondary markets for non-performing loans, by harmonising the requirements and establishing a single market for the management of credit and the sale of bank loans to third parties in the EU. The directive proposed determines the activities of parties that operate in the management of loans (servicers), sets common regulations for authorisation and supervision and establishes rules of conduct throughout the EU. Those purchasing a bank loan must notify the authorities at the time of purchase. Third-country operators that purchase consumer loans are required to make use of authorised EU servicers. Consumers are protected by legal guarantees and transparency regulations so that the sale of loans does not harm the rights and legitimate interests of debtors. 4 Technical Blueprint for the establishment of national Asset Management Companies (AMCs) This technical blueprint, which is not compulsory, offers member states a guide, if they consider it useful, on how to set up national asset management companies in full compliance with EU regulations in force in the banking sector and those on state aid. While an asset management company which comprises an element of state aid represents an exceptional solution, the blueprint clarifies what type of organisation is allowed for a company that benefits from government support. The blueprint also allows alternative measures for non-performing assets. On 15 th March 2018, on conclusion of a public consultation conducted between 4 th October and 8 th December 2017 the European Central Bank (ECB) published an Addendum to the ECB Guidance to banks on non-performing loans: supervisory expectations for provisioning of new NPLs. The addendum adds to previous qualitative recommendations which had been published on 20 th March 2017, which laid down the authority s expectations relating to provisions considered prudent for new NPLs, which is to say for exposures classified as non-performing from 1 st April More specifically, the regulatory framework currently in force requires banking supervisors to assess and decide whether banks provisions are adequate and timely from a prudential viewpoint. When assessing a bank s provisions for non-performing loans, the ECB will take account of the level of protection of the loan and the age range of the exposures, which is an aspect of primary importance. In this regard, the addendum proposes a distinction between exposures that are fully guaranteed, fully unguaranteed, and partially guaranteed. In the latter case, the guaranteed portion is assessed in accordance with the supervisory expectations for guaranteed exposures (100% coverage within an age of 7 years), whereas the unguaranteed portion is assessed in accordance with the supervisory expectations for unguaranteed exposures (100% coverage within an age of 2 years). 5 In this document, the European Commission stated that firms should ask about the preferences of their customers (such as environmental, social and governance factors) and take account of these preferences when assessing the range of financial instruments and insurance products to be recommended as part of the process of selecting the product and assessing its adequacy. 56

57 While the document is not of a binding nature for banks, it will act as a basis for supervisory dialogue. In the course of that dialogue, the central bank will discuss possible divergences from prudential provisioning expectations recommended in the addendum with individual banks and will decide if measures are appropriate and which ones, with account taken of the specific situation of each bank. The results of this dialogue will be integrated for the first time in the 2021 supervisory review and evaluation process (SREP). The addendum is of a complementary nature with respect to any future EU legislation based on the proposal from the European Commission to address NPLs within the Pillar 1 framework. While the addendum regards only significant banks subject to direct supervision by the ECB, the Commission s proposal concerning compulsory minimum provisioning levels is conceived of as a compulsory requirement applicable to all banks. Primary characteristics of the European Commission Regulation and the ECB Addendum Regulatory Launch date Scope of application European Commission Regulation In force following approval by the European Parliament and the Council ECB Addendum In force immediately 14 th March 2018 New loans that generate NPLs over time Provision percentage and timeframe 100% unguaranteed loans within 2 years 100% guaranteed loans within 8 years 1 st April 2018 New NPLs 100% unguaranteed loans within 2 years 100% guaranteed loans between 3 and 7 years Perimeter All banks in the EU Major banks subject to direct supervision Legal framework Pillar 1 Regulation applicable to all parties Pillar 2 Non-binding, but an expectation of the supervisor and a basis for supervisory dialogue Lastly, we report that, again in March, the EBA put guidelines on the management of non-performing exposures and those subject to forbearance measures out for consultation. The objective of the guidelines is to achieve an appreciable reduction in non-performing loans in order to strengthen the resilience of banks and to support their lending activities on the market. The consultation period ended on 8 th June 2018, but the document containing the outcome of the consultation process has yet to be published. On 27 th April 2018, the EBA opened the guidelines on disclosures by credit institutions regarding nonperforming and forborne exposures, as well as pledged assets, for consultation. These guidelines established uniform content and formats for disclosures to provide important information to the market on the asset quality of credit institutions and on the distribution level of guarantees on non-performing exposures with the goal, in part, of properly defining an institution s risk profile and reducing existing asymmetries in information. Disclosure frequency and related obligations are applied in a manner proportionate to the size of the institution and the level of exposures. The consultation period ended on 27 th July 2018, and we are awaiting publication of the outcome. Real estate investments by banks On 16 th March 2018, in confirmation of existing measures that prevent banks from conducting speculative investments in real estate and limit the total amount of real estate and equity investments to no more than the total value of own funds, the Bank of Italy opened the consultation period for proposed new measures that: confirm the general limit but allow it to be surpassed in the event of real estate purchases to protect creditors rights or following the termination of finance lease agreements without any additional requirement; eliminate the obligation of ready liquidity and establish that divestment is to take place over a reasonable time period (over a time horizon of 4 years) taking account of the objective of protecting the resale value; require that all real estate investments be managed within the scope of strategies that ensure the unified coverage of all risks (e.g. strategic, legal, compliance, operational, reputation, liquidity, conflicts of interest, etc.) and observance of the limits set by the RAF, while taking due account of these investments when determining capital and liquidity adequacy; establish organisational constraints and operational synergies with the functions responsible for aspects such as the monitoring of guarantees, credit collection, and control functions, which are to be governed by establishing specific procedures and controls. 57

58 Once it has been determined that the admissible limit for real estate investments has been surpassed, the bank must, within 60 days, establish a plan for returning within the limit that is to be implemented over a reasonable period of time. This plan is to be reported immediately to the Bank of Italy, which will then decide if it is adequate and may, when necessary: require appropriate corrective actions within the scope of the SREP; implement specific measures in the event of new investments; prohibit surpassing the limit; order the bank to sell investment property within a certain period of time. The new provisions are supplemented by specific instructions for calculating the prudential limit and for handling exposures in real estate investments, which the bank must follow in the event that the protection of creditors rights has been managed by way of specialist firms (which may or may not be subject to consolidation by the bank). The Italian Banking Association has created a working group, which includes the involvement of UBI Banca, to define the observations regarding the draft document, which included the need to determine their applicability in relation to property purchased based on special laws, extension to financial companies, and the specification of the criteria adopted in order to assess the adequacy of the corrective action plan. Debt instruments subject to bail-in and held by retail customers Finally, on 30 th May 2018, the EBA and the ESMA issued a joint statement encouraging institutions, market and resolution authorities to give proper consideration to retail holders of debt financial instruments subject to the Bank Recovery and Resolution Directive (BRRD) when carrying out their respective tasks. The authorities note that the distribution of debt instruments issued by financial institutions to retail clients and subject to bail-in may raise significant consumer protection issues and affect the practical application of the resolution framework under the BRRD. The statement points out that the BRRD does not provide for different treatment of eligible liabilities based on the nature of the holder. Therefore, where there is a material presence of retail debt investors, resolution authorities are encouraged to factor this element into their resolution planning and assessment of possible impediments to resolution, while carefully assessing, on a case-by-case basis, whether the bail-inable securities may, under exception and justified circumstances, be excluded from the bail-in. In addition to the provisions of MiFID II regarding product governance and definition of the target market, aimed at properly placing the bail-inable securities, the EBA and the ESMA require further strengthening of the following aspects: - adequate disclosures to customers concerning securities risk and periodic updates in light of the issuer s status, while implementing specific disclosure procedures; - the management of conflicts of interest; - the qualification of bail-inable securities as complex instruments ; - the presentation of (worst-case) scenario analyses. Transparency in Banking and Financial Transactions and Services On 8 th February 2018 the Bank of Italy put out amendments for consultation (until 9 th April 2018) to provisions on Transparency in banking and financial transactions and services. Proper conduct in relationships between the intermediaries and customers. The amendments made are designed to implement the European Banking Authority guidelines dated 22 nd March 2016 on Governance and supervisory measures on retail banking products, applicable from 3 rd January The regulations put out to consultation reinforce the overall provisions governing proper conduct in relations between intermediaries and customers designed to ensure that the provision of banking and financial products is aimed at the type of customer, identified when the products themselves are designed, for whom they are actually suited. With regard to the EBA guidelines, the Bank of Italy recommends: - broadening the range of legal entities to which the regulations are applicable: while the EBA applies the regulations to banks only, the transparency provisions apply to product companies insofar as they are financial intermediaries registered as members of the association pursuant to Art. 106 of the Consolidated Banking Law; - broadening the range of customers protected by the regulations: while the EBA Guidelines refer to consumers only, the Bank of Italy has extended the perimeter to include all retail customers (therefore including micro-businesses and not for profit organisations). As concerns the date on which the regulations become applicable, intermediaries are required to comply with the new provisions by 1 st January The new provisions apply to products created and offered on the market from 1 st January 2019 and in any case to all products subject to substantial modification after that date. Salary-backed loans (SBL) and pension-backed loans (PBL) On 30 th March 2018, the Bank of Italy issued a document containing supervisory guidelines on SBLs or PBLs which provides intermediaries and the market with practical advice on the principles contained in the regulations in order to fight improper conduct and to promote the adoption of proper conduct in dealings with customers. 58

59 The authority considers that it is necessary and urgent on the salary backed loan market to reduce disputes between intermediaries and customers arriving before the Financial Banking Arbitrator and also in order to ensure greater protection of customers and to mitigate operational, reputational and legal risks for intermediaries. INSURANCE SERVICES The legislative framework concerning insurance services is undergoing great change, particularly in consideration of the approaching effective date of Directive (EU) 2016/97 of the European Parliament and of the Council of 20 th January 2016 (the Insurance Distribution Directive, or IDD ) set for October 2018, for which Member States were required to adopt related national legislation by 1st July The IVASS (the insurance authority) has put out amendments for public consultation to ISVAP Regulation No. 7 of the 13 th July 2007 regarding the financial statements of insurance companies and reinsurance companies prepared in accordance with IFRS accounting standards. The amendments follow the entry into force of IFRS 9 and subsequent exemptions granted to insurance companies introduced by amendments to IFRS 4. The consultation period ended on 8 th May 2018 with publication of the outcome of the consultation process. We are still awaiting publication of the appropriately amended Regulation 7/2007. On 21 st May 2018, in implementation of the aforementioned IDD, Italy s parliament issued Legislative Decree no. 68/2018 introducing significant amendments to Legislative Decree nos. 209 of 7 th September 2005 (the Private Insurance Code ), 58 of 24 th February 1998 (the Consolidated Finance Act), and 28 of 4 th March 2010 (regarding out-of-court settlements and arbitration). Following an analysis of the impact of the IDD on company processes, UBI Banca activated a working group in the third quarter of 2017 in order to determine the changes with the greatest impact on the bank, which may be summarised as follows: the obligation to determine the person(s) responsible for distribution activities as appointed by senior management and who possess certain prerequisites and reporting these appointments to the IVASS; the adoption of policies concerning product development and management; changes to the placement process in order to consider additional factors when analysing customer needs; changes to the areas subject to professional training and the procedures for such training; the impact on remuneration processes and in relation to conflicts of interest. Also in response to the IDD and based on the changes brought about by Italian Legislative Decree no. 68/2018, the IVASS began consultation no. 5/2018 regarding the draft regulation on insurance and reinsurance distribution in order to govern these activities in a more unified manner. This organic draft regulation is organised into themes and will, when it goes into effect, contribute to the full amendment and updating of previous provisions on insurance and reinsurance issued by the IVASS. DATA PROTECTION In response to the European General Data Protection Regulation no. 2016/679 (GDPR), which went into effect on 25th May 2016 and is applicable as of 25 th May 2018, important changes to applicable legislation (Legislative Decree no. 196/2003) have been made in Italy. With the GDPR, Europe has sought to uniformly strengthen across all Member States the existing rules concerning the protection of personal data and the free circulation of such data within the European Union. The regulation requires data controllers to play a technical and organisational role that complies with the GDPR, which introduces new principles such as the protection of personal data by way of a prior assessment of the risks of data processing and establishing appropriate measures to mitigate those risks right from the planning phase of activities that call for the handling of personal data. The GDPR also introduces the figure of Data Protection Officer (DPO), which is now mandatory for the UBI Banca Group as well. Within this context, monitoring activities have focused, above all, on the second draft of the legislative decree, which establishes provisions for adapting Italian legislation to the provisions of Regulation (EU) 2016/679 (i.e. the GDPR). Unlike the previous version, which repealed the previous data protection code, the new draft of the decree calls for: - the repeal of provisions that are incompatible with the GDPR; - changes to the data protection code only where necessary in order to implement the provisions of the GDPR that are not directly applicable within Italian law; - the coordination of national provisions with those of the European Community; - the adaptation of Italy s system of administrative and criminal sanctions to the provisions of the GDPR. The legislation, which has reached the consultation phase with the parliamentary commissions, concerns all companies of the UBI Banca Group. 59

60 The distribution network and market positioning The branch network of the Group At the end of June the UBI Banca Group s branch network consisted of 1,817 branches (unchanged at the date of this report), of which 1,812 operating in Italy, down by 26 branches compared with the end of 2017, attributable mainly to the rationalisation of the distribution network at the time of the third and last stage of the integration of the New Banks that took place in February and also, to a marginal extent, the closure of a further six mini-branches 1. The distribution network of the UBI Banca Group divided into seven Macro Geographical Areas is shown on the map printed on the initial pages of this report. The branch network of the UBI Banca Group in Italy and abroad Number of branches Change UBI Banca Spa 1,796 1, of which North West Macro Geographical Area (1) of which Milan and Emilia Romagna Macro Geographical Area (2) of which Bergamo and West Lombardy Macro Geographical Area of which Brescia and North East Macro Geographical Area of which Latium Tuscany Umbria Macro Geographical Area of which the Marches and Abruzzo Macro Geographical Area of which South Macro Geographical Area of which branches not comprised within Macro geographical areas (3) IW Bank Spa former Banca Teatina Spa TOTAL 1,817 1, Total Branches in Italy 1,812 1, (1) The figures are inclusive of 3 foreign branches. (2) The figures do not include the 12 units dedicated exclusively to pawn credit. (3) The figures are inclusive of 2 foreign branches. (4) The figures also include financial advisors belonging to the Wealth Management Area of IW Bank Spa. Financial advisors (4) As already reported, the organisation of the new distribution model, outlined in the 2019/2020 Business Plan, was brought to completion during the course of In detail: the Private & Corporate Unity division underwent the following organisational changes: - staff who worked with Top Private Banking clients joined the Top Private Banking Centres and Corners reporting to the Top Private Banking Manager accounting for a total of 27 Centres and 55 Corners (unchanged compared with the end of 2017); - with the transfer of the remaining Private Bankers into branches, from April 2017 the PCUs and the relative Corners were converted into Corporate Centres belonging to the respective Macro Geographical Areas. As a result of the Corporate & Investment Banking, Corporate Centres and Top Private Banking Centres Corporate & Investment Banking 1 1 Large Corporate GRM 1 1 Corporate Centres (*) North West Macro Geographical Area 5 5 Milan and Emilia Romagna Macro Geographical Area 7 7 Bergamo and West Lombardy Macro Geographical Area 7 7 Brescia and North East Macro Geographical Area 6 6 Latium Tuscany Umbria Macro Geographical Area 8 8 The Marches and Abruzzo Macro Geographical Area 9 8 South Macro Geographical Area 7 7 "Corners" North West Macro Geographical Area 3 4 Milan and Emilia Romagna Macro Geographical Area Bergamo and West Lombardy Macro Geographical Area Brescia and North East Macro Geographical Area Latium Tuscany Umbria Macro Geographical Area 1 2 The Marches and Abruzzo Macro Geographical Area 4 4 South Macro Geographical Area 6 6 Total Top Private Banking Centres "Corners" Total (*) The figures do not include the three UBI Banca units in operation since 6th May 2013, which specialise solely in corporate clients. 1 The Manerbio mini-branch in the Brescia and North East Macro Geographical Area closed on 20 th January 2018, while three minibranches in the North West Macro Geographical Area closed on 31 st May 2018: at the Santi Antonio e Biagio hospital in Alessandria, in the public health centre operated by local health organisation 21 in Casale Monferrato and the public health centre operated by local health organisation 20 in Tortona. Lastly, the mini-branches in Sarnano and Morro d Alba in the Marches and Abruzzo Macro Geographical Area closed in June. 60

61 merger of Banca Teatina, at the end of the first half of 2018 the number of Corporate Centres had risen to 49 2 (48 in December), while the operations of the Mondovì Corner ceased after the end of the year and those of the Trescore and Tivoli Corners ceased in March and the Coccaglio and Montichiari Corners in May. As a consequence the total number of corners had reduced to 54 (59 at the end of 2017). At the date of this report the number of Corners had fallen to 32 after 22 units ceased to operate on 30 th July 3 ; the new Corporate & Investment Banking (CIB) Division became fully operational, as the exclusive manager for Large Corporate Groups 4 by means of the Large Corporate G.R.M. unit, with an innovative team of experts, the Global Relationship Managers, single points of client contact for complex, ordinary and extraordinary operations. Finally, we report that geographical market coverage also continues to be provided by a network of 731 financial advisors belonging to IW Bank (758 at the end of 2017) currently undergoing a process to rationalise the associated portfolios managed. The international presence At the date of this report, the international presence of the UBI Banca Group was structured as follows: five foreign branches of UBI Banca including three in France (Nice, Menton and Antibes) resulting from the merger by incorporation of the former Banca Regionale Europea and two in Munich and Madrid (to be closed by the end of the year) 5 that were transferred on 1 st April 2017 by UBI Banca International Sa, which left the group with effect from 1 st November 2017; representative offices in Russia (Moscow), Asia (Mumbai, Shanghai, Hong Kong and Dubai), North America (New York), South America (Sao Paolo) and Africa (Casablanca); equity investments (mainly controlling interests) in three foreign companies: UBI Trustee Sa (Luxembourg), UBI Management Co. Sa (Luxembourg) and Zhong Ou Asset Management Co. Ltd (China); one branch of UBI Factor Spa in Krakow in Poland; 37 commercial co-operation agreements, unchanged compared with December, with foreign banks (covering over 50 countries) in addition to three trade facilitation agreements with the European Bank for Reconstruction and Development (EBRD), the International Financial Corporation (IFC) and the Asian Development Bank (ADB) and also a product partnership in the Middle East and in Asia to guarantee effective assistance on all the principal markets in those areas for our corporate clients. 2 The opening of a Corporate Centre at Chieti. 3 The following Corners ceased to operate on 30 th July: Rossano Scalo, Reggio Calabria and Matera in the South Macro Geographical Area; Brescia Via Trieste and Corso Martiri della Libertà in the Brescia and North East Macro Geographical Area; Sassuolo and Trezzo sull Adda in the Milan and Emilia Romagna Macro Geographical Area and Alzano Lombardo, Leffe, Nembro, Sarnico, Dalmine, Zogno, Ponte San Pietro, Cantù, Erba, Monza Piazza Duomo, Arcore, Binzago, Luino, Tradate and Gallarate in the Bergamo and West Lombardy Macro Geographical Area. 4 Large corporate: counterparties with annual turnover of greater than 250,000,000 or with authorised credit at sector level of greater than 150,000, For further details see the section Significant events in the first half of 2018 of this report. 61

62 The positioning of the Group UBI Banca Group: market shares (*) The table summarises the market positioning of the UBI Banca Group at both national and regional level and in provinces where a more significant presence exists. The figures are based on the latest available data from the Bank of Italy: 30 th June 2018 for branches and 31 st March 2018 for balance sheet items [the figures relate to branches and banks operating in Italy, including the Italian branches of foreign banks (and thus exclude the foreign branches of Italian banks)]. The rapid and profound changes in progress in the financial sector, which include the restructuring of the financial companies segment, the intensification of the process to dispose of non-performing loans and the multiplication of banks that operate solely through remote channels have made it appropriate to change the method of analysis for calculating market shares in terms of balance sheet items. While previously Bank of Italy matrix items were used with a breakdown based on the location of the branch, the items used from 31 st December 2017 are those with a breakdown by residence of the counterparty, which for lending means that it is only possible to consider performing loans with the exclusion of bad loans. Market share in terms of branches at national level stood at 7%, slightly higher than in March (6.9%), with a significant presence in the regions of Central Italy, which reflects the high concentration in that area of the branches of the acquired Banks. Furthermore, the Group continues to have a substantial presence in Milan (8.9%) and in Rome (6.3%), with shares of higher than 10% in as many as 23 Italian provinces. National market share of conventional funding which does not include bonds stood at 4.5% (4.6% in December) while the share for loans in the private sector, excluding bad loans, was 6.3% (unchanged compared with December). As a result, amongst other things, of the characteristics of the original banking groups, in some areas where the Group s presence is stronger it continues to have a market share of conventional funding and/or lending that is greater than the percentage of branches. Branches Deposits (**) Lending (***) North Italy 6,5% 5,0% 7,0% Lombardy 13,3% 9,2% 11,2% Prov. of Bergamo 24,5% 25,7% 24,6% Prov. of Brescia 22,7% 19,7% 26,9% Prov. of Como 6,5% 5,4% 8,7% Prov. of Cremona 3,3% 3,6% 5,3% Prov. of Lecco 5,9% 4,8% 7,7% Prov. of Lodi 2,9% 3,5% 4,9% Prov. of Mantua 4,6% 2,7% 3,6% Prov. of Milan 8,9% 5,3% 7,0% Prov. of Monza Brianza 9,8% 6,3% 10,0% Prov. of Pavia 14,7% 10,7% 10,6% Prov. of Sondrio 6,1% 2,6% 6,1% Prov. of Varese 25,5% 20,0% 17,2% Piedmont 7,6% 4,1% 6,1% Prov. of Turin 3,0% 2,0% 4,5% Prov. of Alessandria 11,4% 5,1% 7,7% Prov. of Biella 1,7% 1,2% 5,9% Prov. of Cuneo 21,3% 14,5% 12,3% Prov. of Novara 4,1% 3,4% 5,0% Prov. of Vercelli 1,8% 1,4% 5,6% Prov. of Verbano Cusio Ossola 2,8% 1,7% 4,5% Liguria 4,9% 3,0% 6,3% Prov. of Genoa 4,5% 2,5% 6,6% Prov. of Imperia 5,6% 2,5% 6,3% Prov. of La Spezia 6,8% 6,6% 5,3% Prov. of Savona 4,2% 2,6% 5,9% Emilia Romagna 2,1% 1,2% 2,9% Prov. of Rimini 6,3% 3,4% 6,7% Prov. of Bologna 1,9% 0,9% 2,6% Prov. of Piacenza 4,4% 2,1% 4,1% Central Italy 9,6% 4,8% 6,3% Marches 28,3% 22,7% 22,9% Prov. of Ancona 31,0% 24,4% 25,2% Prov. of Macerata 38,5% 34,8% 29,9% Prov. of Pesaro and Urbino 27,3% 21,5% 21,1% Prov. of Fermo 24,1% 14,6% 18,4% Prov. of Ascoli Piceno 11,5% 6,9% 14,6% Umbria 9,0% 4,4% 7,2% Prov. of Perugia 10,5% 4,9% 7,7% Prov. of Terni 3,8% 2,5% 5,4% Latium 6,3% 2,7% 5,5% Prov. of Rome 6,3% 2,6% 5,6% Prov. of Viterbo 14,5% 9,2% 10,0% Prov. of Rieti 10,4% 3,8% 5,2% Tuscany 5,0% 2,6% 2,2% Prov. of Arezzo 19,9% 13,6% 10,3% Prov. of Florence 3,9% 1,8% 1,4% Prov. of Siena 7,0% 3,2% 1,7% Prov. of Grosseto 5,0% 3,3% 3,1% Prov. of Livorno 3,9% 2,3% 1,9% South Italy 8,7% 4,3% 6,2% Calabria 18,1% 8,9% 10,4% Prov. of Catanzaro 11,4% 6,2% 8,2% Prov. of Cosenza 21,2% 12,1% 13,9% Prov. of Crotone 15,6% 6,3% 6,9% Prov. of Reggio Calabria 21,2% 7,0% 8,2% Prov. of Vibo Valentia 13,3% 9,4% 11,2% Abruzzo 12,2% 6,9% 9,6% Prov. of Chieti 30,2% 15,8% 16,0% Prov. of Aquila 3,9% 1,7% 2,5% Prov. of Pescara 8,2% 5,5% 10,1% Prov. of Teramo 4,8% 2,4% 6,4% Molise 8,7% 2,5% 7,1% Prov. of Isernia 24,0% 3,9% 9,5% Prov. of Campobasso 4,4% 1,8% 6,4% Basilicata 7,6% 4,8% 6,8% Prov. of Potenza 7,3% 4,6% 7,1% Prov. of Matera 8,1% 5,5% 6,1% Apulia 7,6% 4,2% 4,6% Prov. of Bari 9,8% 5,4% 5,1% Prov. of Brindisi 10,4% 5,2% 4,8% Prov. of Foggia 5,2% 3,8% 4,9% Prov. of Lecce 4,3% 1,5% 3,5% Prov. of Barletta Andria Trani 5,7% 4,5% 3,8% Prov. of Taranto 8,9% 4,2% 4,3% Campania 5,6% 2,3% 5,2% Prov. of Naples 5,4% 2,5% 5,0% Prov. of Caserta 8,4% 2,7% 6,9% Prov. of Benevento 4,6% 2,0% 4,6% Prov. of Salerno 6,1% 2,8% 5,4% Total Italy 7,0% 4,5% 6,3% (*) Source Bank of Italy: regulatory registers and lists for branch shares; matrix reports for balance sheet totals. (**) M arket shares by residence of the counterparty. The matrix report for funding is based on item relating to current accounts, certificates of deposit, savings deposits and repurchase agreements. Bonds and repurchase agreements with central counterparties are excluded. (***) M arket shares by residence of the counterparty. The matrix report for lending is based on item relating to loans to the private sector excluding the following types of bad loans: advances on receivables, current account overdrafts, mortgages, credit cards, salary backed loans, personal loans, factoring, leasing and other types of financing. 62

63 Human resources Group staff Employees actually in service Employees on the payroll Changes Changes pro-forma pro-forma Number A B A-B C D C-D UBI Banca Spa* 18,101 18, ,079 19, IW Bank Spa UBI Sistemi e Servizi SCpA 1,884 1, ,150 1, UBI Leasing Spa Prestitalia Spa UBI Pramerica SGR Spa UBI Factor Spa BPB Immobiliare Srl** BancAssurance Popolari Spa*** UBI Academy SCRL BancAssurance Popolari Danni Spa*** Kedomus Srl UBI Trustee Sa Assieme Srl*** UBI Management Company Sa Oro Italia Trading Spa - in liquidazione*** Etruria Informatica Srl*** Centrobanca Sviluppo Impresa Spa**** Total 21,123 21, ,146 21, Workers on staff leasing contracts TOTAL UBI BANCA GROUP STAFF 21,124 21, TOTAL FTE STAFF 20, , On secondment outside the Group - out ***** in TOTAL WORKFORCE 21,153 21, ,153 21, * The merger of Banca Teatina into UBI Banca was concluded in February As reported previously, in October and November 2017 Banca Adriatica together with CARILO - Cassa di Risparmio di Loreto and Banca Tirrenica with Banca Federico del Vecchio respectively had already been merged into UBI Banca. ** At the end of the first half, BPB Immobiliare staff also included personnel appointed on seasonal contracts that were not banking industry contracts: 49 as at 30 th June *** These companies were consolidated as of 1 st April **** One person on partial secondment from other Group companies was working at the company as at 30 th June 2018 (two in the comparative period) and was therefore not included among employees actually in service. ***** The increase relates to staff seconded to the pension funds of the New Banks acquired. The table above gives details for each company of the actual distribution of ordinary employees (workers on permanent and temporary contracts and on apprenticeship contracts) as at 30 th June 2018 (column A) and 31 st December 2017 (column B), adjusted to take account of secondments from and to other entities within or external to the Group. On the other hand, columns C and D give the number of employees on the payroll for each company as at the same dates. The figures for December 2017 have been restated on a pro forma basis to take account of the merger of Banca Teatina, which took effect from 26 th February The figures stated as at 31 st December 2017 have been adjusted with respect to those published in the previous financial report as follows: - staff numbers for UBI Banca have been restated on a pro forma basis to take account of the merger of Banca Teatina, which was completed on 26 th February We also report that during the first half staff numbers at the Parent were reduced by two in February due to backdated dismissals and later, in April and June, increased by two following the reinstatement of former employees; - the personnel of UBI Leasing was reduced by one due to a backdated dismissal. Total staff of the UBI Banca Group as at 30 th June 2018 numbered 21,124, one of whom was on a personnel leasing contract to UBI Trustee Sa, down by 289 in the half year. This reduction was due partly to natural attrition, but mainly to redundancy incentive schemes that were implemented as part of signed agreements. In terms of full time equivalents (FTEs), on the other hand, and that is with account taken of the part-time worker effect, Group staff numbered 20,409.9 to give a reduction in numbers of compared with December. As shown in the table, Group companies recorded no substantial changes compared with December, except for the effects of normal turnover, with the following exceptions: 63

64 - UBI Banca (-307 staff) mainly in relation to incentivised redundancies in the period; - Etruria Informatica (-37 staff) following the merger of the company into UBI Sistemi e Servizi with effect from 1 st June The recruitment of these staff members was partly offset by service company redundancies; - BPB Immobiliare (+49 staff) for the usual recruitment of staff on seasonal contracts that are not banking industry contracts. A total of 403 incentivised redundancies were recorded in the six-month period, as reported in detail below. As concerns the stand-alone UBI Banca Group, voluntary redundancies came to 335, as follows: 12 staff left under the 2019/2020 Business Plan Trade Union Memorandum of Intent signed on the 11 th December 2016 which involved voluntary redundancies in the first organisational restructuring stage related to the implementation of the Single Bank Project. The last staff member will leave by the end of 2018; 118 staff left on the other hand, under the agreement signed on 26 th July 2017 which received 623 applications for access to the solidarity fund submitted under the aforementioned December memorandum (the remaining portion of the redundancies already decided resulting from the completion of the Single Bank Project). At the end of the first half 99.2% of the total redundancies had been completed (618 staff) 2 ; 205 on the basis of the agreement of 26 th October 2017 which had received 323 applications 3. Redundancies concluded at the end of March accounted for 63.5% of the total. Staff still waiting to leave as at 30 th June 2018 numbered 124. As concerns the New Banks acquired, 68 redundancies were recorded, categorised as follows: 43 under agreements signed in March and April 2017 which involved a total of 359 redundancies. The redundancy plan was 67.1% complete (241 staff) as at 30 th June; 23 under redundancy plans previously agreed, with 56 staff remaining; 2 under the agreement dated 26 th October 2017 which had received 73 applications, inclusive of 11 under the July memorandum of understanding signed by Banca Teatina (the former Nuova Cassa di Risparmio di Chieti), which completed and added to the April 2017 agreement. Staff still waiting to leave as at 30 th June 2018 numbered 244. The redundancies described above were only partially offset by new appointments provided for as part of the agreements reached. As concerns the generation turnover and support for youth employment, consistently with commitments entered into by the Group in recent years, 278 new staff members were recruited in the first half of 2018 (in addition to one person on a personnel leasing contract to UBI Trustee Sa), of whom 50 are on permanent contracts, 191 on temporary contracts and 37 on apprenticeships, partially offsetting those staff who left. 1 The 600 redundancies planned during the first stage of the Business Plan were added to by 22 redundancies relating to excess applications received under the April 2016 Agreement, accepted in the December 2016 Memorandum of Agreement. The 622 redundancies planned were reduced to 620 as a result of adjustments made in the first quarter of The total number of applications received was subject to a marginal adjustment during the second quarter. The remaining 5 staff will leave by the end of the third quarter of the year. 3 The total number of applications received was subject to a marginal adjustment during the second quarter due to two withdrawals. 64

65 The table giving figures for type of contract shows that in the six months in question net staff on permanent contracts leaving were only partially offset by the increase in staff on temporary contracts, which includes apprentices, which came to account for 2.5% of total workers on the payroll (1.7% in December 2017). The aggregate reduction of employees shown on the payroll by 276 over the half year is due to 553 departures (507 on permanent contracts and 46 on temporary contracts), against appointments Employees on the payroll (50 on permanent contracts and 227 on temporary contracts, 49 of which are the aforementioned BPB Immobiliare seasonal contracts). In addition to the net recruitments on temporary contracts, the events summarised in the table also incorporated 12 stabilisations (i.e. conversions of temporary contracts to permanent contracts). The percentage of employee workers on part-time contracts as at 30 th June 2018 was 14.1% (13.3% in December), while that of female personnel was 42.8% (42.3%). The attention paid to the enhancement of female talent is demonstrated by the award of the 1st European Grand Prix de la Mixité prize in the FTSE MIB Category to UBI Banca, the first Italian bank or listed company to receive this award for best practices in the sphere of gender diversity. The prize, awarded by the Institut du Capitalisme Responsable and Ethics & Boards examined six different criteria divided into two categories: female representation on boards and female representation on executive bodies. UBI Banca achieved a score of 46.3 out of 67, compared with an average score of 21.2 out of 67. This prestigious prize was awarded in Paris on 12 th July 2018 as part of the Paris Europlace International Financial Forum, a major international event that brings together more than 1,500 representatives of companies, international investors and financial institutions. Number pro-forma Total employees 21,146 21,422 of whichpermanent 20,617 21,062 on temporary contracts apprentices (*) (*) An apprenticeship is a contract for young people between the ages of 18 and 29, by which they acquire a qualification through training at work which provides them with specific occupational skills. The duration of the currently existing contracts in the UBI Banca Group is 24 months. The composition of banking staff by rank, details of which are given in the table, was more or less in line with that of the UBI Banca Group in December Composition of staff in Group Banks* by rank Number % pro-forma Senior managers % % Middle managers 3rd and 4th level 3, % 3, % Middle managers 1st and 2nd level 4, % 4, % 3rd Professional Area (office staff) 11, % 11, % 1st and 2nd Professional Area (other staff) % % TOTAL FOR BANKS 19, % 19, % % * The figures reported include UBI Banca and IW Bank staff 4 The number does not include the recruitment of one employee outside the Group, at UBI Pramerica SGR Spa. 65

66 Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules Reclassified consolidated balance sheet Figures in thousands of euro A B C Change A-B % change A/B Change A-C % change A/C ASSETS 10. Cash and cash equivalents 616, , ,578 3, % -195, % 20. Financial assets measured at fair value through profit or loss 1,488,445 1,541,428 1,979,802-52, % -491, % 1) loans and advances to banks 14,796 14,900 14, % % 2) loans and advances to customers 313, , ,425-27, % -48, % 3) securities and derivatives 1,160,069 1,185,728 1,602,622-25, % -442, % 30. Financial assets measured at fair value through other comprehensive income 11,527,974 12,645,089 12,435,307-1,117, % -907, % 1) loans and advances to banks ) loans and advances to customers ) securities 11,527,974 12,645,089 12,435,307-1,117, % -907, % 40. Financial assets measured at amortised cost 103,886, ,740, ,833,189 1,145, % 2,053, % 1) loans and advances to banks 9,513,708 8,142,802 7,814,815 1,370, % 1,698, % 2) loans and advances to customers 91,342,643 91,575,231 90,980, , % 361, % 3) securities 3,029,948 3,022,360 3,037,415 7, % -7, % 50. Hedging derivatives 59,804 67, ,907-7, % -110, % 60. Fair value change in hedged financial assets (+/-) 33, ,035 34,007 n.s. 35,861 n.s. 70. Equity investments 240, , ,165-7, % -2, % 80. Technical reserves of reinsurers % % 90. Property, plant and equipment 1,799,295 1,799,070 1,811, % -12, % 100. Intangible assets 1,711,908 1,723,921 1,728,328-12, % -16, % of which: goodwill 1,465,260 1,465,260 1,465, Tax assets 4,122,268 4,017,911 4,184, , % -62, % 120. Non-current assets and disposal groups held for sale 1, % % 130. Other assets 1,415,721 1,165,674 1,451, , % -35, % Total assets 126,904, ,563, ,647, , % 256, % LIABILITIES AND EQUITY 10. Financial liabilities measured at amortised cost 111,617, ,520, ,182,776 96, % 434, % a) Due to banks 16,607,300 17,308,468 16,733, , % -125, % b) Due to customers 70,582,753 68,944,514 68,434,827 1,638, % 2,147, % c) Debt securities issued 24,427,302 25,267,635 26,014, , % -1,587, % 20. Financial liabilities held for trading 386, , ,653 19, % -24, % 30. Financial liabilities designated as at fair value 75,488 59,019 43,021 16, % 32, % 40. Hedging derivatives 102,961 98, ,590 4, % 2, % 50. Fair value change in hedged financial liabilities (+/-) 54,008 27,825-26, % 54, Tax liabilities 208, , ,908-63, % -32, % 80. Other liabilities 2,654,081 2,035,487 2,694, , % -40, % 90. Provision for post-employment benefits 328, , ,779-8, % -22, % 100. Provisions for risks and charges: 565, , ,612-18, % -59, % a) commitments and guarantees granted 73,964 77,284 88,347-3, % -14, % b) pension and similar obligations 130, , ,213-4, % -6, % c) other provisions for risks and charges 360, , ,052-10, % -38, % 110. Technical reserves 1,879,072 1,901,000 1,780,701-21, % 98, % Share capital, share premiums, reserves, valuation reserves and treasury shares 8,756,026 9,183,186 8,447, , % 308, % 190. Minority interests (+/-) 67,336 59,724 79,688 7, % -12, % 200. Profit for the period (+/-) 208, , ,557 91, % -481, % Total liabilities and equity 126,904, ,563, ,647, , % 256, % Some figures as at 1 st January 2018 [(items 20.2), 20.3), 40.1) and 40.3)] differ from those published in the financial report for the period ended 31 st March 2018 due to marginal changes, consisting mainly of figures rounded up or down. 66

67 Reclassified consolidated income statement Figures in thousands of euro 1H.2018 IFRS 9 2nd Quarter 2018 IFRS 9 1st Quarter 2018 IFRS 9 Change % change 2nd Quarter 2017 IFRS 9 Change % change A B C B-C B/C D B-D B/D Net interest income 896, , ,794 20, % 398,013 of which: TLTRO II 25,247 12,693 12, % - of which: IFRS9 credit components 61,206 35,543 25,663 9, % - of which: IFRS9 contractual modifications without derecognition components (22,072) (13,412) (8,660) 4, % Dividends and similar income 8,369 3,232 5,137 (1,905) (37.1%) 7,998 (4,766) (59.6%) Profits of equity-accounted investees 9,013 1,752 7,261 (5,509) (75.9%) 6,789 (5,037) (74.2%) Net fee and commission income 807, , ,338 (6,708) (1.6%) 410,534 (9,904) (2.4%) of which performance fees 8,489 6,745 1,744 5,001 n.s. 3,990 2, % Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities measured at fair value through profit or loss 52,236 18,494 33,742 (15,248) (45.2%) 83, Net income from insurance operations 11,003 5,548 5, % 4,145 1, % 230. Other net operating income/expense 51,761 23,394 28,367 (4,973) (17.5%) 29,956 (6,562) (21.9%) Operating income 1,836, , ,094 (13,686) (1.5%) 940, a) Staff costs (749,859) (374,325) (375,534) (1,209) (0.3%) (396,313) (21,988) (5.5%) 190. b) Other administrative expenses (392,557) (186,643) (205,914) (19,271) (9.4%) (199,694) (13,051) (6.5%) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (82,001) (40,384) (41,617) (1,233) (3.0%) (40,207) % Operating expenses (1,224,417) (601,352) (623,065) (21,713) (3.5%) (636,214) (34,862) (5.5%) Net operating income 612, , ,029 8, % 304, Net impairment losses for credit risk relating to: (266,340) (142,252) (124,088) 18, % (228,243) 130. a) - financial assets measured at amortised cost: loans and advances to banks (1,460) 265 (1,725) 1,990 n.s a) - financial assets measured at amortised cost: loans and advances to customers (258,166) (140,495) (117,671) 22, % (147,826) 130. a) - financial assets measured at amortised cost: securities (104) 15 (119) 134 n.s b) - financial assets measured at fair value through other comprehensive income (6,610) (2,037) (4,573) (2,536) (55.5%) (80,417) 200. a) Net provisions for risks and charges - commitments and guarantees granted 14,540 3,477 11,063 (7,586) (68.6%) (2,246) 200. b) Net provisions for risks and charges - other net provisions (17,113) (15,700) (1,413) 14,287 n.s. 2, Profits from the disposal of equity investments (623) (78.6%) 496 (326) (65.7%) 290. Pre-tax profit from continuing operations 344, , ,384 (32,633) (17.3%) 76, Taxes on income for the period from continuing operations (116,908) (55,557) (61,351) (5,794) (9.4%) (40,407) 15, % 340. (Profit) loss for the period attributable to minority interests (13,803) (7,794) (6,009) 1, % (6,362) 1, % Profit for the period before the Business Plan and other impacts 213,424 92, ,024 (28,624) (23.7%) 29, a) Redundancy expenses net of taxes and minority interests - (164) 164 (328) n.s. (2,285) (2,121) (92.8%) Business Plan Project expenses net of taxes and 190. b) minority interests (4,557) (1,029) (3,528) (2,499) (70.8%) (11,571) (10,542) (91.1%) 275. Negative consolidation difference ,900 (612,900) (100.0%) Profit for the period attributable to the shareholders 350. of the Parent 208,867 91, ,660 (26,453) (22.5%) 629,008 (537,801) (85.5%) 67

68 Reclassified consolidated income statement net of the most significant non-recurring items Figures in thousands of euro 1H 2018 A net of non-recurring items 2nd Quarter 2018 B net of non-recurring items 1st Quarter 2018 C net of non-recurring items Change B-C % change B/C Net interest income 896, , ,794 20, % of which: TLTRO II 25,247 12,693 12, % of which: IFRS9 credit components 61,206 35,543 25,663 9, % of which: IFRS9 contractual modifications without derecognition components (22,072) (13,412) (8,660) 4, % Dividends and similar income 8,369 3,232 5,137 (1,905) (37.1%) Profits of equity-accounted investees 9,013 1,752 7,261 (5,509) (75.9%) Net fee and commission income 807, , ,338 (6,708) (1.6%) of which: performance fees 8,489 6,745 1,744 5,001 n.s. Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities measured at fair value through profit or loss 52,236 18,494 33,742 (15,248) (45.2%) Net income from insurance operations 11,003 5,548 5, % Other net operating income/expense 51,761 23,394 28,367 (4,973) (17.5%) Operating income 1,836, , ,094 (13,686) (1.5%) Staff costs (749,859) (374,325) (375,534) (1,209) (0.3%) Other administrative expenses (379,672) (173,758) (205,914) (32,156) (15.6%) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (82,001) (40,384) (41,617) (1,233) (3.0%) Operating expenses (1,211,532) (588,467) (623,065) (34,598) (5.6%) Net operating income 624, , ,029 20, % Net impairment losses for credit risk relating to: (266,340) (142,252) (124,088) 18, % - financial assets measured at amortised cost: loans and advances to banks (1,460) 265 (1,725) 1,990 n.s. - financial assets measured at amortised cost: loans and advances to customers (258,166) (140,495) (117,671) 22, % - financial assets measured at amortised cost: securities (104) 15 (119) 134 n.s. - financial assets measured at fair value through other comprehensive income (6,610) (2,037) (4,573) (2,536) (55.5%) Net provisions for risks and charges - commitments and guarantees granted 14,540 3,477 11,063 (7,586) (68.6%) Net provisions for risks and charges - other net provisions (17,113) (15,700) (1,413) 14,287 n.s. Profits from the disposal of equity investments (623) (78.6%) Pre-tax profit from continuing operations 357, , ,384 (19,748) (10.5%) Taxes on income for the period from continuing operations (121,097) (59,746) (61,351) (1,605) (2.6%) (Profit) loss for the period attributable to minority interests (13,803) (7,794) (6,009) 1, % Profit for the period attributable to the shareholders of the Parent 222, , ,024 (19,928) (16.5%) 68

69 Reclassified consolidated income statement net of the most significant non-recurring items: details 2nd Quarter 2018 IFRS Business Plan 2nd Quarter 2018 IFRS 9 Business Plan Project Expenses Redundancy expenses Extraordinary Contribution to Resolution Fund net of nonrecurring items 1st Quarter 2018 IFRS Business Plan 1st Quarter 2018 IFRS 9 Business Plan Project Expenses Redundancy expenses net of nonrecurring items Net interest income 458, , , ,794 of which: TLTRO II 12,693 12,693 12,554 12,554 of which: IFRS9 credit components 35,543 35,543 25,663 25,663 of which: IFRS9 contractual modifications without derecognition components (13,412) (13,412) (8,660) (8,660) Dividends and similar income 3,232 3,232 5,137 5,137 Profits of equity-accounted investees 1,752 1,752 7,261 7,261 Net fee and commission income 400, , , ,338 of which: performance fees 6,745 6,745 1,744 1,744 Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities measured at fair value through profit or loss 18,494 18,494 33,742 33,742 Net income from insurance operations 5,548 5,548 5,455 5,455 Other net operating income/expense 23,394 23,394 28,367 28,367 Operating income 911, , , ,094 Staff costs (374,325) (374,325) (375,534) (375,534) Other administrative expenses (186,643) 12,885 (173,758) (205,914) (205,914) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (40,384) (40,384) (41,617) (41,617) Operating expenses (601,352) ,885 (588,467) (623,065) - - (623,065) Net operating income 310, , , , ,029 Net impairment losses for credit risk relating to: (142,252) (142,252) (124,088) (124,088) - financial assets measured at amortised cost: loans and advances to banks (1,725) (1,725) - financial assets measured at amortised cost: loans and advances to customers (140,495) (140,495) (117,671) (117,671) - financial assets measured at amortised cost: securities (119) (119) - financial assets measured at fair value through other comprehensive income (2,037) (2,037) (4,573) (4,573) Net provisions for risks and charges - commitments and guarantees granted 3,477 3,477 11,063 11,063 Net provisions for risks and charges - other net provisions (15,700) (15,700) (1,413) (1,413) Profits from the disposal of equity investments Pre-tax profit from continuing operations 155, , , , ,384 Taxes on income for the period from continuing operations (55,557) (4,189) (59,746) (61,351) (61,351) (Profit) loss for the period attributable to minority interests (7,794) (7,794) (6,009) (6,009) Profit for the period before the Business Plan and other impacts 92, , , , ,024 Redundancy expenses net of taxes and minority interests (164) (164) - Business Plan Project expenses net of taxes and minority interests (1,029) 1,029 - (3,528) 3,528 - Profit for the period 91,207 1, , , ,660 3,528 (164) 121,024 69

70 Reconciliation schedule for the period ended 30th June 2018 RECLASSIFIED CONSOLIDATED INCOME STATEMENT Reclassifications 1H H 2018 Profits (losses) Items Mandatory Profits of Net income Depreciation from contractual BP BP Reclassified consolidated Tax equityaccounted insurance from for leasehold modifications Redundancy Project financial financial recoveries improvements without expenses Expenses statements statements investees operations Figures in thousands of euro derecognition Net interest income 938,134 (19,910) (22,072) 896,152 of which: TLTRO II 25,247 25,247 of which: IFRS9 credit components 61,206 61,206 of which: IFRS9 contractual modifications without derecognition components - (22,072) (22,072) 70. Dividends and similar income 9,811 (1,442) 8,369 Profits of equity-accounted investees - 9,013 9, Net fee and commission income 808,810 (842) 807, Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities measured at fair value through profit or loss 54,831 (2,595) 52, Net income from insurance operations (3,872) 14,875 11, , Other net operating income/expense 159,044 (119,260) 2,063 9,914 51,761 Operating income 1,966,758 (119,260) 2,063 9,013 - (22,072) - - 1,836, a Staff costs (749,859) (749,859) 190.b Other administrative expenses (518,666) 119,260 6,849 (392,557) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (79,938) (2,063) (82,001) Operating expenses (1,348,463) 119,260 (2,063) ,849 (1,224,417) Net operating income 618, ,013 - (22,072) - 6, , Net impairment losses for credit risk relating to: (266,340) (266,340) 130. a) - financial assets measured at amortised cost: loans and advances to banks (1,460) (1,460) 130. a) - financial assets measured at amortised cost: loans and advances to customers (258,166) (258,166) 130. a) - financial assets measured at amortised cost: securities (104) (104) 130. b) - financial assets measured at fair value through other comprehensive income (6,610) (6,610) 140. Loss from contractual modifications without derecognition (22,072) 22, a) Net provisions for risks and charges - commitments and guarantees granted 14,540 14, b) Net provisions for risks and charges - other net provisions (17,113) (17,113) Profits from the disposal of equity investments 9,976 (9,013) Pre-tax profit from continuing operations 337, , , Taxes on income for the period from continuing operations (114,681) (2,227) (116,908) 340. (Profit) loss for the period attributable to minority interests (13,738) (65) (13,803) Profit for the period before the Business Plan and other impacts 208, , , a) Redundancy expenses net of taxes and minority interests b) Business Plan Project expenses net of taxes and minority interests - (4,557) (4,557) 350. Profit for the period attributable to the shareholders of the Parent 208, ,867 70

71 Reconciliation schedule for the period ended 31st March 2018 RECLASSIFIED CONSOLIDATED INCOME STATEMENT Reclassifications Profits (losses) Items Mandatory Profits of Net income Depreciation from contractual BP BP Reclassified consolidated Tax equityaccounted insurance from for leasehold modifications Redundancy Project financial financial recoveries improvements without expenses Expenses statements statements investees operations Figures in thousands of euro derecognition Net interest income 455,511 (9,057) (8,660) 437,794 of which: TLTRO II 12,554 12,554 of which: IFRS9 credit components 25,663 25,663 of which: IFRS9 contractual modifications without derecognition components - (8,660) (8,660) 70. Dividends and similar income 5,265 (128) 5,137 Profits of equity-accounted investees - 7,261 7, Net fee and commission income 407,675 (337) 407, Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities measured at fair value through profit or loss 33,806 (64) 33, Net income from insurance operations (261) 5,716 5, , Other net operating income/expense 83,612 (60,159) 1,044 3,870 28,367 Operating income 985,608 (60,159) 1,044 7,261 - (8,660) , a Staff costs (375,281) (253) (375,534) 190.b Other administrative expenses (271,387) 60,159 5,314 (205,914) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (40,573) (1,044) (41,617) Operating expenses (687,241) 60,159 (1,044) (253) 5,314 (623,065) Net operating income 298, ,261 - (8,660) (253) 5, , Net impairment losses for credit risk relating to: (124,088) (124,088) 130. a) - financial assets measured at amortised cost: loans and advances to banks (1,725) (1,725) 130. a) - financial assets measured at amortised cost: loans and advances to customers (117,671) (117,671) 130. a) - financial assets measured at amortised cost: securities (119) (119) 130. b) - financial assets measured at fair value through other comprehensive income (4,573) (4,573) 140. Loss from contractual modifications without derecognition (8,660) 8, a) Net provisions for risks and charges - commitments and guarantees granted 11,063 11, b) Net provisions for risks and charges - other net provisions (1,413) (1,413) Profits from the disposal of equity investments 8,054 (7,261) Pre-tax profit from continuing operations 183, (253) 5, , Taxes on income for the period from continuing operations (59,708) 84 (1,727) (61,351) 340. (Profit) loss for the period attributable to minority interests (5,955) 5 (59) (6,009) Profit for the period before the Business Plan and other impacts 117, (164) 3, , a) Redundancy expenses net of taxes and minority interests b) Business Plan Project expenses net of taxes and minority interests - (3,528) (3,528) 350. Profit for the period attributable to the shareholders of the Parent 117, ,660 71

72 Notes to the reclassified consolidated financial statements The Mandatory Financial Statements, subjected to a limited accounting audit by the independent auditors, have been prepared on the basis of Bank of Italy Circular No. 262/2005 of 22 nd December 2005 as introduced by the 5 th update, dated 22 nd December The latter introduced changes to the statements mainly to implement the introduction of the international financial reporting standard IFRS 9 Financial instruments, which replaced IAS 39 Financial instruments: recognition and measurement as of 1 st January For the reason just mentioned, the mandatory financial statements are different from those used for the Consolidated financial statements of the UBI Group for the year ended 31 st December Reference is made to the Explanatory Notes to the Condensed interim consolidated financial statements as at and for the period ended 30 th June 2018 for further details. Reclassified financial statements have been prepared in order to allow a meaningful management accounting commentary on capital and operating figures, not subject to audit by the independent auditors, on the basis of the financial statements pursuant to the 5 th update of Bank of Italy Circular No. 262/2005. In detail: - from a balance sheet viewpoint, details of the items specifically affected by the adoption of IFRS 9 have been given by type of financial instrument and counterparty. This has been done in order to show their contribution to the capital position of the UBI Banca Group consistent with past financial reports. In terms of comparability with previous periods, the reclassified financial statements for the period ended 30 th June 2018 provide information (in addition to the figures for the period ended 31 st March 2018) on figures calculated as at 1 st January 2018, in application of the new financial reporting standard. This allows a consistent management accounting commentary of changes occurring in the first half of We report that in application of the provisions of the aforementioned circular, non-performing exposures resulting from the acquisition of the New Banks (stated with closed balances in accordance with IFRS 3) have been classified as Purchased or originated credit impaired ( POCI ) and they have therefore been recognised within item 40 Financial assets measured at amortised cost ; - from an income statement viewpoint, in order to allow a management accounting commentary on the second quarter of 2018, the income statement also provides information on figures for the second quarter of 2017, appropriately restated. This comparison provides consistency in terms of the scope of consolidation considered because it includes the contribution of the New Banks from 1 st April It is nevertheless underlined that the comparative figures for the second quarter of 2017 have been calculated on the basis of the application of IAS 39 and therefore, while these amounts have been stated in compliance with the measurement rules of that standard, in order to allow a better comparison they have been reclassified as follows: IAS 39 IFRS 9 Reclassified financial statements pursuant to Bank of Italy Circular No. 262/05, 4 th update Reclassified financial statements pursuant to Bank of Italy Circular No. 262/05, 5 th update [ ] Net interest income [ ] Net interest income [ ] "Net income (loss) from trading, hedging and disposal/repurchase activities and from assets/liabilities designated at fair value [130a.] Net impairment losses on: loans [130b.] Net impairment losses on: available-for-sale financial assets [130d.] Net impairment losses on: other financial transactions [ ] Net income (loss) from trading, hedging and disposal/repurchase activities and from assets/liabilities at fair value through profit or loss [130a.] Net impairment losses for credit risk relating to: financial assets measured at amortised cost - loans and advances to banks - loans and advances to customers - securities [130b.] Net impairment losses for credit risk relating to: financial assets measured at fair value through other comprehensive income [200a.] Net provisions for risks and charges: commitments and guarantees granted It is underlined that with regard to the figures for the first half of 2018, net interest income includes: 1. with regard to non-performing positions: 1 The update is applicable for financial statements ending as at 31 st December 2018 or still open on that date. 2 Prepared in compliance with the provisions of the 4 th Bank of Italy Circular No. 262/2005 of 15 th December

73 - the recognition, in accordance with IFRS 9, of interest on a net basis (i.e. on the basis of the amount of the exposure net of accumulated impairment losses); - the release of the time value connected with the measurement of the exposures; 2. with specific reference to POCI positions, the interest recognised in application of the effective interest rate, adjusted for credit risk, calculated as at the date of initial recognition. For the purposes of better comparability with the figures for the second quarter of 2017, the line item IFRS 9 credit components separates, as part of net interest income, the following components which until 31 st December 2017 had been recognised in compliance with IAS 39 within the former item 130 a) Net impairment losses on: loans : - the adjustment recognised on the part of interest deemed not recoverable, used to recognise it on a net basis, in relation to non-performing positions; - the release of the time value connected with the measurement of non-performing exposures. Given the above, the reclassified financial statements have been prepared in application of the following rules: - net interest income includes the result for item 140 net interest income (expense) from contractual modifications without derecognition in the income statement in order to ensure consistency with future financial reports, considering that the effect of the release of discounts (time value) will be recognised in net interest income. The result for that item is shown on a separate line as part of that interest income; - the item profits (losses) of equity-accounted investees includes the profits (losses) of equity-accounted investees included within item 250 in the mandatory financial statements; - net income from insurance operations comprises the following revenues of BancAssurance Popolari Spa and BancAssurance Popolari Danni Spa: net interest, dividends, net fees and commissions, the result for finance activities, net premiums (item 160), the balance on income and expenses of insurance operations (items 170 and 230). The remaining items have been consolidated line-by-line in the income statement; - the tax recoveries recognised within item 230 of the mandatory financial statements (other net operating income/expenses) have been reclassified as a reduction in indirect taxes included within other administrative expenses; - the item other net operating income/expense includes item 230, net of the reclassifications mentioned under other points; - the item net impairment losses on property, plant and equipment and intangible assets includes items 210 and 220 in the mandatory financial statements and the instalments relating to the depreciation of leasehold improvements classified within item 230; - the item profits (losses) from the disposal of equity investments includes the item 250, net of profits (losses) of equity-accounted investees and also item 280 in the mandatory financial statements; - expenses incurred in relation to the Business Plan have been separated and stated on single lines (net of taxes and minority interests) at the foot of the statements as follows: redundancy expenses partially include item 190. a) in the mandatory financial statements; Business Plan Project expenses comprise part of item 190. b) in the mandatory financial statements. The reconciliation of the items in the reclassified financial statements with the figures in the mandatory financial statements has been facilitated, on the one hand, with the insertion in the margin against each item of the corresponding number of the item in the mandatory financial statements with which it is reconciled and, on the other hand, with the preparation of special reconciliation schedules. The comments on the performance of the main balance sheet and income statement items have been made on the basis of the reclassified financial statements and the reclassified financial statements for the comparative periods. In order to facilitate analysis of the Group s operating performance and in compliance with Consob Communication No. DEM/ of 28 th July , two special schedules have been included. One is a brief summary (which provides a comparison of the normalised results for the period) and one is more detailed, which shows the impact on earnings of the principal non-recurring events and items since the relative effects on capital and cash flow, being closely linked, are not significant which are summarised as follows: 1 st Quarter 2018: - expenses incurred in relation to 2017/2020 Business Plan; 2 nd Quarter 2018: - expenses incurred in relation to the extraordinary contribution to the Resolution Fund and to the Business Plan. 3 Following the entry into force (on 3 rd July 2016) of ESMA guidelines 2015/1415 which the Consob (Italian securities market authority) incorporated in its issuer and supervisory and monitoring practices, the UBI Banca Group criteria for the identification of non-recurring items (reported in the normalised statements) have been subject to revision. The new criteria approved by the Management Board on 18 th October 2016 limit the nature of non-recurring expenses to clearly specified items of income and expense (connected for example with the adoption of a Business Plan, or with the impacts of valuations and disposals of property plant and equipment, intangible and financial assets, with the effects of regulatory and methodological changes and also with extraordinary events including those of a systemic nature). 73

74 The consolidated income statement The income statement figures commented on are based on the reclassified consolidated financial statements (the income statement and the income statement net of the more significant non-recurring items in brief and detailed versions) contained in the relative section of this report. The detailed tables provide the figures for both the first half of 2018 and the first and second quarters of the year, all in accordance with the fifth update of Circular no For a description of the changes made in preparing the reclassified statements, see both the explanatory notes following the statements themselves and the related reconciliations. The comments concern developments in the first half of 2018, and we also look at the quarterly figures for the first two quarters of 2018 (shown on a lightly coloured background). The first half of 2018 closed with net profit of million, which includes non-recurring items totalling a net negative 13.2 million. Normalised profit of million represents one of the Group s best performance levels and confirms the success of cost containment efforts, the work done to improve the Group s asset quality, and the validity of the revenue strategies implemented in a challenging landscape both economically and financially. The first and second quarters closed with net profit of million and 91.2 million ( 121 million and million on a normalised basis), respectively. Ordinary operations for the period generated operating income of 1.8 billion, 93% of which represents core revenues (i.e. net interest income and net fee and commission income). Net interest income for the period ended 30 th June came to million. Interest and similar income: composition Figures in thousands of euro Debt securities Financing Other transactions 1H Q Q Financial assets measured at fair value through profit or loss 577 3,750-4,327 1,967 2, Financial assets held for trading Financial assets designated as at fair value Other financial assets mandatorily measured at fair value 528 3,750-4,278 1,950 2, Financial assets measured at fair value through other comprehensive income 63,453 - X 63,453 33,391 30, Financial assets measured at amortised cost 34, ,319-1,005, , , Loans and advances to banks 7 3,187 X 3,194 1,701 1, Loans and advances to customers 34, ,132 X 1,002, , , Hedging derivatives X X (26,961) (26,961) (13,363) (13,598) 5. Other assets X X Financial liabilities X X X 29,908 14,979 14,929 Total 98, ,069 (26,873) 1,076, , ,427 Interest and similar expense: composition Figures in thousands of euro Borrowing s Securities Other transactions 1H Q Q Financial liabilities measured at amortised cost (45,597) (213,091) - (258,688) (128,216) (130,472) 1.1 Due to central banks - X X Due to banks (15,341) X X (15,341) (8,184) (7,157) 1.3 Due to customers (30,256) X X (30,256) (15,151) (15,105) 1.4 Debt securities issued X (213,091) X (213,091) (104,881) (108,210) 2. Financial liabilities held for trading Financial liabilities designated as at fair value Other liabilities and provisions X X (13) (13) (8) (5) 5. Hedging derivatives X X 96,660 96,660 52,270 44, Financial assets X X X (18,145) (9,599) (8,546) Total (45,597) (213,091) 96,647 (180,186) (85,553) (94,633) Net interest income 896, , ,794 74

75 In accordance with IFRS 9, the item includes 61.2 million net in relation to the reversal of time value connected with the measurement of non-performing exposures, to interest recognised on a net basis on non-performing loans and also to the release of the time value of the PPA relating to loans resulting from the operation to acquire the New Banks. It also includes the negative impact of 22.1 million related to profit/losses on contractual modifications without derecognition (item 140) and the positive 25.2 million related to the TLTRO II benefit recognised during the period. Net of these components, net interest income would be million. The quarterly figures show growth of 4.7% in net interest income, which is confirmed even net of the components mentioned above: +3.8% compared with the first quarter of 2018; compared with the 398 million recognised in the second quarter of The table below provides a breakdown of this item by sector of activity 1 : Contribution to net interest income 2018 Figures in thousands of euro 1H nd Quarter 1st Quarter Banking business with customers 813, , ,899 Financial activities 81,859 42,682 39,177 Interbank business 382 (1,308) 1,690 Other items Net interest income 896, , ,794 general banking business with customers increased from 397 million for the first quarter to 417 million in the second (performance which is confirmed net of the impact of IFRS 9). Based on management accounting figures, we see a widening of 5 bp in the interest rate spread in the second quarter due to a further reduction in the cost of funding as a result of the decrease in medium and long-term funding and to an improvement in both the shortterm and the medium to long-term mark-down. Lending s contribution to net interest income slipped slightly in the second quarter due to another slight decrease in average volumes, particularly in the short-term component; the securities portfolio generated net interest of 42.7 million in the second quarter, as compared with the 39.2 million of the previous quarter. Despite a reduction in total assets (with debt securities down 1.3 billion in the first half of the year), the increase in average yields resulted in an improvement in the contribution to net interest income; the interbank portfolio provided a net negative contribution of 1.3 million in the second quarter as compared to the positive 1.7 million for the previous quarter. With regard to the ECB, although the benefit of TLTRO II interest remained stable, there was a net decrease in the contribution for the second quarter ( 4.7 million) compared with the first quarter ( 7.3 million) due to interest expense on the increase in available funds, with a view to future use, deposited in the liquid part of the compulsory reserve (which rose to roughly 7 billion from the previous 5.3 billion) related to the sale of securities in the financial portfolios. Business with other banks, on the other hand, generated net interest expense of 6.4 million, as compared with a net expense of 5.6 million in the first quarter. During the first half of the year, dividends in the amount of 8.4 million were received, 4.5 million of which related to the Bank of Italy shares and with the remainder being related to equity investments, including SACBO ( 1.2 million) and Nexi (recognised within Financial assets measured at fair value through profit or loss - Item 20). Profits of equity-accounted investees 2 came to 9 million for the first half of the year and refer to: Zhong Ou Asset Management in the amount of 4 million; Lombarda Vita in the amount of 6.5 million; and Aviva Vita for a negative 1.7 million (which reflects the impairment losses on the securities held). 1 The calculation of net balances was performed by allocating interest income and expense on hedging derivatives and interest expense on financial liabilities held for trading within the different areas of business (with customers, financial, with banks). 2 The item consists of the profits of the companies recognised on the basis of the percentage interest held by the Group. 75

76 Net fees and commissions 3 totalled 808 million: million related to management, trading and advisory services 4 (which includes performance commissions in the amount of 8.4 million and fees for the placement of the Group s SICAVs and other funds in the amount of 88.8 million) and million related to banking services. The table below provides a breakdown of fee and commission income and expense. Fee and commission income: composition Fee and commission expense: composition Figures in thousands of euro 1H Q Q 2018 Figures in thousands of euro 1H Q Q 2018 a) guarantees granted 25,561 11,502 14,059 a) guarantees received (8,409) (4,143) (4,266) c) management, trading and advisory services 506, , ,741 c) management and trading services: (43,666) (21,410) (22,256) 1. trading in financial instruments 4,833 2,272 2, trading in financial instruments (4,991) (2,304) (2,687) 2. foreign exchange trading 4,171 2,155 2, foreign exchange trading (2) (2) - 3. portfolio management 197, ,469 95, portfolio management (3,991) (1,906) (2,085) 3.1. individual 36,171 17,709 18, delegated to third parties (3,991) (1,906) (2,085) 3.2. collective 161,479 84,760 76, custody and administration of securities (3,407) (1,642) (1,765) 4. custody and administration of securities 3,888 1,900 1, placement of financial instruments (3,013) (1,380) (1,633) 6. placement of securities 148,723 71,217 77, financial instruments, products and 7. receipt and transmission of orders 19,323 10,218 9,105 services distributed through indirect networks (28,262) (14,176) (14,086) 8. advisory activities 4,485 2,286 2,199 d) collection and payment services (27,630) (14,483) (13,147) 8.1 on investments 4,485 2,286 2,199 e) other services (21,365) (9,759) (11,606) 9. distribution of third party services 123,053 58,867 64, portfolio management Total (101,070) (49,795) (51,275) individual insurance products 109,290 51,880 57, other products 13,443 6,830 6,613 d) collection and payment services 85,924 44,066 41,858 f) services for factoring transactions 5,918 2,978 2,940 i) current account administration 113,791 57,846 55,945 j) other services 171,718 82,648 89,070 Total 909, , ,613 Net fee and commission income 807, , ,338 The quarterly figures show a reduction of 1.6% in net fees and commissions 5. Net of performance fees ( 1.7 million in the first quarter and 6.7 million in the second) and fees for the placement of SICAVs and other funds ( 49.2 million and 39.5 million, respectively), the two figures would be essentially stable (-0.5%): management, trading and advisory services contributed million to the total in the first quarter and million in the second. The overall decrease ( 2.7 million) reflects divergent trends. The most significant categories are as follows: net revenue on portfolio management, which increased by 7.5 million to million (mainly due to collective investment management), and on order receipt/transmission, which increased by 1.1 million to 10.2 million; net income on the placement of securities, which decreased by 6 million to 69.8 million (which essentially reflects the decrease in up-front fees related to the Group s SICAVs and other funds); and the contribution of the distribution of third-party services, which decreased by 5.3 million to 58.9 million essentially in the area of insurance products, and life-insurance policies in particular; ordinary banking business generated fees and commissions of million in the first quarter and million in the second quarter (down 4.1 million). The segment related to other services (which includes 39.3 million for the recognition of commitment fees in the first quarter and 38.1 million in the second) posted a net reduction of 4.6 million, which essentially reflects a shift in the contribution of financial assets, particularly in the Corporate and Investment Banking segments, whereas fees and commissions on guarantees issued/received decreased by 2.4 million. Conversely, revenues on current account administration increased by 1.9 million due, in part, to the increase in average current account balances in the second quarter, which also resulted in an increase of 0.9 million in 3 The changes were calculated by subtracting commission expense from the respective commission income. 4 The amount consists of management, trading and advisory services net of the corresponding expense items and is calculated excluding currency trading. 5 In the second quarter of 2017, net fees and commissions totalled million. The reduction was due to the deconsolidation of UBI International, the presence of fees on securitisation conducted at the end of 2017 payable beginning in 2018 (- 4 million), and the lack of fee and commission income on extraordinary structured finance operations related to the acquisition of the three banks that were present only in 2017 (- 5.8 million). 76

77 payment and collection services. The results generated by the other activities reported in the table remain less substantial. Net trading income (item 80) Gains Profits from trading Losses Losses from trading Net income 1H 2018 Net income 2Q 2018 Net income 1Q 2018 Figures in thousands of euro (A) (B) (C) (D) [(A+B)-(C+D)] [(A+B)-(C+D)] [(A+B)-(C+D)] 1. Financial assets held for trading 70 20,976 (481) (1,525) 19,040 13,918 5, Debt securities (75) (598) (618) (57) (561) 1.2 Equity securities (309) (37) (190) (249) Shares in UCITS Financing Other - 20,831 (97) (890) 19,844 14,224 5, Financial liabilities held for trading Debt securities Payables Other Financial assets and liabilities : Exchange rate differences X X X X 5,114 5, Derivative instruments 111,437 57,843 (83,961) (70,340) 11,206 3,548 7, Financial derivatives 111,437 57,843 (83,961) (70,340) 11,206 3,548 7,658 - on debt securities and interest rates 107,658 49,368 (79,900) (64,251) 12,875 9,698 3,177 - on equity securities and share indices 145 4,977 (516) (2,574) 2, ,731 - on currencies and gold X X X X (3,773) (6,460) 2,687 - other 3,634 3,498 (3,545) (3,515) Credit derivatives of which: natural hedges related to the fair value option X X X X Total 111,507 78,819 (84,442) (71,865) 35,360 22,543 12,817 Net hedging loss (item 90) Figures in thousands of euro 1H Q Q 2018 Net hedging loss (4,227) (2,698) (1,529) Profit from disposal/repurchase (item 100) Figures in thousands of euro Profits Losses 1H Q Q 2018 Financial assets 1. Financial assets measured at amortised cost 6,689 (21,556) (14,867) (14,303) (564) 1.1 Loans and advances to banks Loans and advances to customers 6,689 (21,556) (14,867) (14,303) (564) 2. Financial assets measured at fair value through other comprehensive income 68,033 (15,481) 52,552 27,348 25, Debt securities 68,033 (15,481) 52,552 27,348 25, Financing Total assets (A) 74,722 (37,037) 37,685 13,045 24,640 Financial liabilities measured at amortised cost 1. Due to banks Due to customers Debt securities issued 421 (4,659) (4,238) (1,887) (2,351) Total liabilities (B) 533 (4,659) (4,126) (1,815) (2,311) Total 75,255 (41,696) 33,559 11,230 22,329 Net income (loss) from other financial assets and liabilities measured at fair value through profit or loss (item 110) Figures in thousands of euro 1H Q Q 2018 Net income (loss) from financial assets and liabilities measured at fair value through profit or loss (12,456) (12,581) 125 Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities measured at fair value through profit or loss 52,236 18,494 33,742 During the first half of the year, financial assets generated income of 52.2 million driven by the net performance of trading ( 35.4 million) and by the net gain ( 33.6 million) on the sale/repurchase mainly of debt securities measured at fair value with an impact on comprehensive income. By quarter, we see the following trends: trading made a positive contribution of 12.8 million in the first quarter and 22.5 million in the second (up 9.7 million): while there were marginal changes in both debt securities (up 0.5 million) and equity securities and derivatives on equity and equity indexes (down 77

78 1.7 million), assets in a foreign currency related to operations with corporate customers 6 increased by 4.5 million due to an increase in volumes; derivatives on debt securities and interest rates (gains, losses and accruals) posted an increase of 6.5 million. The latter, which also incorporate business carried out on behalf of customers, reflect both trading in derivatives (including possible unwinding) and fair value movements in the derivatives themselves (for investment and balanced on the market) as well as the realisation of the relative differentials; hedging 7, which shows the net change in the fair value of derivatives and of the related items hedged against specific types of risk, resulted in a loss of 1.5 million in the first quarter and 2.7 million in the second quarter; although the market landscape has had an impact on the value of the assets (i.e. securities and loans) and liabilities hedged, the results point to the essential efficacy of the hedges in place; the sale of assets and the repurchase of financial liabilities resulted in income of 22.3 million in the first quarter and 11.2 million in the second: - financial assets measured at fair value through comprehensive income generated more or less equal gains for the two periods ( 2.1 million) attributed entirely to debt securities sold; - the sale of portfolios of bad and unlikely-to-pay loans generated a net loss of 14.3 million in the second quarter and a net loss of 0.5 million in the first quarter; - repurchases of bonds from customers generated a loss of 1.9 million in the second quarter, which is down 0.5 million compared with the previous quarter; the net result of other assets and liabilities measured at fair value through profit or loss reflects the effects of measurement of the loans in this portfolio (a loss of 14.9 million in the second quarter as compared with a gain of 0.4 million in the first), which were only partially offset by the fair value of shares of UCITSs (a loss of 4.2 million in the first quarter and 0.5 million in the second). Net income on insurance operations by the insurance subsidiaries (i.e. BancAssurance Popolari and BancAssurance Popolari Danni) came to 11 million and was distributed evenly across the first two quarters. Other operating income/expense came to a net income balance of 51.8 million on income of 79.3 million, 50.1 million of which from prior-year and other income (which includes 18.1 million for fast credit processing fees), and expenses of 27.5 million, which is mainly related to prior-year expenses. Other net operating income/expense Figures in thousands of euro 1H Q Q 2018 Other operating income 79,319 40,306 39,013 Recovery of expenses and other income on current acc 9,308 4,816 4,492 Recovery of insurance premiums 9,112 4,716 4,396 Recoveries of taxes 119,260 59,101 60,159 Rents and other income for property management 3,252 1,660 1,592 Recovery of expenses on finance lease contracts 7,545 3,762 3,783 Other income and prior year income 50,102 25,352 24,750 Reclassification of "tax recoveries" (119,260) (59,101) (60,159) Other operating expenses (27,558) (16,912) (10,646) Depreciation of leasehold improvements (2,063) (1,019) (1,044) Costs relating to finance lease contracts (5,170) (2,603) (2,567) Expenses for public authority treasury contracts (993) (492) (501) Other expenses and prior year expense (21,395) (13,817) (7,578) Reclassification of depreciation of leasehold improvements 2,063 1,019 1,044 Total 51,761 23,394 28,367 By quarter, other operating income/expense saw income remain essentially stable (up 1.3 million) while expenses increased ( 6.3 million) due partly to an increase in prior-year expenses related to the closure of claw-back actions and unsettled legal actions. It must always be considered that because the underlying items of prior year income and expense items are of a varied and non-structural nature, they often fluctuate greatly from one period to another. 6 The Group does not enter into speculative positions and the results relate to business with customers and on own behalf generally balanced on the market. As a consequence, the items in question (line items 1.5, Currency translation differences and 3 currency and gold derivatives) must be considered together as a whole. On the whole the items relate to the results of spot and forward currency trading by customers (transactions closed and/or existing) and also transactions on behalf of customers balanced operationally by UBI Banca on the market. 7 As already reported, the UBI Banca Group has chosen to take the opt-out option and therefore to continue to apply IAS 39 rules. 78

79 Operating expenses for the first half of the year totalled 1.2 billion, of which million related to staff costs, for other administrative expenses, and 82 million related to net impairment losses on property, plant and equiment and intangible assets. The ongoing process of cost reduction and optimisation has continued, as can be seen in a comparison between the second quarter of this year and the same period of 2017, which shows an overall reduction in costs of 34.9 million (-5.5%). The following is an analysis of the three components of this aggregate by quarter: Staff costs: composition 1H Q Q 2018 Figures in thousands of euro 1) Employees (744,780) (371,775) (373,005) a) Wages and salaries (524,409) (258,731) (265,678) b) Social security charges (137,599) (69,804) (67,795) c) Post-employment benefits (29,541) (14,658) (14,883) d) Pension expense (34) (19) (15) e) Provision for post-employment benefits (492) (168) (324) f) Pensions and similar obligations: (978) (418) (560) - defined contribution (487) (205) (282) - defined benefit (491) (213) (278) g) Payments to external supplementary pension plans: (22,468) (10,100) (12,368) - defined contribution (22,366) (10,048) (12,318) - defined benefit (102) (52) (50) h) Expenses resulting from share based payments i) Other employee benefits (29,259) (17,877) (11,382) 2) Other staff in service (505) (298) (207) - Expenses for agency staff on staff leasing contracts Other expenses (505) (298) (207) 3) Directors and statutory auditors (4,574) (2,252) (2,322) 4) Expenses for retired staff Total (749,859) (374,325) (375,534) staff costs decreased by 1.2 million. The reduction in wages and salaries (down 6.9 million) was nearly totally offset by Other employee benefits. The reduction in wages and salaries was due to the gradual reduction in the workforce related to voluntary early retirement in line with trade-union agreements and to the seasonal effect of distribution of the length of service bonus of a former network bank scheduled for the first quarter. Other employee benefits, in turn, reflect the seasonal effect of recognition, in the second quarter, of the outlay of scholarships and the launch of training programs and internal communication initiatives; other administrative expenses fell by 19.3 million. Membership fees in particular decreased by 25.9 million. In the first quarter, 34.2 million was recognised as the estimate of the ordinary portion for 2018 to be paid into the Resolution Fund, but this estimate was adjusted to 29.2 million in the second quarter 8. Also in the second quarter, an extraordinary contribution of 12.9 million was made to the Resolution Fund, which is subject to normalisation (see the notes to the condensed consolidated interim financial statements). Conversely, Professional and advisory services increased by 7.8 million due to an increase in costs in the second quarter for consulting projects, such as the mass sale of NPLs, and for real estate and IT projects; Other administrative expenses: composition 1H Q Q 2018 Figures in thousands of euro A. Other administrative expenses (372,010) (176,449) (195,561) Rent payable (37,319) (18,188) (19,131) Professional and advisory services (54,423) (31,123) (23,300) Rentals hardware, software and other assets (19,162) (9,577) (9,585) Maintenance of hardware, software and other assets (26,266) (13,439) (12,827) Tenancy of premises (24,459) (11,578) (12,881) Property maintenance (11,425) (7,067) (4,358) Counting, transport and management of valuables (6,472) (3,179) (3,293) Membership fees (48,737) (11,425) (37,312) Information services and land registry searches (6,074) (3,311) (2,763) Books and periodicals (617) (283) (334) Postal (7,636) (3,551) (4,085) Insurance premiums (15,542) (7,511) (8,031) Advertising (11,072) (5,412) (5,660) Entertainment expenses (534) (291) (243) Telephone and data transmission expenses (25,672) (12,631) (13,041) Outsourced services (30,317) (14,050) (16,267) Travel expenses (10,048) (4,909) (5,139) Credit recovery expenses (22,877) (11,928) (10,949) Forms, stationery and consumables (3,294) (1,497) (1,797) Transport and removals (3,847) (2,132) (1,715) Security (3,497) (1,977) (1,520) Other expenses (2,720) (1,390) (1,330) B. Indirect taxes (20,547) (10,194) (10,353) Indirect taxes and duties (6,069) (3,118) (2,951) Stamp duty (108,680) (54,397) (54,283) Municipal property tax (11,636) (5,878) (5,758) Other taxes (13,422) (5,902) (7,520) Reclassification of "tax recoveries" 119,260 59,101 60,159 Total (392,557) (186,643) (205,914) 8 In May, following the final communication by the Bank of Italy concerning the payment for the current year, 34.4 million, and in line with what was done in previous periods, the Bank opted to pay 85% of the contribution in cash and 15% in the form of a commitment. As such, on 31 st May 2018, full payment of the amount due was made, with 29.2 million being recognised among other administrative expenses and 5.2 being recognised below the line among irrevocable payment commitments. 79

80 depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets totalled 40.4 million in the second quarter, as compared with 41.6 million in the first, due essentially to a decrease in the amortisation of leasehold improvements and other intangible assets. As a result of the trends described above, operating income came to million ( 302 million in the first quarter and million in the second). Net impairment losses for credit risk relating to financial assets measured at amortised cost totalled million in the first half, million of which related to loans to customers which as a percentage of total loans to customers recognised within item 40, gave a loan loss rate of 0.57% (annualised). The table details the following in particular: 1.46 million of collective impairment losses on loans to banks classified in stage one; million of net impairment losses on loans to customers. The item is the aggregate result of million of specific impairment losses of exposures classified in stage three and 56.1 million of net reversals on exposures classified in stages one and two. 104 thousand in net impairment losses on debt securities clasified within stage one (rows A and B in the table). An analysis by quarter shows an increase in total net impairment losses from million in the first quarter to million in the second. Related solely to loans to customers, impairment losses increased from million to million: positions classified within stage three decreased to million from the previous million due both to sales of non-performing exposures and to the reduction in migrations from performing to default status; in stages one and two, net impairment losses of 7.2 million were recognised, as compared with 48.9 million for the first quarter, which included the benefit of a one-off application of the new models (the Model Change ). Consequently, the loan loss rate for the second quarter (annualised) was 0.61%, as compared with 0.51% in the first quarter. Net impairment losses for credit risk relating to financial assets measured at amortised cost Transactions/Components of income Impairment losses /reversals Impairment losses /reversals Impairment losses /reversals Stages one and two Stage three 1H 2018 Stages one and two Stage three 2Q 2018 Stages one and two Stage three 1Q 2018 Figures in thousands of euro A. Loans and advances to banks (1,458) - (1,458) (1,724) - (1,724) - Financing (1,460) - (1,460) (1,725) - (1,725) - Debt securities of which: purchased or originated creditimpaired loans B. Loans and advances to customers 56,054 (314,326) (258,272) 7,233 (147,714) (140,481) 48,821 (166,612) (117,791) - Financing 56,160 (314,326) (258,166) 7,219 (147,714) (140,495) 48,941 (166,612) (117,671) - Debt securities (106) - (106) (120) - (120) of which: purchased or originated creditimpaired loans (4,782) (4,782) - 4,782 4,782 Total 54,596 (314,326) (259,730) 7,499 (147,714) (140,215) 47,097 (166,612) (119,515) Net impairment losses for credit risk related to financial assets measured at fair value through comprehensive income (item 130.b) includes measurements net of expected credit losses, totalling 6.6 million, related to debt securities recognised within item 30 of the balance sheet. Impairment losses on performing securities purchased in the first half, which in accordance with IFRS 9 require immediate recognition of the expected credit loss, also contributed to that balance. Comparing the first two quarters, we see a decrease due to the reduction in financial assets recognised within this item (down 1.1 billion). 80

81 Net impairment losses for credit risk relating to financial assets measured at fair value through other comprehensive income Transactions/components of income Stages one and two Impairment losses Reversals Stage three Stages one and Stage three 1H Q Q 2018 two Figures in thousands of euro Write-offs Other A. Debt securities (7,283) (6,610) (2,037) (4,573) B. Financing to customers to banks of which: Financial assets purchased or originated credit impa Total (7,283) (6,610) (2,037) (4,573) The following was also recognised in the income statement in the first half: a negative 2.6 million under net provisions for risks and charges. In the first quarter, the item benefited from a write-back of 11.1 million related to the credit risk on loan Net provisions for risks and charges commitments and guarantees given (in line with IFRS 9), whereas the second quarter included an allocation of roughly 10 million to conventional provisions for risks and charges related to a position connected with 1H Q Q 2018 Figures in thousands of euro Net provisions for credit risk relating to loan commitments and guarantees granted 14,540 3,477 11,063 Net provisions relating to other commitments and to other guarantees granted Net provisions for other risks and charges (17,113) (15,700) (1,413) for revocation (clawback) risks (519) (356) (163) staff costs for bonds in default (229) (266) 37 for litigation (13,360) (13,169) (191) arbitration proceedings initiated during the period thousand of net profit on the disposal of equity and other investments attributable to the sale of real estate properties by the Parent and, to a marginal extent, by BPB Immobiliare. In the first quarter, this totalled 793 thousand, whereas it totalled 170 thousand in the second. Other (3,005) (1,909) (1,096) Total (2,573) (12,223) 9,650 As a result of the performance described above, pre-tax profit from continuing operations was million. Taxes on income from continuing operations for the period came to million, for a tax rate of 33.97%, which is slightly higher than the theoretical rate (of 33.07%). The tax rate was conditioned primarily by the non-deductibility for corporate income tax (IRES) purposes of impairment losses on FVTPL equity instruments and other expenses (2.3 percentage points) and for regional production tax (IRAP) purposes of expenses for staff on temporary contracts, other administrative expenses and depreciation and amortisation (1 percentage point). However, these effects were offset by the aid to economic growth concession known as ACE (0.8 percentage points), the measurement of equity investments measured according to the equity method (1 percentage point), and write-backs of equity investments that are not relevant for fiscal purposes (0.6 percentage points). As a result of the performance of Group banks and companies, profit for the period attributable to minority interests (inclusive of the effects of consolidation entries) stood at 13.8 million ( 7.8 million in the second quarter and 6 million in the first). Finally, the following item (subject to normalisation) has been stated separately net of tax and minority interests: Business Plan Project expenses (recognised within other administrative expenses) of 4.6 million (net of taxes of 2.2 million and minority interests of 65 thousand). 81

82 The comments that follow are based on items in the consolidated balance sheet contained in the reclassified consolidated financial statements on which the relative tables furnishing details are also based. The section Consolidated companies: the principal figures may be consulted for information on UBI Banca and other Group companies. General banking business with customers: funding The figures as at 30th June 2018, which include the effect of the adoption of the accounting standard IFRS 9, are compared with those as at 1 st January 2018 in order to allow a comparison of the items. The section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 may be consulted for details of the reconciliation of figures as at 31 st December 2017 and those resulting from first-time adoption of the new standards as at 1 st January Total banking funding Total banking funding from customers Figures in thousands of euro A % B % Changes Changes A-B * A-C % C amount % amount % Direct banking funding 95,010, % 94,212, % 797, % 94,449, % 560, % Indirect funding 98,528, % 97,663, % 864, % 96,465, % 2,062, % of which: assets under management 68,682, % 66,870, % 1,812, % 65,443, % 3,239, % Total banking funding 193,538, % 191,875, % 1,662, % 190,915, % 2,623, % Total banking funding net of CCG and institutional funding 177,416, ,247,203 1,169, % 176,880, , % of which: ordinary captive customers 177,115, ,945,983 1,169, % 176,412, , % * In accordance with standard accounting practice, the 31 st December 2017 is shown as a.m. on 1st January Total Group banking funding consisting of total amounts administered on behalf of customers stood at billion as at 30 th June As shown in the table, if the total is considered net of institutional components (inclusive of the Cassa di Compensazione e Garanzia CCG, a central counterparty clearing house) and of noncaptive totals (the former Centrobanca), then funding from ordinary captive customers stood at approximately billion. The item performed well on a half year basis, driven mainly by indirect funding (+ 2.1 billion in the six months and billion in April-June), and particularly by the managed component (+ 3.2 billion and billion). The process to transform maturing bond funding into assets under management continued, consistent with Business Plan objectives. Direct funding also increased, albeit less dramatically, above all in the second quarter, involving the debt component in particular, due in part to uncertainty amongst investors regarding investment decisions, given the current scenario of persistently low market rates and strong volatility, partially attributable to the Italian political instability that prevailed during the period. 82

83 Direct banking funding Direct banking funding from customers Changes Changes A-B A-C % % % A B C Figures in thousands of euro amount % amount % Current accounts and sight deposits 66,725, % 64,624, % 2,100, % 64,258, % 2,467, % Term deposits 1,292, % 1,754, % -461, % 2,364, % -1,072, % Financing 1,741, % 1,401, % 340, % 513, % 1,228, % - repurchase agreements 1,404, % 1,061, % 343, % 167, % 1,237, % of which: repos with the CCG 699, % 676, % 23, % , other 336, % 339, % -2, % 346, % -9, % Other payables 823, % 1,164, % -341, % 1,298, % -474, % Total amounts due to customers [liabilities item 10. b) Consolidated balance sheet] 70,582, % 68,944, % 1,638, % 68,434, % 2,147, % Bonds 23,793, % 24,408, % -614, % 24,865, % -1,071, % Certificates of deposit 633, % 858, % -225, % 1,144, % -511, % Other certificates , % -4, % Total debt securities issued (*) [liabilities item 10. c) Consolidated balance sheet] 24,427, % 25,267, % -840, % 26,014, % -1,587, % of which: securities subscribed by institutional customers: 15,422, % 14,952, % 470, % 14,034, % 1,387, % The EMTN programme (**) 4,702, % 4,310, % 391, % 4,552, % 149, % The covered bond programme 10,720, % 10,641, % 78, % 9,482, % 1,238, % securities subscribed by ordinary customers: 9,004, % 10,315, % -1,310, % 11,975, % -2,970, % of the Group: - Certificates of deposit 633, % 858, % -225, % 1,144, % -511, % - Bonds 8,069, % 9,155, % -1,085, % 10,362, % -2,292, % external distribution networks: - Bonds issued by the former Centrobanca 301, % 301, % % 467, % -166, % Total direct funding 95,010, % 94,212, % 797, % 94,449, % 560, % Due to customers net of the CCG 69,883,358 68,268,160 1,615, % 68,434,827 1,448, % Total direct funding net of the CCG and institutional funding 78,888,204 78,583, , % 80,414,860-1,526, % (*) Within the item, subordinated securities, consisting of Lower Tier 2 issues, amounted to 2,913 million as at 30 th June 2018 (of which 1,272 million consisting of two EMTNs), to 3,018 million as at 31 st March 2018 (of which 1,288 million consisting of two EMTNs) and to 2,994 million as at 1 st January 2018 (of which 1,272 million consisting of two EMTNs). (**) The corresponding nominal amounts were 4,655 million as at 30 th June 2018 (of which 1,250 million nominal subordinated), 4,261 million as at 31 st March 2018 (of which 1,250 million nominal subordinated) and 4,492 million as at 1 st January 2018 (of which 1,250 million nominal subordinated). The UBI Banca Group s direct banking funding amounted to 95 billion as at 30 th June 2018, with a marginal increase on 94.4 billion at the beginning of As shown in the table, in line with Group strategies, a further change in the mix of this item occurred during the halfyear into amounts due to customers and into sight funding in particular (up to 70.2%) and, within debt securities issued, into issues intended for institutional customers, in some cases consisting of new instruments issued. Amounts due to customers of 70.6 billion ( 68.9 billion in March and 68.4 billion as at 1 st January 2018) rose due to an increase in current accounts and deposits, which partly offset the programmed reduction in some more costly types of funding term deposits and certificates of deposit thereby freeing up cash to be reinvested, and in financing, above all reverse repurchase agreements. The total is composed principally as follows: current accounts and deposits ( 66.7 billion in June, from 64.6 billion in March and 64.3 billion at the beginning of 2018), up by over 2.4 billion in the six months, almost all of which ( 2.1 billion) attributable to the second quarter. The increase in this type of funding from April to June reflects both an effective increase in average balances of 1.1 billion and the deposits held by small to medium-size enterprises and corporates, partially intended for use in the normal course of operations, given that the end of the half-year coincided with a holiday period; 83

84 term deposits ( 1.3 billion at the end of the half-year, down from 1.8 billion in March and 2.4 billion as at 1 st January 2018), originated almost entirely by the New Banks, having reduced progressively by 1.1 billion in the six months as no longer subject to renewal on maturity; repurchase agreements with the Cassa di Compensazione e Garanzia (a central counterparty clearing house) ( 699 million, up from 676 million at the end of March and not present at the beginning of the year), used to cover temporary liquidity requirements and, when necessary, to finance the Italian government bond portfolio. At the end of the period repurchase agreements with customers amounted to 705 million ( 385 million three months before and 167 million six months before), essentially attributable to institutional counterparties of the Parent and having as their underlying non-italian government bonds ( 681 million, up from 289 million and 126 million); financing other amounting to approximately 337 million ( 340 million as at 31 st March and 346 million as at 1 st January 2018), inclusive of funds, net of amortisation for the period, of approximately 291 million ( 283 million in March and 277 million in January) made available to UBI Banca by the Cassa Depositi e Prestiti (CDP a state controlled fund and deposit institution) as part of intervention to support SMEs. Debt securities issued fell to 24.4 billion, down 1.6 billion compared with 26 billion at the beginning of the year (- 0.9 billion compared with 25.3 billion in March). The item was composed as follows: - bonds of 23.8 billion ( 24.4 billion at the end of March and 24.9 billion at the beginning of 2018), down 1.1 billion in the six months (- 0.6 billion in the quarter) due to the net effect of the maturity of bonds subscribed by ordinary customers; - certificates of deposit amounting to 0.6 billion (comparative figures of 0.9 billion and 1.1 billion), tending to contract as a result of failures to renew on maturity and consisting almost entirely of instruments held by customers of the New Banks. In terms of type of customer, FUNDING IN SECURITIES FROM INSTITUTIONAL CUSTOMERS was composed as follows: EMTNs (Euro Medium Term Notes) amounting to 4.7 billion (+ 150 million in the halfyear, million in the three months), listed in Dublin and issued by UBI Banca as part of a programme for a maximum issuance of 15 billion. In the first quarter there were no new issues, against maturities amounting to 231 million nominal, while in the second quarter the first senior non-preferred bond was issued, with settlement date of 12 th April, 500 million nominal, term of five years and fixed rate of 1.75% 1, against maturities amounting to 106 million nominal. It should be noted that the figures shown in the table also incorporate the effects of accounting adjustments on the securities; Covered bonds of 10.7 billion (+ 1.2 billion over the six months). UBI Banca issued 6.5- year and 12-year dual tranche covered bonds, both fixed-rate (0.5% and 1.25%, respectively), with a value date of 15 th January 2018, for a total of 1 billion, as part of its First Covered Bond Programme. In February, on the other hand, two issuances were made for a total of 250 million nominal in the form of private placements. No issuances took place in the April-June period, against amortisation of 11.4 million of the amortising bond entered into with the EIB. It should be noted that the changes shown in the table were also affected by the impacts of accounting adjustments on the securities. 1 On 16 th March 2018 UBI Banca filed a Supplement to the Base Prospectus with the Stock Exchange of Ireland relating to the existing 15 billion EMTN programme and published that prospectus. That supplement was produced, amongst other things, to update the section entitled Terms and conditions of the Notes in order to provide for a new class of senior bonds, the senior nonpreferred class. These are tier 2 unsecured debt instruments pursuant to Art. 12 bis of the Consolidated Banking Act, introduced to Italian law by Art. 1103, letter b) of Law No. 205 of 27th December Orders were received for a total of approximately 1 billion. The final allotment saw 50% subscribed by Italian investors and the remaining 50% subscribed by foreign investors. 84

85 UBI Banca currently, now, as also as at 30 th June 2018, has 13 covered bonds in issue under the First multioriginator Programme backed by residential mortgages with a 15 billion ceiling for a nominal amount of 10,341 million (net of amortisation totalling 159 million nominal 2 ). The securities are traded in Dublin. As at 30th June 2018 the residential mortgage asset pool formed at UBI Finance to back the issuances amounted to 15.3 billion, of which 98.9% originated by UBI Banca and 1.1% by IW Bank. The portfolio continued to show a high degree of fragmentation, including over 195 thousand mortgages with average residual debt of 78.7 thousand, distributed with approximately 67.9% in North Italy and in Lombardy especially (48.2% of the total). UBI Banca completed the transfer to the Programme of residential mortgage loans with a residual debt of approximately 2.2 billion with effect from 1 st May 2018, and on 28 th May bad loans were repurchased, amounting to approximately 117 million for by UBI Banca and to over 1 million for IW Bank. A Second UBI Banca Programme, again multioriginator, is also operational with a ceiling of 5 billion, backed by commercial mortgages and by residential mortgages not used in the first programme. So far this programme, listed on the Dublin stock exchange, has only been used for self retained issuances 3. At the end of March the commercial and residential asset pool formed at UBI Finance CB 2 to back these issuances stood at 2.9 billion, of which 99.4% originated by UBI Banca and 0.6% by IW Bank. The portfolio includes approximately 27 thousand mortgages with average residual debt of 108 thousand, distributed, as for the first programme, with a high concentration in North Italy (68.2%) and in Lombardy especially (46.9% of the total). UBI Banca consummated the repurchase of performing mortgage loans with a residual balance of 93.8 million (a total of 1,520 positions, originated by UBI Banca) with effect for operating purposes from 26th March 2018 and for legal purposes from 28 th March On 20 th May UBI Banca then repurchased bad loans with a total value of over 53 million. Finally, on 1 st June, the Parent transferred mortgage loans with a residual balance of over 323 million to the programme. As a consequence of the process to change the mix of investment choices currently in progress, at the end of the half-year SECURITIES FUNDING FROM ORDINARY CUSTOMERS fell to 9 billion (from approximately 12 billion at the beginning of 2018), now with 93% consisting of bonds. The item included: - bonds issued almost entirely by UBI Banca amounting to 8.1 billion 4 (- 2.3 billion compared with 1 st January 2018, billion with the end of March). In the first quarter the Bank did not issue any bonds, while bonds amounting to approximately 1,350 million nominal matured and bonds amounting to million nominal were repurchased. In the second quarter, bond issuance amounted to approximately 500 million nominal, maturities to approximately 1,382 million nominal and repurchases to 181 million nominal; - the remaining funding from non-captive customers, consisting of securities issued by the former Centrobanca and placed through indirect banking networks, was also down to million following maturities amounting to million nominal (almost entirely attributable to the first quarter). It should be noted that the figures shown in the table also incorporate the effects of accounting adjustments on the securities. 2 Two self-retained issuances were made under the same programme for 1,250 million nominal, one for 500 million carried out in December 2015 and one for 750 million concluded in the June The 1 billion issuance made at the end of March 2016 was derecognised in January Because these were repurchased by UBI Banca, these liabilities have not been recognised, in accordance with IFRS. 3 Totalling 1,950 million nominal: one issuance for 500 million in 2012, one 200 million issuance in March 2014, a third for 650 million completed in July 2015, a fourth for 300 million concluded in June 2016 and a fifth for 300 million performed in December Because these were repurchased by UBI Banca, these liabilities have not been recognised, in accordance with IFRS. As previously reported, the issuance undertaken in May 2012, in the original amount of 1.8 billion, was fully amortised in May This amount also includes approximately 334 million nominal still existing, issued in relation to securitisations of the New Banks acquired. 85

86 The table below summarises maturities for bonds in issue at the end of June Maturities of bonds outstanding as at 30th June 2018 * Nominal amounts in millions of euro 3rd Quarter th Quarter Subsequent years Total UBI BANCA 1,146 2,059 6,072 2,288 1, ,521 22,499 Bonds ordinary customers 943 1,171 3, ,503 Bonds institutional customers ,074 1,548 1, ,499 14,996 of which: EMTNs , ,750 4,655 Covered bonds ,023 1,523 1, ,749 10,341 IW Bank Total 1,147 2,059 6,072 2,288 1, ,521 22,500 * The table does not include maturities of bonds (approximately 334 million nominal) issued in connection with the securitisations of the New Banks acquired nor securities that had matured and had not yet been redeemed at the end of June * * * There were no issues of UBI Comunità - Social Bonds during the first six months of the year. A social bond of 20 million nominal was issued for the benefit of Cesvi Onlus after the reporting date, on 9 th July From 2012 the year of its launch until the reporting date, 89 issuances have been placed to acquire funding of million, resulting in charitable donations of 4.7 million and the grant of loans or the provision of loan pools amounting to approximately 20.5 million. * * * Listed securities (at the date of this report) Bonds listed on the MOT (electronic bond market) Nominal amount of Book value as at issue ISIN number IT Centrobanca zero coupon L. 800 billion - 166,395,581 IT Centrobanca 1998/2018 reverse floater capped L. 320 billion 118,230, ,279,852 IT Centrobanca 1999/2019 step dow n indicizzato al tasso sw ap euro 10 anni 170,000, ,472, ,046,907 IT Centrobanca 1999/2019 step dow n eurostability bond 60,000,000 69,543,239 69,208,519 IT UBI subordinato low er tier 2 fix to float con rimborso anticipato ,000, ,747, ,775,757 IT UBI subordinato low er tier 2 fix to float con rimborso anticipato ,000, ,003, ,028,583 IT UBI subordinato low er tier 2 tasso fisso 5,50% con ammortamento Welcome Edition 400,000,000-80,927,393 IT UBI subordinato low er tier 2 tasso fisso 5,40% con ammortamento ,000,000 80,000,000 80,822,384 IT UBI subordinato low er tier 2 tasso misto Welcome Edition 222,339, ,512, ,520,100 IT UBI subordinato low er tier 2 tasso misto Welcome Edition 200,000, ,107, ,144,081 IT UBI subordinato low er tier 2 tasso fisso 6% con ammortamento ,457, ,928, ,350,200 Covered bonds listed on the Dublin stock exchange Nominal amount of Book value as at ISIN number issue IT UBI Covered Bonds due 16 December % guaranteed by UBI Finance Srl 1,000,000,000 1,068,234,505 1,062,925,270 IT UBI Covered Bonds due 30 April 2022 floating rate amortising guaranteed by UBI Finance Srl 250,000,000 90,738, ,054,096 IT UBI Covered Bonds due 28 January ,25% guaranteed by UBI Finance Srl 1,000,000,000 1,103,084,410 1,143,124,745 IT UBI Covered Bonds due 14 October ,125% guaranteed by UBI Finance Srl 1,500,000,000 1,592,007,169 1,577,298,362 IT UBI Covered Bonds due 5 February ,125% guaranteed by UBI Finance Srl 1,000,000,000 1,115,737,151 1,121,336,354 IT UBI Covered Bonds due 7 February ,25% guaranteed by UBI Finance Srl 1,000,000,000 1,011,479,887 1,012,961,934 IT UBI Covered Bonds due 27 January ,00% guaranteed by UBI Finance Srl 1,250,000,000 1,275,940,297 1,277,719,717 IT UBI Covered Bonds due 14 September ,375% guaranteed by UBI Finance Srl 1,000,000, ,063, ,829,872 IT UBI Covered Bonds due 4 October ,125% guaranteed by UBI Finance Srl 1,250,000,000 1,251,831,182 1,238,991,994 IT UBI Covered Bonds due 15 July ,50% guaranteed by UBI Finance Srl 500,000, ,497,340 - IT UBI Covered Bonds due 15 January ,25% guaranteed by UBI Finance Srl 500,000, ,683,049 - IT UBI Covered Bonds due 23 February ,78% guaranteed by UBI Finance Srl 90,000,000 93,474,754 - IT UBI Covered Bonds due 25 February ,75% guaranteed by UBI Finance Srl 160,000, ,499,875 - The list does not include the EMTN issues listed in Dublin and securities generated by securitisations performed for internal purposes by UBI Banca (as the survivor of the mergers of the former network banks), the former B@nca 24-7 and UBI Leasing, all listed on the Dublin stock exchange. It also excludes securities issued by the SPEs relating to the New Banks acquired. 86

87 * * * Geographical distribution of funding from customers by the counterparty's region of residence (excluding repurchase agreements and bonds) (*) percentage of total Lombardy 48.53% Marches 11.02% Latium 8.23% Piedmont 6.84% Apulia 3.67% Calabria 3.16% Campania 3.10% Tuscany 3.11% Abruzzo 2.48% Emilia Romagna 2.19% Veneto 1.83% Liguria 1.63% Umbria 1.02% Basilicata 0.73% Friuli Venezia Giulia 0.30% Trentino Alto Adige 0.22% Molis e 0.21% Sicily 0.11% Sardinia 0.07% Valle d'aosta 0.03% Abroad 1.52% Total % Finally, the table Geographical distribution of direct funding from customers by region of residence of the counterparty gives the geographical distribution of traditional funding (consisting of current accounts, savings deposits and certificates of deposit) in Italy. The entry of the New Banks, which carry on their business in central Italy, within the scope of the consolidation brought the Group's share of funding from that geographical area to 23.4%. The predominant concentration in Northern Italy (61.6% of the total) and in regions of the North-West (57.2%) in particular nevertheless continued. North 61.6% - North West 57.2% - North East 4.4% Central 23.4% South 13.5% Abroad 1.5% (*) The aggregates relate to banks only. 87

88 Indirect banking funding and assets under management Indirect banking funding from ordinary customers Changes A/B * Changes A/C % % % Figures in thousands of euro A B amount % C amount % Assets under custody 29,845, % 30,792, % -947, % 31,022, % -1,176, % Assets under management 68,682, % 66,870, % 1,812, % 65,443, % 3,239, % Customer portfolio management 6,419, % 6,582, % -162, % 6,787, % -368, % of which: fund based instruments 1,876, % 1,898, % -21, % 1,844, % 32, % Mutual investment funds and Sicav s 38,033, % 37,532, % 501, % 37,051, % 982, % Insurance policies and pension funds 24,229, % 22,756, % 1,473, % 21,603, % 2,625, % of which: Insurance policies 24,226, % 22,753, % 1,473, % 21,601, % 2,625, % Total 98,528, % 97,663, % 864, % 96,465, % 2,062, % * In accordance with standard accounting practice, the 31 st December 2017 is shown as a.m. on 1st January The breakdown of insurance policies has been restated to ensure better comparability with subsequent periods. At the end of June, the UBI Banca Group's indirect funding amounted to 98.5 billion, up 2.1 billion over the half-year, of which 1.2 billion is attributable to the first quarter of the year. The increase in financial market volatility since the beginning of the year further intensified by the growing global trade tensions and political instability of the EU, starting with the difficult Italian situation conditioned the item's performance in the first half of 2018, primarily at the level of assets under custody, but did not disrupt the tendency for households to invest their savings in asset management and insurance products, due in part to extraordinarily low market interest rates. Total assets under management, amounting to 68.7 billion and accounting for 69.7% of the total indirect funding, recorded growth of 3.2 billion in the six months (+ 1.8 billion since March). The table shows that the trend for the item was driven primarily by insurance policies, which rose to 24.2 billion (+ 2.6 billion since the beginning of the year; billion in the second quarter) in line with the favourable trend for the sector the result, amongst other things, of the placement since January of two innovative life policies entitled Multiramo (multi-business sector), which combine investment and protection solutions 5. The results of the distribution of some new products, sub-funds and Sicav s, as well as the positive response by customers to products classified as Long-term Individual Savings Schemes (PIR) 6 drove the total for mutual investment funds and Sicav s to 38 billion (+ 1 billion in six months; billion since March), notwithstanding the negative effect of market performance in the period. Customer portfolio management, amounting to 6.4 billion, reflected the effects of market fair value movements, falling with respect to both comparative periods. Assets under custody which fell for the second consecutive quarter to 29.8 billion (- 1.2 billion since the beginning of January, of which billion since March) continued to be 5 On 8 th January 2018 UBI Banca Group commenced the distribution of a policy entitled Multiramo Twin Selection (targeted at the Mass-Market and Affluent customer segments) and a policy entitled Multiramo Twin Top Selection (targeted at the Top Private Banking customer segment). These policies aim to combine the traditional life and pension component with a personal and family protection component associating a proposal for complete protection with the multi-business sector policy, which gives customers exclusive access to additional types of insurance cover, such as Temporanea Caso Morte, Long Term Care and Dread Disease, for protection against events which can suddenly transform everyday needs. 6 The 2017 Legge di stabilità ( stability law annual finance law) (law of 11 th December 2016, Art. 1, paragraphs 100 to 114) introduced into Italy along the lines of similar products existing in other countries, (e.g. France and Great Britain) long-term Individual Savings Schemes (ISS) in order to incentivise investments also in medium-size companies. The ISS is a savings instrument consisting of a special legal relationship (with particular characteristics and subject to a special conditional tax exemption regime) within which savers can allocate sums of cash or valuables in compliance with constraints set by the legislation. In order to allow UBI Banca Group customers to benefit from the opportunities offered by the ISS legislation, on 18 th April 2017 UBI Pramerica SGR, in agreement with UBI Banca, created a new range of UBI Pramerica MITO Funds which consist at present of three funds: Fondo UBI Pramerica MITO 25 and Fondo UBI Pramerica MITO 50 and Fondo UBI Pramerica MITO 95, the latter of which has been distributed since 17th May

89 affected primarily by the effect of prices but also by changes in the mix of customer portfolios into assets under management. * * * Fund assets (including assets managed for the UBI Banca Group under a mandate) UBI Banca Group Changes A/B * Changes A/C % % % Figures in millions of euro A B amount % C amount % Equities 3, % 3, % % 3, % % Balanced 11, % 10, % % 10, % % Bond 15, % 15, % % 15, % % Monetary funds % % % % % Flexible 1, % 1, % % 1, % % TOTAL (a) 31, % 32, % % 31, % % Sector Changes A/B * Changes A/C % % % Figures in millions of euro A B amount % C amount % Equities 228, % 224, % 3, % 221, % 6, % Balanced 102, % 97, % 4, % 98, % 3, % Bond 386, % 399, % -12, % 413, % -26, % Monetary funds 32, % 29, % 3, % 32, % % Flexible 250, % 246, % 3, % 240, % 9, % Hedge funds 3, % 3, % 2 0.1% 4, % % Unclassified - - 3, % -3, % TOTAL (b) 1,004, % 1,004, % -90-1,011, % -6, % Market share of the UBI Banca Group (a)/(b) 3.18% 3.19% 3.14% Market share of the UBI Banca Group limited to bank-related management companies only 6.18% 6.15% 6.09% (*) In accordance with standard accounting practice, the 31st December 2017 is shown as a.m. on 1st January Source: Assogestioni (national association of asset management companies). Any marginal differences compared with the data published previously were due to the periodic revision of data carried out by Assogestioni. As previously reported, as part of the periodic surveys performed by Assogestioni, since June 2012 the figure for assets under management for the UBI Banca Group also includes, in consideration of their nature, the management mandates granted to Pramerica Financial the brand name used by Prudential Financial Inc. (USA) a UBI Banca partner through UBI Pramerica SGR ( 5.7 billion of mutual funds and Sicav s, of which 1.9 billion in equities and 3.8 billion in bonds as at 30th June 2018). This presentation provides a more consistent account of the actual assets under management of the UBI Banca Group. At the end of the first half, Assogestioni (national association of asset management companies) 7 data relating to the UBI Banca Group asset management companies for MUTUAL FUNDS AND SICAV S, was as follows for assets under management originated: net inflows of million, amounting to 2.2% of assets under management as at 1 st January 2018 (net inflows for the sector nationally on the other hand were 10 billion 8, amounting to 1% of assets managed at the beginning of the year); an increase in assets over the half-year (+ 199 million; +0.6%) compared with a fall for the sample (- 6.4 billion; -0.6%). By contrast, in the second quarter the comparison presented in the table shows a slight decline in the Group's assets under management against substantial stability for the banking sample; assets of 31.9 billion, which puts the Group in ninth place with market share of 3.18% (3.19% in March; 3.14% at the beginning of 2018). It must nevertheless be considered that Assogestioni's sample also includes non-banking operators. Consequently, market shares for the UBI Banca Group in the asset management sector (mutual investment fund business) are naturally smaller than those for direct funding, lending and number of branches. If the analysis is restricted to banks only, the Group s market share as at 30 th June 2018 was 6.18% compared with 6.15% in March and 6.09% at the beginning of the year placing UBI Banca stably in fourth position among Italian operators in the sector. 7 Monthly map of assets under management, June For companies not included in the Quarterly map of assets under management, March On the basis of Assogestioni data, approximately 83% of net inflows nationally are attributable to foreign registered funds ( 8.3 billion) and to a residual extent to Italian registered funds ( 1.7 billion). In terms of type of fund, the performance was driven by flexible funds ( billion) and by balanced funds (+ 7.6 billion), while the contribution from equity funds was lower (+ 2.6 billion), compared with decreases both for bond funds ( billion) and substantial stability for monetary funds (+ 0.5 billion) and hedge funds (+ 0.1 billion). Net inflows in the first half also included billion into unclassified funds. 89

90 The summary figures given in the table below confirm the prudential approach of Group customers: a percentage of lower risk funds (monetary funds and bonds) that is again higher than the figure for the sector, but down over the six months (from 50.9% to 49.3%) as also occurred for the Assogestioni sample (down from 44.1% to 41.7%); at the same time a greater percentage of balanced funds up from 33.1% to 35.7%, compared with an average figure for the sector nationally up from 9.8% to 10.2% also to be seen in relation to expansion of the products range in the period; a percentage of equity funds down slightly and constantly lower than the benchmark sample (9.6% compared with 22.8%); a fall in the percentage of flexible funds (5.4%), compared with a figure very much higher for the sector nationally (24.9%); no investment in hedge funds (0.4% of the Assogestioni sample). * * * As concerns, on the other hand, assets under management net of Group funds (which includes COLLECTIVE INSTRUMENTS AND CUSTOMER PORTFOLIO MANAGEMENT), at the end of June the UBI Banca Group was positioned in seventh place in the sector (in fifth place among Italian banking groups) with total assets for both ordinary and institutional customers amounting to 56.6 billion and a market share of 3.03%, a progressive increase compared with all the previous periods (2.99% in March; 2.94% as at 1 st January 2018). If the analysis is limited to banks only, the Group s market share in June 2018 was 6.97%, up on 6.81% in March and 6.70% at the beginning of 2018, placing the UBI Banca stably in fourth position among operators in the sector. 90

91 Insurance deposits and technical reserves Direct deposits from insurance business and technical reserves Figures in thousands of euro A % B % Changes A-B Changes A-C % C amount % amount % Financial liabilities designated as at fair value related to insurance business [liabilities item 30] 75, % 59, % 16, % 43, % 32, % of which: Pension funds 12, % 11, % % 13, % -1, % Unit-linked products 63, % 47, % 16, % 29, % 33, % Technical reserves [liabilities item 110] 1,879, % 1,901, % -21, % 1,780, % 98, % Life business sector 1,877, % 1,899, % -21, % 1,778, % 98, % of which: mathematical reserves 1,864, % 1,879, % -15, % 1,766, % 97, % reserves for sums to be paid 11, % 17, % -6, % 11, % % other reserves 1, % 1, % % % % Non-life business sector 1, % 1, % % 1, % % Direct deposits from insurance business and technical reserves 1,954, % 1,960, % -5, % 1,823, % 130, % Direct insurance deposits and technical reserves stood at approximately 2 billion as at 30 th June 2018, an increase of 7.2% over the half-year, with a slight slowdown in the second quarter, despite the stable net inflows compared with the period ended 31 st March 2018, due solely to the negative market performance that characterised the period. Financial liabilities relating to insurance business designated as at fair value, representing the value of positions relating to Business sector III (Unit-Linked products) or Business sector VI (pension funds) insurance policies, increased by 75.5% over the six months to over 75 million, mainly due to the positive performance of the net inflows generated by the new policies issued since 1 st January 2018, which amounted to 32 million. In the second quarter, growth was in line with the previous quarter, despite the increase in net inflows (from 14 to 18 million), due to financial market dynamics, which resulted in a decrease in the value of the insurance positions. Technical reserves referred to the value as at 30 th June 2018 of insurance positions relating to Business Sector I, Business Sector V, and, to a residual extent, non-life policies. The balance was 1.9 billion, accounting for 96% of the total. The increase during the half-year ( million) benefited from the net inflows for Business Sectors I and V of 132 million, in addition to the revaluation of the insurance positions already in portfolio at the end of the previous year, but was adversely affected by the decline in unrealised gains on the securities in the company's separate management portfolios recognised through technical reserves according to a shadow accounting approach. The negative effect due to the decrease in the shadow accounting reserve was particularly evident in the April-June period, resulting in a decline in the value of the item in the second quarter. 91

92 General banking business with customers: lending Considering that the Group conducts mainly conventional banking business and holds a portfolio of loans originated in order to finance individuals and companies in their business activities as well as households, Hold to Collect 1 is the Business Model adopted for the management of almost the entirety of the loan portfolio. The contractual characteristics of the UBI Banca Group s loans to customers are normally such that they pass the SPPI test and they are therefore classified predominantly within financial assets measured at amortised cost [asset item 40 in the consolidated balance sheet] with recognition of net impairment losses determined in compliance with IFRS 9 rules on impairment recognised through profit or loss. However, loans which do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, where the SPPI test has not been passed, are recognised at fair value with changes in fair value recognised through profit or loss [asset item 20 in the consolidated balance sheet]. The figures as at 30 th June 2018, which include the effect of the adoption of the accounting standard IFRS 9, are compared with those as at 1 st January 2018 in order to allow a uniform comparison of the items. The section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this document may be consulted for details of the reconciliation of figures as at 31 st December 2017 and those resulting from first-time adoption of the new standards as at 1 st January Total loans and advances to customers Figures in thousands of euro A % B Changes A/B Changes A/C % amount % C amount % Loans and advances to customers measured at fair value through profit or loss (*) [Asset item 20. 2) in the Reclassified Consolidated Balance Sheet] 313, % 340, % -27, % 362, % -48, % % Loans and advances to customers measured at amortised cost through profit or loss [Asset item 40. 2) in the Reclassified Consolidated Balance Sheet] 91,342, % 91,575, % -232, % 90,980, % 361, % Totale 91,656, % 91,916, % -259, % 91,343, % 312, % (*) The changes in the figures as at 1st January 2018 with respect to the previous March quarterly financial report are to be attributed to marginal variations, essentially rounding. Total loans of the UBI Banca Group as at 30 th June 2018 stood at 91.7 billion which, as stated in the introduction, are primarily classified within Financial assets measured at amortised cost and to a residual extent within Financial assets measured at fair value through profit or loss. Reflecting the growth trend in finance for households and businesses in local communities, the item was up million in the six months (+0.3%) as the result of an increase in the first quarter ( million; +0.6%) that more than offset the marginal decline in the second quarter. Loans and advances to customers measured at fair value through profit or loss Asset item 20. 2) in the Reclassified Consolidated Balance Sheet As shown in the table entitled Total loans and advances to customers, at the end of the half year those loans that had not passed the SPPI test, and which were therefore classified within Financial assets measured at fair value through profit and loss, totalled million, down on both comparative periods ( million on March; million on January). Those exposures, which related exclusively to the Parent, were completely negligible compared with the total size of the Group s lending assets, and were mainly related to business in gold with customers and to a minor extent to loans granted by the Corporate & Investment Banking (CIB) Division. 1 Financial instruments associated with the hold to collect business model are held within the framework of the management model the objective of which is to collect cash flows the contractual terms of which give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. 92

93 Loans and advances to customers measured at amortised cost Asset item 40. 2) in the Reclassified Consolidated Balance Sheet Financial assets measured at amortised cost are classified, in accordance with IFRS 9, within three different credit risk stages depending on the state of creditworthiness of the financial instrument as at the measurement date compared with the grant date. In detail: - performing exposures are divided into stage 1 (loans that are performing according to expectations) and stage 2 (loans that have recorded a significant increase in credit risk since the initial recognition date); - non-performing loans (past-due exposures, unlikely-to-pay loans and bad loans) are allocated within stage 3 (loans which present objective evidence of impairment loss). Performance of the loan portfolio Composition of loans to customers measured at amortised cost Changes of which of which Stages one Stage three Total Stages one Stage three Total (A+B)-(C+D) purchased or purchased or and two and two originated % originated % Figures in thousands of euro credit credit amount % A B impaired (*) A+B C D impaired (*) C+D Current account overdrafts 7,005, , ,201 7,820, % 7,678, , ,185 8,542, % -721, % Reverse repurchase agreements Mortgage loans and other medium to long-term financing 56,704,797 4,429, ,542 61,133, % 56,583,871 4,617, ,364 61,201, % -67, % Credit cards, personal loans and salary-backed loans 3,285,515 98,639 3,178 3,384, % 3,035, , ,151, % 232, % Finance leases 5,368, ,339 55,401 6,349, % 5,508, ,588 53,788 6,507, % -157, % Factoring 2,062, ,510-2,298, % 2,182, ,702-2,433, % -135, % Other transactions 9,771, ,647 53,733 10,355, % 8,543, ,062 19,144 9,145, % 1,209, % Total Asset item 40. 2) in the Reclassified Consolidated Balance Sheet 84,199,995 7,142, ,055 91,342, % 83,533,165 7,447, ,321 90,980, % 361, % of which: Short-term 18,841,202 20,474, % 18,404,597 20,121, % 353, % Medium to Long-term 65,358,793 70,867, % 65,128,568 70,859, % 8, % (*) Non-performing exposures resulting from the acquisition of the New Banks [Purhcased or Originated Credit Impaired ( POCI )] Composition of loans to customers measured at amortised cost Changes of which Total of which Stages one Stage three Stages one Stage three Total (A+B)-(E+F) purchase or purchase or and two and two originated % originated % Figures in thousands of euro credit credit amount % A B impaired (*) A+B E F impaired (*) E+F Current account overdrafts 7,005, , ,201 7,820, % 7,221, , ,231 8,058, % -238, % Reverse repurchase agreements , , % -7, % Mortgage loans and other medium to long-term financing 56,704,797 4,429, ,542 61,133, % 56,757,534 4,584, ,142 61,341, % -207, % Credit cards, personal loans and salary-backed loans 3,285,515 98,639 3,178 3,384, % 3,120, ,087 2,542 3,226, % 157, % Finance leases 5,368, ,339 55,401 6,349, % 5,436,633 1,006,091 54,121 6,442, % -92, % Factoring 2,062, ,510-2,298, % 1,723, ,547-1,970, % 327, % Other transactions 9,771, ,647 53,733 10,355, % 9,922, ,692 37,183 10,526, % -171, % Total Asset item 40. 2) in the Reclassified Consolidated Balance Sheet 84,199,995 7,142, ,055 91,342, % 84,191,465 7,383, ,219 91,575, % -232, % of which: Short-term 18,841,202 20,474, % 18,876,499 20,563, % -89, % Medium to Long-term 65,358,793 70,867, % 65,314,966 71,011, % -143, % (*) Non-performing exposures resulting from the acquisition of the New Banks [Purhcased or Originated Credit Impaired ( POCI )] As at 30 th June 2018, loans and advances to customers measured at amortised cost totalled 91.3 billion accounting for 99.7% of the Group's total loan portfolio up million (+0.4%) during the HALF YEAR, an important sign of the recovery of lending to the economy, due in part to the strong performance by the new Corporate & Investment Banking (CIB) Division. This progress was partly conditioned by the decline in non-performing loans classified within stage 3 ( million, of which million concentrated in the second quarter), whereas the Parent's business with the Cassa di Compensazione e Garanzia ( the CCG, a 93

94 central* counterparty clearing house) remained essentially unchanged on 1 st January 2018 ( million) 2. As may be seen from the table, net performing loans, classified in risk Stages 1 and 2, rose to 84.2 billion, an increase of million for the half year (+0.8%) [ million net of the CCG]. From the viewpoint of maturities, the medium to long-term component grew in the period by million, rising to 65.4 billion accounting for 77.6% of the total, while short-term loans grew by million ( million net of the CCG) to total 18.8 billion, accounting for 22.4%. Good performance by short-term loans was the aggregate result of an increase in other transactions, concentrated in the first quarter, in particular in international business, which more than offset a fall in factoring and current account overdrafts. According to management accounting records, the average balances of gross interest-bearing loans (i.e., not including bad loans) continued to decline slightly, despite the signs of a recovery seen in the first three months: the segment continues to be conditioned by the modest demand for working capital on the part of businesses, which in many cases preferred to replace their short-term credit with financing granted from the TLTRO loan pool. Against a decline in finance leases, the trend for volumes of longer term loans is being driven by new grants from TLTRO funds (the total remaining debt was up 0.9 billion, entirely attributable to the first quarter) and by the sound performance of consumer credit, a reflection of positive growth in business with customers, but which was also strengthened by signals of recovery from Prestitalia in the light of initiatives to increase business carried out under the Business Plan. According to management accounting records, the average balances of gross interest-bearing loans (i.e., not including bad loans) appear to have declined slightly, essentially attributable to the second quarter. The 61.1 billion of mortgages and other medium to long-term financing outstanding at the end of the half year were composed, on the basis of management accounting figures, of residential mortgages totalling 27 billion, of which 25.1 billion granted to consumer households and 1.9 billion to businesses, down on March ( 27.4 billion, of which 25.4 billion granted to consumer households and 2 billion to businesses). As at 30 th June 2018 performing residential mortgage loans totalled 25.2 billion, of which 23.9 billion granted to consumer households and 1.3 billion to businesses. In the SECOND QUARTER, outstanding loans at amortised cost (performing and non-performing) declined by million (-0.3%), driven by a reduction in non-performing loans ( million) and by a marginal change in exposures to the CCG ( billion) 3. Net of both components, loans to the economy were essentially stable ( million; +0.1%), reflecting the stability of both longer term positions, due to the strong performance of consumer credit, and of short-term loans, due in particular to the recovery of factoring during the period. In consideration of the relative two aggregates, the loan to deposit ratio stood at 96.1% (97.2% at the end of March; 96.3% as at 1 st January 2018). 2 As at 30 th June 2018, the total exposure to the CCG was million and consisted almost solely ( million) of margin deposits backing repurchase agreements involving Italian government bonds, correlated with the performance of average transaction volumes and, to a residual extent ( 1 million), repos ( million at the end of 2017, attributable solely to margin deposits). 3 Exposure to the CCG as at 31 st March 2018, recognised within other transactions, totalled million, relating totally to margin deposits required to guarantee repurchase agreements on Italian government securities, in relation to changes in the average volumes of business. 94

95 Distribution of loans by economic sector and ATECO code (Bank of Italy classification) Total of w hich nonperforming of w hich bad loans Manufacturing and service companies (non-financial companies and producer households) 55.6% 9.3% 5.0% of which: manufacturing activities: 15.0% 1.5% 0.7% - Metallurgy, fabrication of metal products and processing of non-metallic minerals 4.1% 0.5% 0.2% - Foodstuff, beverage and tobacco industries 1.9% 0.2% 0.1% - Fabrication of machinery 1.8% 0.1% 0.1% - Fabrication of oil refinery, chemical and pharmaceutical products 1.5% 0.0% 0.0% - Textile industries, tailoring of articles in leather and fur, fabrication of articles in leather and similar 1.3% 0.2% 0.1% - Fabrication of articles in rubber and plastic 1.0% 0.1% 0.0% - Fabrication of electronic products, electrical and non-electrical equipment 0.9% 0.1% 0.1% - Timber industry and fabrication of furniture 0.8% 0.2% 0.1% - Fabrication of motor vehicles, trailers, semitrailers and other means of transport 0.6% 0.1% 0.0% - Fabrication of paper and paper products, printing and reproduction of recorded media 0.6% 0.0% 0.0% - Other manufacturing industries 0.5% 0.0% 0.0% Real estate activities 9.2% 2.2% 1.0% Wholesale and retail commerce, repair of motor vehicles and motorcycles 8.6% 1.1% 0.8% Constructions 6.8% 2.8% 1.5% Professional, scientific and technical activities 3.2% 0.3% 0.1% Supply of electricity, gas, steam and air conditioning 2.7% 0.1% 0.1% Transport and warehousing 2.0% 0.3% 0.1% Accommodation and catering services 1.9% 0.4% 0.3% Agriculture, forestry and fishing 1.9% 0.3% 0.2% Hire, travel agency, business support services 1.2% 0.1% 0.1% Information and communication services 1.0% 0.1% 0.1% Water supply; sewerage, waste management and cleanup activities 0.7% 0.0% 0.0% Financial and insurance activities 0.2% 0.0% 0.0% Extraction of minerals from quarries and mines 0.1% 0.0% 0.0% Residual activities 1.1% 0.1% 0.1% Consumer households 36.8% 3.4% 2.1% Financial companies 3.3% 0.1% 0.1% Public administrations 1.1% 0.0% 0.0% Other (not-for-profit institutions and the rest of the world) 3.2% 0.3% 0.2% Total 100.0% Source: management accounting database (ICAAP). Total gross lending w ith ATECO codes ( billion as at 30th June 2018).The amount does not include the book restatement in accordance with IFRS 3 of the gross non-performing loans of the New Banks. The table gives, in management accounting terms, the distribution of lending by economic sector and ATECO (Italian equivalent to the NACE classification) of consolidated loans measured at amortised cost considered gross of impairment losses. As is shown, as at 30 th June 2018, 92.4% of outstanding loans were destined to manufacturing and service companies and to consumer households taken together, which reflects the traditional attention paid by the Group to its local communities. Loan concentration 4 In terms of concentration, the end of half year figures show a slight increase compared with the previous periods, although it is still at very low levels, which confirms the constant attention that the Group pays to this qualitative aspect of the portfolio. Concentration of risk (largest customers or groups as a percentage of total gross loans, unsecured guarantees and securities - management accounting figures) Customers or Groups IAS 39 Largest % 3.9% 3.7% Largest % 6.3% 6.1% Largest % 7.9% 7.8% Largest % 9.2% 9.1% Largest % 10.2% 10.0% 4 Concentration, large exposures and the breakdown of loans and advances to customers by geographical area are defined as relating to the total loan portfolio of the Group consisting of the sum of loans to customers classified within Financial assets measured at amortised cost and those classified within Financial assets measured at fair value, even if the unit and overall size of the latter are not sufficient to affect the results of the measurements. 95

96 With regard to large exposures, the June 2018 Large exposures supervisory reports 5 showed 4 positions equal to or greater than 10% of the qualifying capital for a total of 24.7 billion. In detail: Figures in thousands of euro 14.3 billion relates to the Ministry of the Economy and Finance mainly for investments in government securities by the Parent and the remaining amount relates to current and deferred tax assets ( billion in March; billion in December); 7.8 billion to funds deposited with the Bank of Italy ( 6.09 billion; 6 billion); Number of positions Exposure 24,680,875 24,638,040 24,630,887 Risk positions 519, , , billion to investments in securities issued by the United States Treasury ( 1.37 billion; 1.42 billion); 1.1 billion to business with a major banking counterparty (for repurchase agreements). The figure was 1.03 billion in March and 1.22 billion at the end of In addition to the above, in March there was an exposure of 1.37 billion relating to investments in Spanish government bonds. In consideration, amongst other things, of the application of a zero weighting factor for transactions with the government, only three actual risk positions for the Group existed, after weightings, for an amount of 0.5 billion, mainly attributable to the banking counterparty mentioned. The percentage of the qualifying capital is well below the limit of 25% set for banking groups for each of the exposures reported. Geographical distribution of loans to customers by the counterparty's region of residence (*) percentage of total Lombardy 49.94% Latium 10.22% Marches 7.50% Piedmont 6.54% Emilia Romagna 4.13% Campania 3.48% Veneto 2.67% Apulia 2.38% Liguria 2.24% Tuscany 2.16% Abruzzo 2.04% Calabria 1.61% Umbria 1.34% Trentino Alto Adige 0.49% Friuli Venezia Giulia 0.49% Basilicata 0.41% Molise 0.22% Sardinia 0.52% Sicily 0.52% Valle d'aosta 0.05% Abroad 1.05% Total % A summary of the geographical distribution of lending in Italy is given in the table geographical distribution of loans to customers by residency of the counterparty. Overall, at the end of the half year the bulk of the Group's loan portfolio continued to be attributable to borrowers based in the northern regions of Italy (66.6% of the total), and in the North West in particular (58.8%), although the acquisition of the New Banks contributed to an increase in the weight of loans to the central regions of Italy to 21.2% 6. North 66.6% - North West 58.8% - North East 7.8% Central 21.2% South 11.2% Abroad 1.0% (*) Performing loans, excluding bad loans, relating to the banking perimeter only. 5 Prepared on the basis of the provisions of the Basel 3 rules, in force from 1 st January Bank of Italy Circulars No. 285 and No. 286 of 17 th December 2013 and subsequent updates. 6 The share for the Latium Region may be affected by seasonal factors relating to business with companies controlled by central government organisations. 96

97 Financing with funds provided by the European Central Bank (TLTRO) With regard to targeted longer-term refinancing operations (TLTROs), as already reported, on 10 th March 2016 the ECB approved a new programme entitled New series of targeted longer-term refinancing operations (TLTRO II), which involves four quarterly operations (from June 2016 to March 2017) each with a life of four years. The UBI Banca Group applied for funds under that programme totalling 12.5 billion, against a maximum of 14.5 billion 7 that could be applied for. In detail: in June 2016 the Group took part in the first of four auctions. It fully repaid funds obtained from the previous TLTRO operations totalling 8.1 billion 8 and was allotted new funds amounting to 10 billion with the due date on 24 th June in March 2017 the Group took part in the fourth and last auction and obtained liquidity of 2.5 billion with the due date on 24 th March Financing granted to customers drawn from those funds amounted to 13.9 billion as at 30 th June 2018, with a remaining outstanding debt of 10.4 billion ( 9.5 billion at the end of 2017). Loans approved and not yet granted as at that same date amounted to 1.3 billion. Initiatives in co-operation with the European Investment Bank (EIB) In the first half of 2018, the UBI Banca Group continued to offer medium to long-term loans to companies under attractive terms thanks to the positive collaboration with the European Investment Bank. More specifically, approximately 840 loans were granted for approximately 260 million, drawn from the following loan pools: - a loan pool of 190 million intended to finance projects undertaken by SMEs and mid-caps (Loan for SMEs & Mid Caps VI); - a loan pool of 50 million intended to finance the investments undertaken by Social Activities (Social Activities MBIL); - a loan pool of 300 million intended to finance projects undertaken by SMEs and mid-caps (Loan for SMEs & Mid Caps II); A loan pool agreement of an additional 100 million for SMEs and mid-caps is expected to be signed in the second half of Riskiness The entry into force of international reporting standard IFRS 9 determined a revision of the procedures used for determining impairment losses on loans, with a changeover from the concept of incurred credit loss to one of expected credit loss (ECL). The standard requires a different way of calculating impairment (ECL) based on deterioration of credit quality as follows: 1-year ECL for positions classified within the stage 1 and lifetime ECL of an instrument for those included within stages 2 and 3. Estimates of ECL involve the inclusion of forward-looking scenarios and, in relation to specific portfolios to be sold, it reflects not only recovery through the ordinary management of loans, but also the presence of a sales scenario consistent with the UBI Banca Group s Strategic NPL Plan submitted to the ECB in April At the end of June the Group's total gross non-performing loans amounted to 12 billion, down million compared with the beginning of January (-3.3%), of which million concentrated in the second quarter. The weight of such loans therefore declined to 12.41% from 12.85% as at 1 st January 2018 (12.74% in March), and significant improvement is expected as a result of the finalisation of the securitisation in process 10. The decline of million in the item in the second quarter was seen across all categories and primarily affected unlikely-to-pay loans ( million) and bad loans ( million), above all as a consequence of the disposals during the period, but also of the strong results of the insourcing of debt recovery. We report that in the second quarter disposals of bad loans, mainly unsecured, were carried out amounting to approximately 94 million gross in management accounting terms (for a total of million in the six 7 As communicated by the Bank of Italy. In the second quarter of 2018 the amount of TLTRO II funds declined to 12.4 billion. The decrease in debt should be viewed within the framework of Decision (EU) 2016/810 of the European Central Bank, which establishes the final interest rates to be applied to the amounts awarded to counterparties in each TLTRO II auction. The Bank of Italy began to communicate the above rates to participating counterparties on 5 th June In the case of the UBI Banca Group, the communication in question indicates the application of a negative rate of -0.40%, which resulted in a reduction in the debt contracted through the auction. 8 The total amount that had been allotted to the Group with its participation in three of the seven TLTRO I auctions held by the ECB. 9 The total funds acquired in the four operations by intermediaries in the euro area came to 740 billion ( 331 billion net of voluntary repayments of the funding still outstanding obtained from the first series of TLTROs). Bank of Italy counterparties were awarded a total of 241 billion ( 128 billion net). 10 See the section Significant events in the first half of 2018 in this report for further details of this transaction. 97

98 months) together with disposals of unlikely-to-pay exposures, with a gross management accounting value of approximately 97 million ( million since January). The downward trend for new inflows from performing loans continued in the second quarter. The table reporting movements in gross non-performing exposures shows total inflows of million, down 19.7% on the first quarter. As a result of this decline, the annualised default rate 11 fell to 1.48% from 1.85% in the first quarter (1.67% on a half-yearly basis). Overall, in the six months the recovery rate 12 on total gross non-performing loans came to an annualised 11% (a recovery rate of 5.9% for bad loans), confirming the successful performance of the activity. Given the concurrent increase in outflows to performing status ( million, compared with 95.2 million in the first quarter), in the second quarter the net outflows from the performing category (inflows - outflows) also improved accordingly, declining 34.1%. In further confirmation of the current positive signs, transfers to bad loans from other nonperforming categories, chiefly unlikely-to-pay loans, remained essentially stable, while decreases due to write-offs, collections and disposals increased considerably, principally as a consequence of the disposals completed during the period. Loans and advances to customers measured at amortised cost as at 30th June 2018 (*) Figures in thousands of euro Gross exposure Impairment losses Carrying amount Coverage (**) Non-performing exposures (stage three) (12.41%) 12,008,425 4,865,777 (7.82%) 7,142, % - Bad loans (7.43%) 7,192,530 3,719,025 (3.80%) 3,473, % - Unlikely-to-pay loans (4.83%) 4,676,478 1,132,267 (3.88%) 3,544, % - Past-due loans (0.15%) 139,417 14,485 (0.14%) 124, % Performing loans (stages one and tw o) (87.59%) 84,748, ,047 (92.18%) 84,199, % Total 96,756,467 5,413,824 91,342, % The item as a percentage of the total is given in brackets. Loans and advances to customers measured at amortised cost as at 31st March 2018 (*) Figures in thousands of euro Gross exposure Impairment losses Carrying amount Coverage (**) Non-performing exposures (stage three) (12.74%) 12,378,749 4,994,983 (8.06%) 7,383, % - Bad loans (7.52%) 7,309,326 3,813,243 (3.82%) 3,496, % - Unlikely-to-pay loans (5.06%) 4,914,595 1,167,872 (4.09%) 3,746, % - Past-due loans (0.16%) 154,828 13,868 (0.15%) 140, % Performing loans (stages one and tw o) (87.26%) 84,761, ,300 (91.94%) 84,191, % Total 97,140,514 5,565,283 91,575, % The item as a percentage of the total is given in brackets. Loans and advances to customers measured at amortised cost as at 1st January 2018 Figures in thousands of euro Gross exposure Impairment losses Carrying amount Coverage (**) Non-performing exposures (stage three) (12.85%) 12,413,612 4,965,818 (8.19%) 7,447, % - Bad loans (7.60%) 7,340,234 3,821,113 (3.87%) 3,519, % - Unlikely-to-pay loans (5.08%) 4,910,074 1,129,026 (4.16%) 3,781, % - Past-due loans (0.17%) 163,304 15,679 (0.16%) 147, % Performing loans (stages one and tw o) (87.15%) 84,175, ,344 (91.81%) 83,533, % Total 96,589,121 5,608,162 90,980, % The item as a percentage of the total is given in brackets. (*) The final PPA to the New Banks' non-performing loans resulted in a positive reversal of 36.9 million in the first half of 2018 ( 18.9 million in the second quarter and 18 million in the first quarter). (**) The coverage ratio is calculated as the ratio of impairment losses to gross exposure. For bad loans only, consistent with Group policies, impairment losses and gross exposures are shown net of write-offs of positions still subject to ongoing bankruptcy proceedings. Loan write-offs relating to creditor legal actions still in progress (corresponding to the cumulative amount of write-offs on financial assets still recognised in the accounts) amounted to 2.4 billion as at 30 th June 2018 (of which approximately 1.7 billion relating to partial write-offs), up slightly compared with the end of the quarter and the beginning of When adjusted to take account of loan write-offs relating to creditor legal actions still in progress, the coverage ratio for total non-performing loans was 50.53% (49.83% at the end of March; 49.54% at the beginning of 2018) while the ratio for bad loans was 63.90% (63.77%; 63.67%). The decline in gross loan volumes described above in turn drove a decrease in net nonperforming loans to 7.1 billion, marking a drop of million (-4.1%) in the half year due 11 The indicator is calculated according to the following ratio: annualised gross movements from performing to non-performing loans/initial balances of gross performing loans. 12 The indicator is calculated according to the following ratio: receipts/(balance of gross non-performing loans at the beginning of the period + increases). 98

99 to a reduction in unlikely-to-pay loans of million, in bad loans of 45.6 million and in exposures past due and/or in arrears of 22.7 million. As for gross volumes, the trend in the six months was essentially due to the second quarter, when there was a decline of million (-3.3%), primarily attributable to unlikely-to-pay loans ( million) and, to a residual extent, to the remaining categories ( million for bad loans and - 16 million for exposures past due and/or in arrears). Benefiting, amongst other things, from an increase in the total size of the portfolio of loans measured at amortised cost in the six months, the percentage of net non-performing loans fell to 7.82% from 8.19% on 1 st January 2018 (8.06% in March). In terms of types of loan, the table Composition of loans to customers measured at amortised cost, shows that net nonperforming loans (Stage three) are mainly concentrated in the item mortgage loans and other medium to long-term loans, backed moreover by collateral and with prudential loan to value (LTV) ratios, which results automatically in a lower level of coverage. Loans to customers measured at amortised cost: changes in gross non-performing exposures in the first half of 2018 Figures in thousands of euro Bad loans Unlikely-to-pay loans Past-due exposures Total Initial gross exposure as at 1st January ,340,234 4,910, ,304 12,413,612 Increases 580, , ,108 1,694,807 inflows from performing exposures 30, , , ,682 transfers from other classes of non-performing exposures 365, , ,786 other increases 184, , ,339 Decreases -728,599-1,168, ,995-2,099,994 outflows to performing loans -2, ,469-44, ,969 write-offs (*) -457,286-52, ,288 payments received -233, ,410-31, ,744 disposals -20,901-60, ,390 losses from disposals -4,085-17, ,304 transfers to other classes of non-performing exposure -5, , , ,786 other decreases -6,117-8, ,513 Final gross exposure as at 30th June ,192,530 4,676, ,417 12,008,425 Loans to customers measured at amortised cost: changes in gross non-performing exposures in the first quarter of 2018 Figures in thousands of euro Bad loans Unlikely-to-pay loans Past-due exposures Total Initial gross exposure as at 1st January ,340,234 4,910, ,304 12,413,612 Increases 270, ,412 85, ,505 inflows from performing exposures 15, ,806 85, ,350 transfers from other classes of non-performing exposures 180,916 58, ,856 other increases 74, , ,299 Decreases -301, ,891-94, ,368 outflows to performing loans ,713-14,680-95,170 write-offs (*) -163,660-19, ,359 payments received -120, ,487-18, ,543 disposals -6,980-8, ,748 losses from disposals ,051 transfers to other classes of non-performing exposure -2, ,340-61, ,856 other decreases -6,142-4, ,641 Final gross exposure as at 31st March ,309,326 4,914, ,828 12,378,749 (*) The item includes write-offs, and that is write-offs subject to bankruptcy proceedings that are still ongoing and to true debt cancellations, and that is write-offs relating to bankruptcy proceedings that have been concluded in the period. Due to a parallel reduction in the pertinent items, in particular tangible equity, affected by the negative balance on the fair value reserve for securities held in portfolio due to a widening of spreads, the Texas Ratio 13 which measures the ratio of net non-performing loans to tangible equity amounted to 100.4% at the end of June 14 (98.2% in March). However, the trend is expected to improve with the closing of the securitisation announced on 1 st August The coverage ratio for total non-performing loans rose during the three months to 40.52% (50.53% inclusive of write-offs related to creditor legal actions still in progress), a ratio that 13 This indicator is calculated according to the following ratio: total net non-performing loans/[book equity (exclusive of profit/inclusive of loss for the period) + minority interests total intangible assets] % if calculated excluding non-controlling interests. 15 See the section Significant events in the first half of 2018 in this report for further details of this transaction. 99

100 must always be interpreted in close relation to the high percentage of positions backed by collateral which characterises loans granted by the Group. The coverage ratio for bad loans in particular reached 51.71% (63.90% when adjusted to take account of write-offs relating to creditor legal actions still in progress) 16, down marginally on both comparative periods (52.17% in March; 52.06% at the beginning of the year), due in part to the disposals completed during the period, involving a series of positions showing levels of provisioning above the average for the category. The coverage ratio for unlikely-to-pay loans reached 24.21% (22.99% at the beginning of January). However, if one considers the exposure attributable to the former New Banks on the basis of pre-closing figures 17, coverage would be 33.93%, consistent with average market levels. At the end of June, the breakdown of performing loans into stages one and two had not changed significantly with respect to 1 st January 2018 (for information, see the statements of reconciliation provided in the section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 ). The coverage ratio of 0.65% was essentially unchanged from March, but down in the six months, principally due to the release of collective impairment losses resulting from the adoption of the model change authorised on 21 st March Management accounting figures for the internal rating perimeter confirmed the favourable risk profile of the Group s performing portfolio, with the highest risk classes now stably below the threshold of 4% of the total and the lower classes accounting for as much as 79.5%. As may be seen from the tables below, forborne exposures declined to 5.9 billion in gross terms (- 93 million since the beginning of January) and to 4.8 billion in net terms ( million) due to the decrease in the second quarter, principally attributable to non-performing exposures, and also in part to the disposals of significant positions undertaken during the period. As already reported, the performance of the item and its composition are also affected by the forbearance regulations 18 introduced in September In fact non-performing positions must pass a minimum period of one year (cure period), after which the return of the customer s credit quality is assessed before it can be reclassified among performing positions. On the other hand forborne positions classified as performing must pass a minimum period of two years ( probation period ) before a position can be released from its forborne status and therefore be eliminated from the category in supervisory reports. 85.0% 80.0% 75.0% 70.0% 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Total UBI Banca Group Performing Loan Portfolio - Risk profile Management accounting figures for the internal rating High Risk Medium Risk Low Risk Unrated June % 12.7% 79.5% 4.1% December % 13.1% 78.8% 4.4% 16 The management accounting records for the Group which do not reflect the application of IFRS 3 to the New Banks' bad loans indicate coverage of 84.8% of bad loans not backed by collateral, inclusive of loan write-offs (85.2% in March). 17 As previously reported, in accordance with IFRS 3, following the conclusion of the PPA process, with effect from December 2017 the non-performing loans of the former New Banks have been recognised net of provisions for impairment existing at the time of the purchase and the additional provisions due to the PPA. 18 This term is used to indicate a situation in which a debtor is not considered able to meet due dates and comply with contractual terms and conditions as a result of financial difficulties. Because of those difficulties the creditor decides to modify the due date and the contractual terms and conditions in order to allow the debtor to honour the debt or to refinance it, either fully or partially. 100

101 Forborne exposures measured at amortised cost as at 30th June 2018 Forborne exposures are composed of one of the categories of non-performing loans (stage 3) and of performing loans (stages 1 and 2) reported in the table Composition of loans to customers measured at amortised cost. Figures in thousands of euro Gross exposure Impairment losses Carrying amount Coverage (*) Non-performing exposures (61.35%) 3,624, ,115 (54.63%) 2,642, % - Bad loans (17.73%) 1,047, ,513 (12.96%) 626, % - Unlikely-to-pay loans (43.32%) 2,559, ,075 (41.33%) 1,999, % - Past-due loans (0.30%) 17,543 1,527 (0.34%) 16, % Performing loans (38.65%) 2,283,080 88,581 (45.37%) 2,194, % Total 5,907,202 1,070,696 4,836, % The item as a percentage of the total is given in brackets. Forborne exposures measured at amortised cost as at 31st March 2018 Forborne exposures are composed of one of the categories of non-performing loans (stage 3) and of performing loans (stages 1 and 2) reported in the table Composition of loans to customers measured at amortised cost. Figures in thousands of euro Gross exposure Impairment losses Carrying amount Coverage (*) Non-performing exposures (61.22%) 3,724, ,315 (54.85%) 2,750, % - Bad loans (16.55%) 1,006, ,071 (11.86%) 594, % - Unlikely-to-pay loans (44.33%) 2,697, ,412 (42.61%) 2,136, % - Past-due loans (0.34%) 20,571 1,832 (0.38%) 18, % Performing loans (38.78%) 2,359,894 95,542 (45.15%) 2,264, % Total 6,084,573 1,069,857 5,014, % The item as a percentage of the total is given in brackets. Forborne exposures measured at amortised cost as at 1st January 2018 Forborne exposures are composed of one of the categories of non-performing loans (stage 3) and of performing loans (stages 1 and 2) reported in the table Composition of loans to customers measured at amortised cost. Figures in thousands of euro Gross exposure Impairment losses Carrying amount Coverage (*) Non-performing exposures (60.33%) 3,619, ,244 (54.11%) 2,685, % - Bad loans (15.29%) 917, ,365 (11.02%) 546, % - Unlikely-to-pay loans (44.69%) 2,681, ,367 (42.72%) 2,120, % - Past-due loans (0.35%) 20,783 2,512 (0.37%) 18, % Performing loans (39.67%) 2,380, ,074 (45.89%) 2,277, % Total 6,000,161 1,037,318 4,962, % The item as a percentage of the total is given in brackets. (*) The coverage is calculated as the ratio of impairment losses to gross exposure. 101

102 The interbank market and the liquidity position The figures as at 30 th June 2018, which include the effect of the adoption of the accounting standard IFRS 9, are compared with those as at 31 st March 2018 and with those as at 1 st January 2018 in order to allow a comparison of the items. The section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this publication may be consulted for details of the reconciliation of figures as at 31 st December 2017 and those resulting from first-time adoption of the new standards as at 1 st January The UBI Banca Group's net interbank position amounted to billion as at 30 th June 2018, down on both a half-yearly and quarterly basis: net of transactions with the ECB the Group's main counterparty the balance (- 2.3 billion), while still negative, does not represent a significant change with respect to either January or March. Net interbank position Figures in thousands of euro (*) Loans and advances to banks measured at fair value through profit or loss [Asset item 20. 1) in the Reclassified Consolidated Balance Sheet] 14,796 14,900 14,755 Loans and advances to banks measured at amortised cost [(Asset item 40. 1) in the Reclassified Consolidated Balance Sheet)] 9,513,708 8,142,802 7,814,815 Loans and advances to banks 9,528,504 8,157,702 7,829,570 of which: Loans to Central Banks 7,660,634 5,992,469 5,799,045 Due to banks measured at amortised cost [Asset item 10. a) in the Reclassified Balance Sheet] 16,607,300 17,308,468 16,733,006 of which: Due to Central Banks 12,474,154 12,486,468 12,428,723 Net interbank position -7,078,796-9,150,766-8,903,436 Loans and advances excluding central banks 1,867,870 2,165,233 2,030,525 Due to banks excluding central banks 4,133,146 4,822,000 4,304,283 Net interbank position net of central banks -2,265,276-2,656,767-2,273,758 (*) "Loans to banks measured at amortised cost" differ from the figure published in the financial report for the period ended 31st March 2018 due to marginal changes, essentially rounding. The Group continues to maintain a more than positive position in terms of liquidity buffers, demonstrated, amongst other things, by specific short-term (liquidity coverage ratio) and structural (net stable funding ratio) Basel 3 indicators, both well above 100% 1. It must also be stated that these indicators would be greater than one even in the presence of an ordinary funding structure not based on TLTRO II support. Comments on the main trends at the half-yearly level and, where relevant, at the quarterly level, are provided below. Loans and advances to banks, which contain no exposures classified within stage 3, rose to 9.5 billion from 7.8 billion at the beginning of the year and from 8.1 billion in March. As shown in the table, the item includes marginal exposures measured at fair value through profit or loss relating exclusively to business in gold with banking counterparties and was stable at approximately 15 million. However the majority of this item continues to consist of exposures measured at amortised cost. The table giving details of loans to banks measured at amortised cost shows the following: - loans to Central Banks amounting to 7.7 billion, consisting exclusively of the compulsory reserve held with the ECB, up in the second quarter due to the liquidity generated by the sales of securities from the Parent's portfolio, awaiting reinvestment; 1 The Commission Delegated Regulation (EU) 2015/61 established the introduction of the LCR indicator from 1 st October 2015 with a minimum level requested initially set at 60%; 70% from 1 st January 2016; 80% from 1 st January 2017; and 100% from1 st January

103 - current accounts and sight deposits, amounting to 701 million, having reduced progressively ( million in the six months and - 61 million in the comparison with March). The item contains both deposits relating to ordinary interbank business and deposits held with international counterparties relating to margin deposits on derivatives; - financing - other amounting to 1.1 billion (- 26 million compared with 1 st January and million in the three months) which is used partly to recognise credit exposure to banks linked to industrial and/or financial groups that operate in the consumer credit sector (up slightly) and partly for international business with foreign counterparties used to support commercial transactions with customers; - term deposits amounting to 12.8 million, which continued to represent a marginal and progressively declining share of the item during the period. Composition of loans to banks measured at amortised cost Changes Changes Stages one Total Stages one Total A/B Stages one Total A/C % % % Figures in thousands of euro and two A and two B amount % and two C amount % A. Loans to central banks 7,660,634 7,660, % 5,992,469 5,992, % 1,668, % 5,799,045 5,799, % 1,861, % 2. Compulsory reserve requirement 7,660,634 7,660, % 5,992,469 5,992, % 1,668, % 5,799,045 5,799, % 1,861, % B. Loans to banks 1,853,074 1,853, % 2,150,333 2,150, % -297, % 2,015,770 2,015, % -162, % 1. Financing 1,853,074 1,853, % 2,150,333 2,150, % -297, % 2,015,770 2,015, % -162, % 1.1 Current accounts and sight deposits 700, , % 761, , % -61, % 820, , % -119, % 1.2 Term deposits 12,759 12, % 22,858 22, % -10, % 19,827 19, % -7, % 1.3 Other financing: 1,139,505 1,139, % 1,365,564 1,365, % -226, % 1,175,406 1,175, % -35, % - Reverse repurchase agreements % 4,116 4, % -3, % 10,323 10, % -9, % - Other 1,138,841 1,138, % 1,361,448 1,361, % -222, % 1,165,083 1,165, % -26, % Total asset item 40. 1) in the Reclassified Consolidated Balance Sheet 9,513,708 9,513, % 8,142,802 8,142, % 1,370, % 7,814,815 7,814, % 1,698, % No positions classified in stage 3 existed as at 30 th June, 31 st March 2018 or 1 st January 2018, nor were there any purchased or originated credit-impaired positions relating to stages one, two and three. Interbank funding of 16.6 billion at the end of June was essentially in line with the beginning of the year but down by 701 million during the quarter. The main form of funding, amounting to 12.5 billion nominal consisted of unconventional refinancing operations with the ECB, TLTRO II (targeted refinancing operations designed to expand lending to businesses and households). UBI Banca was allotted 10 billion nominal of funds with value date 29 th June 2016 (maturity June 2020) and a further 2.5 billion nominal with value date 29 th March 2017 (maturity March 2021). Net of that source of funding, amounts due to banks amounted to 4.1 billion: 992 million in current accounts and deposits, down slightly in the course of ordinary business in the six months, and more sharply in the April-June period due to the presence as at 31 st March of balances accumulated in view of credit transfers awaiting settlement, due to the holiday falling at the end of the quarter; 1.6 billion of repurchase agreements, which declined by 231 million in the second quarter due to the decrease in financing transactions with institutional market counterparties for investments, above all in US Treasuries, but also, albeit to a lesser extent, in foreign government bonds; financing other, amounting to 1.4 billion, consisting almost entirely of loans with the EIB, i.e. medium-/long-term funding transactions with the European Investment Bank aimed at supporting SMEs, declined slightly, by 76 million, compared with the beginning of the year, due to amortisation for the period; other payables amounted to 21.8 million, consisting of provisions relating to credit card settlement arrangements with Nexi (formerly Istituto Centrale Banche Popolari). This item was down slightly on the balance for March ( 19.7 million) and 28.2 million on the balance at the beginning of the year ( 50 million). 103

104 Composition of amounts due to banks measured at amortised cost Changes A/B Changes A/C % % % A B C Figures in thousands of euro amount % amount % 1. Due to Central Banks 12,474, % 12,486, % -12, % 12,428, % 45, % 2. Due to banks 4,133, % 4,822, % -688, % 4,304, % -171, % 2.1 Current accounts and sight deposits 992, % 1,469, % -477, % 1,023, % -31, % 2.2 Term deposits 75, % 55, % 19, % 62, % 12, % 2.3 Financing: 3,033, % 3,267, % -234, % 3,156, % -123, % Repurchase agreements 1,618, % 1,849, % -231, % 1,665, % -46, % Other 1,414, % 1,417, % -3, % 1,490, % -76, % 2.5 Other payables 32, % 29, % 3, % 61, % -28, % Total asset item 10. a) in the Reclassified Consolidated Balance Sheet 16,607, % 17,308, % -701, % 16,733, % -125, % * * * Available liquidity reserve Management accounting figures in millions of euro - net of haircuts A % B Changes A/B * % % amount % C Changes A/C amount % ECB pool 18, % 19, % % 19, % -1, % of which government securities 4, % 5, % % 5, % % of which Italian government securities 4, % 4, % % 4, % % Liquid securities not included in the ECB pool 2, % 3, % -1, % 4, % -2, % of which government securities 2, % 3, % -1, % 4, % -2, % of which Italian government securities 2, % 2, % % 3, % -1, % Securities refinanced 2, % 2, % % 1, % 1, % of which Italian government securities % % % Liquid part of compulsory reserve 6, % 5, % 1, % 5, % 1, % Total liquidity reserve (**) 30, % 30, % % 31, % % ECB auctions (portion pledged) -12, % -12, % % -12, % % Government securities refinanced -2, % -2, % % -1, % 1, % Available liquidity reserve 15, % 15, % % 17, % -1, % of which (***) Available reserves eligible for the purposes of the LCR indicator 15, % 15, % % 16, % -1, % * In accordance with standard accounting practice, the 31 st December 2017 is shown as a.m. on 1 st January (**) Eligible assets (ECB collateral pool, marketable securities not included in the ECB collateral pool and refinanced government bonds) amounted to 23,582 million as at 30 th June 2018 and included government bonds of 9,933 million (of which Italian government bonds of 7,061 million). These amounted to 26,008 million as at 31 st December 2017, of which 11,541 million consisting of government securities (of which 8,766 million consisting of Italian government securities). As at 31 st March they stood at 25,055 million (government bonds of 11,222 million, of which Italian securities of 7,781 million). The composition of assets eligible for refinancing by type of underlying asset is given in the table Assets eligible: composition by type of underlying assets. (***) Available reserves eligible for the purposes of the LCR indicator are liquid assets that satisfy the general and operational requirements set respectively by articles 7 and 8 of Commission Delegated Regulation (EU) No. 2015/61 of 10 th October 2014 [which added to Regulation (EU) No. 575/2013 of the Parliament] and the eligibility criteria set in Chapter 2 of that same regulation. At the end of the half-year, the Group s liquidity reserve 2 amounted to 30.5 billion, down by 664 million, and was composed as follows: 18.6 billion of assets pledged to the ECB collateral pool to secure access to the TLTRO II programme: the decline in the six months was due in part to the progressive sale of government bonds (- 259 million) and to the cancellation, in the first quarter of the year, of a retained covered bond with a value of 1 billion nominal ( 0.86 billion net of haircuts), issued under the first residential mortgage programme; 2.5 billion of readily marketable spot and forward assets (mainly Italian government securities) not lodged with the collateral pool, available to the Parent treasury for short-term liquidity management. Such assets were also progressively reduced during the half-year, as a result of the sales undertaken as part of the management of financial portfolios; 2 An asset is considered liquid or marketable if the credit institution is able to convert it into cash rapidly without encountering practical or legal difficulties. 104

105 2.5 billion of government bonds refinanced through repurchase agreements, primarily having as their underlying U.S. Treasuries, Italian government bonds and, to a marginal extent, French government bonds. The item grew by more than 1 billion during the half-year, almost entirely attributable to the first quarter, when new transactions were undertaken with both the Cassa di Compensazione e Garanzia (CCG a central counterparty clearing house) and international banking counterparties; the available compulsory reserve of approximately 7 billion (the amount in excess of the compulsory level), the balance of which increased as a result of the liquidity generated by the aforementioned sales of securities awaiting reinvestment. The Group is pursuing a policy to gradually lighten and diversify the portfolios (by geographical area and by sovereign and corporate issuer), designed nevertheless to maintain sufficiently large investments in domestic government securities to ensure optimum management of liquidity by means of the eligibility of these. The total liquidity reserve is equivalent to 45.8% of direct sight funding consisting of current accounts and sight deposits as at 30 th June In terms of composition by type of financial instrument, the liquidity reserve (considered net of the available part of the compulsory reserve) of billion recorded the following main movements in the period: a decrease in eligible or readily marketable instruments in the securities portfolio of 1.6 billion, in keeping with the reduction in the portfolios; a decline in retained covered bonds of 1.1 billion, chiefly due to the aforementioned cancellation of a bond of 1 billion nominal in January 2018; an increase in eligible assets of 0.3 billion due to participation in ABACO. Retained securitisations (net of the relative amortisation instalments) remained unchanged. As a consequence of the performance reported above, at the end of the first half the available liquidity margin stood at 15.6 billion, of which 15.3 billion of reserves eligible for the purposes of the LCR, down compared with 17.3 billion at the end of December. At the operational level, in the second quarter the amount of TLTRO II funds considered declined from 12.5 to 12.4 billion. The decline in debt should be viewed within the framework of Decision (EU) 2016/810 of the European Central Bank, which states that final interest rates applied to the amounts allotted to counterparties in each auction of the second series of longer-term refinancing operations (TLTRO II) are determined according to specific calculation procedures and notified to the participating counterparties from 5th June The communication of the application of a negative rate of -0.40% resulted in a decrease in the debt contracted at auction for the purposes of calculating the liquidity reserve. The margin of available liquidity amounts to approximately 23.4% of on demand direct funding consisting of current accounts and free deposits as at 30 th June Assets eligible: composition by type of underlying assets * Figures in billions of euro nominal amount amount net of haircuts nominal amount amount net of haircuts nominal amount amount net of haircuts Own securities (1) Covered bonds ("self-retained" issues) Securitisation of residential mortgages of the former B@nca Marche M6 Srl securitisation UBI Leasing assets securitisation Securitisation of performing residential mortgages Loans eligible due to participation in ABACO (2) Assets eligible for refinancing * In accordance with standard accounting practice, the 31 st December 2017 is shown as a.m. on 1 st January (1) Owned securities, stated both at nominal value and net of haircuts, include the amount for refinanced securities. The item is therefore fully comparable with the figures reported in the table Available liquidity reserve, where the allocation (pool, non-pool, refinanced) of the government securities included here is reported. These represent the most significant part of the Group s liquid assets. (2) ABACO (bank assets eligible as collateral) is the name given to procedures drawn up by the Bank of Italy for the management of loans eligible for refinancing. In order to qualify as eligible, an asset must meet specific requirements contained in Bank of Italy regulations concerning the following: type of debtor (public sector, non-financial company, international and supranational institutions), credit rating (set by external ratings, rating tools of approved providers and internal ratings [for banks authorised by the Bank of Italy to use internal rating models]), minimum amount ( 0.03 million for domestic loans) and type of asset. 105

106 Financial activities The figures as at 30 th June 2018, which include the effect of the adoption of the accounting standard IFRS 9, are compared not only with those as at 31 st March 2018, but also with those as at 1 st January 2018 in order to allow a uniform comparison of the items. The section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this publication may be consulted for details of the reconciliation of figures as at 31 st December 2017 and those resulting from first-time adoption of the new standards as at 1 st January The financial assets of the Group as at 30 th June 2018 amounted to 15.7 billion, down 1.4 billion compared with 17.1 billion as at 1 st January 2018 and 1.1 billion compared with almost 16.9 billion as at 31 st March. If financial liabilities held for trading are considered, consisting solely of financial derivatives, then net assets came to 15.3 billion ( 16.7 billion in January and 16.5 billion in March). Strategic action (started at the end of 2015) continued during the first half to progressively reduce the size of the Italian government securities portfolio, while maintaining an optimum amount for liquidity management purposes, as part of a broader change in the mix and diversification of investments. As shown in the table, the most significant portfolios within the item financial assets consist of the categories Financial assets measured at fair value through comprehensive income and Financial assets measured at amortised cost which account for 73.3% and 19.3%. respectively of the total. In terms of type of financial instrument, 63.1% of the portfolio consists of Italian government securities, down compared with 66.8% at the beginning of 2018 due to actions undertaken. On the other hand, an increase can be seen in the percentage of other debt securities accounting for 30.2% (26.9% in January and 31.9% in March), due to the already mentioned diversification of investments into corporate and government securities, not only of European countries, but also of emerging countries. Both equity securities and UCITS shares are now of a marginal amount, accounting for a total of 3.9% (3.9% and 4.1%). Financial assets/liabilities Figures in thousands of euro Changes (*) Changes A-B A-C Carrying amount A % Carrying amount B % amount % Carrying amount C % amount % Financial assets measured at fair value through profit or loss [Asset item 20. 3) in the Reclassified Consolidated Balance Sheet] 1,160, % 1,185, % -25, % 1,602, % -442, % Financial assets held for trading 453, % 445, % 8, % 887, % -433, % of which: financial derivatives contracts 443, % 409, % 33, % 421, % 21, % Financial assets designated as at fair value 10, % 10, % % 11, % -1, % Financial assets mandatorily measured at fair value 696, % 729, % -32, % 704, % -7, % Financial assets measured at fair value through other comprehensive income [Asset item 30. 3) in the Reclassified Consolidated Balance Sheet] 11,527, % 12,645, % -1,117, % 12,435, % -907, % Financial assets measured at amortised cost [Asset item 40. 3) in the Reclassified Consolidated Balance Sheet] 3,029, % 3,022, % 7, % 3,037, % -7, % Financial assets (a) 15,717, % 16,853, % -1,135, % 17,075, % -1,357, % of which: - debt securities 14,663, % 15,764, % -1,100, % 16,001, % -1,337, % - of which: Italian government securities 9,913, % 10,385, % -471, % 11,412, % -1,498, % - equity securities 302, % 333, % -30, % 319, % -16, % - shares of UCITS 308, % 345, % -37, % 334, % -25, % Financial liabilities held for trading (b) 386, % 367, % 19, % 411, % -24, % of which: financial derivatives contracts 386, % 367, % 19, % 411, % -24, % NET FINANCIAL ASSETS (a-b) 15,331,030 16,486,072-1,155, % 16,663,691-1,332, % (*) Some figures differ from those published in the first quarter financial report due to marginal changes, consisting mainly of figures rounded up or down. 106

107 Management accounting figures 1 as at 30 th June 2018, show the following: - in terms of type of financial instrument, the Group s securities portfolio was composed as follows: 89.7% of government securities; 6.3% of corporate securities, equally divided between the financial sector and other corporate issuers (95% of these investments have an investment grade rating, 53% of which concentrated in the BBB segment and 36% in the A segment); and 4% of the remainder consisting of hedge funds, funds and equities (which included the stakes held in the Atlante Fund and the Bank of Italy); - from a financial viewpoint, floating rate securities accounted for 0.57% of the portfolio and fixed rate securities for 99.31%, while the remainder was composed of convertible, subordinated and structured securities; - as regards the currency of denomination, 85.82% of the securities were denominated in euro and 14.18% in dollars with natural currency hedges, while in terms of geographical distribution, 84.87% of the investments (excluding hedge funds) were issued from countries in the euro area; - an analysis by rating (for the bond portfolio only) shows that 99.64% of the portfolio consisted of investment grade securities. Financial assets measured at fair value through profit or loss Financial assets measured at fair value through profit or loss, asset item 20 in the consolidated balance sheet, were composed as follows: Financial assets held for trading [Item 20 a)], consisting of: - financial instruments managed with the objective of realising cash flows through the sale of the asset because: (i) they were acquired or incurred principally for the purpose of selling or repurchasing them in the short-term; (ii) they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; - derivatives held for trading; Financial assets designated as at fair value [Item 20 b)]: financial instruments classified in this category in application of the fair value option (FVO); Other financial assets mandatorily measured at fair value [Item 20 c)], financial instruments (i) for which the management strategy is determined on the basis of their fair value; or (ii) they are instruments for which the objective contractual characteristics do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding where the solely payment of principal and interest test ( SPPI test) has not been passed. These financial instruments are measured at fair value with changes in fair value recognised through profit or loss. Financial assets held for trading Financial assets held for trading [Asset item 20. a) in the Consolidated Balance Sheet] (*) Changes A-B Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount B amount % On-balance sheet assets Debt securities , , , % of which: Italian government securities , ,283-17, % Equity securities 9, ,223 17, ,784-8, % Shares of UCITS Total (a) 9, , , , , % Derivative instruments Financial derivatives 1, ,949 71, ,099 1, ,868 75, ,113 21, % Credit derivatives Total (b) 1, ,949 71, ,099 1, ,868 75, ,113 21, % Total (a+b) 11, ,238 71, , , ,211 75, , , % (*) Some figures differ from those published in the first quarter financial report due to marginal changes, consisting mainly of figures rounded up or down. 1 The management accounting analysis relates to a smaller portfolio than that stated in the consolidated financial statements, because they exclude some smaller portfolios and also financial derivatives contracts held for trading. Securities relating to insurance business are not included. 107

108 Financial assets held for trading [Asset item 20. a) in the Consolidated Balance Sheet] Changes A-C Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount C amount % On-balance sheet assets Debt securities , ,475-2, % of which: Italian government securities , ,512-2, % Equity securities 9, ,223 32, ,347-23, % Shares of UCITS Total (a) 9, ,110 35, ,822-25, % Derivative instruments Financial derivatives 1, ,949 71, ,099 2, ,173 71, ,308 33, % Credit derivatives Total (b) 1, ,949 71, ,099 2, ,173 71, ,308 33, % Total (a+b) 11, ,238 71, ,209 38, ,547 71, ,130 8, % At the end of June financial assets held for trading totalled million, ( million at the beginning of January 2018 and million at the end of March 2018), consisting of onbalance sheet assets of 10.1 million ( 466 million and 35.8 million) and of derivatives amounting to million ( million and million). As shown in the table, debt securities, amounting to 887 thousand, were down 447 million in the first half, especially with regard to other debt securities ( 874 thousand at the end of June), a reduction of 430 million due to the sale at the beginning of the year of 175 million nominal of French OATs and 250 million nominal of German bund. It should be noted that the changes shown in the tables take account of end of period accounting adjustments. Equity securities, amounting to 9.2 million (- 8.6 million in the six-month period and million in the second quarter), represent the main item within on-balance sheet assets and were composed mainly of many investments for small amounts made by the Parent totalling 6.7 million and only marginally of those made by Group companies operating in the insurance sector, which totalled 2.5 million. The decrease in the item recorded during both the first half and the quarter is entirely attributable to insurance activities. Finally, with regard to derivative instruments, these consisted solely of financial derivatives, for which the changes must be interpreted in strict relation to the corresponding item recognised within financial liabilities held for trading. As at 30 th June 2018 they amounted to million, up approximately 22 million in the first half and 33.8 million quarter-onquarter. These are not contracts with complex structures, but mainly interest rate swaps attributable almost entirely to UBI Banca s activities. Financial assets designated as at fair value Financial assets designated as at fair value [Asset item 20. b) in the Consolidated Balance Sheet] Changes A-B Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount B amount % Debt securities 10, ,085 11, ,271-1, % of which: Italian government securities 5, ,843 7, ,102-1, % Total 10, ,085 11, ,271-1, % 108

109 Financial assets designated as at fair value [Asset item 20. b) in the Consolidated Balance Sheet] Changes A-C Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount C amount % Debt securities 10, ,085 10, , % of which: Italian government securities 5, ,843 6, , % Total 10, ,085 10, , % Financial assets designated as at fair value, amounting to 10.1 million, were down 1.2 million in the first half and 0.9 million in the quarter and related entirely to the Group s insurance business activities. The debt securities, the only aggregate within the item, included Italian government securities amounting to 5.8 million ( 7.1 million as at 1 st January 2018 and 6.3 million in March) and had contracted as a result of movements in the portfolio in the period: net sales in the first quarter of BOTs, BTPs, CCTs and CTZs for 339 thousand nominal ( 1,108 thousand of sales and 769 thousand of purchases) and redemptions of BOTs, BTPs and CTZs for 477 thousand nominal; net purchases in the second quarter of BTPs, CCTs and CTZs for 284 thousand nominal ( 1,491 thousand of sales and 1,207 thousand of purchases) and redemptions of BTPs and CCTs for 506 thousand nominal. The changes reported in the tables take account of end of period accounting adjustments. The other debt securities, which were unchanged in the first half, were composed of government securities of other countries (Austria, Belgium, Germany, Spain, France, Holland, United States) and of corporate securities to a marginal extent. Other financial assets mandatorily measured at fair value Other financial assets mandatorily measured at fair value [Asset item 20. c) in the Consolidated Balance Sheet] (*) Changes A-B Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount B amount % Debt securities 91,998 36,044 17, ,054 67,830 41,740 18, ,579 17, % of which: Italian government securities 35, ,568 45, ,329-9, % Equity securities 22,482 2, , ,335 22,203 2, , , % Shares of UCITS 122, ,537 37, , , ,547 32, ,090-25, % Total 236, , , , , , , ,198-7, % (*) Some figures differ from those published in the first quarter financial report due to marginal changes, consisting mainly of figures rounded up or down. Other financial assets mandatorily measured at fair value [Asset item 20. c) in the Consolidated Balance Sheet] Changes A-B Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount C amount % Debt securities 91,998 36,044 17, ,054 84,590 37,301 15, ,055 7, % of which: Italian government securities 35, ,568 37, ,892-2, % Equity securities 22,482 2, , ,335 17,921 2, , ,928-3, % Shares of UCITS 122, ,537 37, , , ,919 22, ,641-37, % Total 236, , , , , , , ,624-32, % 109

110 Other financial assets mandatorily measured at fair value amounted to million as at 30 th June 2018, almost unchanged compared with million as at 1 st January and slightly down compared with million as at 31 st March. The table shows debt securities amounting to million, of which 35.6 million consisting of Italian government securities, down 9.8 million in the first half and 2.3 million in the quarter, as follows: down 0.3 million nominal net in the first three months, due to the sale in January of 17.1 million of BTPs and the purchase at the same time of 16.8 million of CCTs; down 0.6 million nominal net in the second three months, again due to the sale, in May, of BTPs. The remaining decrease was attributable to insurance business securities. The increase in other debt securities, up to million from 82.3 million as at 1 st January 2018 ( 99.2 million as at 31 st March), relates almost entirely to insurance business. The change also comprises the sale, concluded in the second quarter of 2018, of 1.3 million nominal of Corporate securities. As already reported, the changes shown in the tables take account of end of period accounting adjustments. Equity securities, classified mainly within fair value level three, amounted to million (+ 0.8 million in the first half and million in the quarter). Shareholdings recognised in fair value level three and totalling million, were held in the Bank of Italy, SACBO and Nexi (the former Istituto Centrale delle Banche Popolari). Again in fair value level three, a share was sold in the second quarter of 2018 for 8.7 million. Shares of UCITS were down 25.7 million over six months and 37.3 million over three months to million. Mainly funds were recognised within fair value level one as follows: UBI Pramerica Global Multi Asset Allocation ( 42.6 million), Polis ( 7.7 million) and Tages for which a residual amount of 2.2 million was recognised after the disposals made at the end of Fair value level two was composed largely of real estate funds (approximately 60 million relating to UBI Banca and 21.1 million to UBI Leasing), while shares of the Atlante Fund were recognised within fair value level three amounting to 37.3 million 2. The total also includes 80.9 million of UCITS shares subscribed in relation to insurance business classified within fair value levels one and two. Financial liabilities held for trading Financial liabilities held for trading: composition [Liabilities item 20. in the Consolidated Balance Sheet] Changes A-B Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount B amount % On-balance sheet liabilities Due to banks Due to customers Debt securities Total (a) Derivative instruments Financial derivatives , , , ,653-24, % Credit derivatives Total (b) , , , ,653-24, % Total (a+b) , , , ,653-24, % 2 The amount not only reflects the fair value movements recognised in the period, but also includes 13.2 million relating to contributions paid in the second quarter of 2017, 8.8 million in the fourth quarter of 2017 and 15.2 million in the second quarter of In fact in April UBI Banca made a further payment as consideration for the investment in the Italian Recovery Fund (the former Atlante Fund II), thereby more or less fully satisfying the commitment recognised in the financial statements for the year ended 31 st December

111 Financial liabilities held for trading: composition [Liabilities item 20. in the Consolidated Balance Sheet] Changes A-B Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount C amount % On-balance sheet liabilities Due to banks Due to customers Debt securities Total (a) Derivative instruments Financial derivatives , ,959 1, , ,105 19, % Credit derivatives Total (b) , ,959 1, , ,105 19, % Total (a+b) , ,959 1, , ,105 19, % Financial liabilities held for trading, amounting to approximately 387 million in June ( million in March and million as at 1 st January 2018), continued to consist solely of financial derivatives. The amounts and performance of these derivative instruments must be interpreted in relation to those for the corresponding item recognised within financial assets held for trading. Financial assets measured at fair value through other comprehensive income Financial assets measured at fair value through other comprehensive income, asset item 30 in the Consolidated balance sheet are composed of the following: (i) financial instruments associated with the Hold to Collect and Sell business model, which is to say they are held within the framework of a business model, the objective of which is achieved both by the collection of cash flows and by the sale of the instruments themselves and the contractual terms of which give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (the SPPI test is passed); (ii) equity securities for which an OCI election has been opted for to present changes in fair value in other comprehensive income 3. The financial instruments referred to in item (i) are measured at fair value with changes recognised within valuation reserves. Impairment losses and reversals of those losses determined in compliance with IFRS 9 impairment rules are recognised through profit or loss against valuation reserves in the statement of comprehensive income, while the equity securities referred to in item (ii) are measured at fair value with changes recognised within valuation reserves within the statement of comprehensive income 4. Financial assets measured at fair value through other comprehensive income [Asset item 30. in the Consolidated Balance Sheet] Changes A-B Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount B amount % Debt securities 11,393,607 84, ,477,753 12,311,776 64, ,376, , % of which: Italian government securities 6,848, ,848,166 8,310, ,310,949-1,462, % Equity securities ,221 50, ,754 58,754-8, % Total 11,393,607 84,131 50,236 11,527,974 12,311,776 64,713 58,818 12,435, , % 3 In fact with reference to the provisions of IFRS 9, an entity may make an irrevocable election at initial recognition for particular investments in equity instruments that would otherwise be measured at fair value through profit or loss to present subsequent changes in fair value in other comprehensive income. 4 With specific reference to equity securities, the amount recognised within valuation reserves is never transferred to the income statement (known as FVOCI with no recycling), not even when the investments are sold. 111

112 Financial assets measured at fair value through other comprehensive income [Asset item 30. in the Consolidated Balance Sheet] Changes A-B Figures in thousands of euro L 1 L 2 L 3 Carrying amount A L 1 L 2 L 3 Carrying amount C amount % Debt securities 11,393,607 84, ,477,753 12,518,281 72, ,590,654-1,112, % of which: Italian government securities 6,848, ,848,166 7,321, ,321, , % Equity securities ,221 50, ,435 54,435-4, % Total 11,393,607 84,131 50,236 11,527,974 12,518,281 72,358 54,450 12,645,089-1,117, % Financial assets measured at fair value through other comprehensive income amounted to 11.5 billion as at 30 th June 2018, down 907 million in the first half from 12.4 billion at the beginning of the year and down 1.1 billion in the quarter from 12.6 billion in March. As shown in the table, debt securities, amounting to 11.5 billion included 6.8 billion of Italian government securities, of which 1.2 billion related to insurance business. Investments in the Italian government securities fell 1.5 billion over six months, mainly attributable to banking business as a result of the following: net sales, with a view to reducing the portfolio, of 932 million nominal in the first quarter (sales of 2.4 billion of BTPs and redemptions of 12 million of BTPs and CTZs, against purchases of 1.48 billion of BTPs). net sales of 50 million nominal in the second quarter (sales of BTPs for 1.77 billion against purchases of BTPs for 1.32 billion and of BOTs for 400 million) and redemptions of the CTTs amounting to 30.4 million. Furthermore, a switch transaction was carried out in the period involving BOTs for an amount of 100 million nominal. As regards other debt securities, on the other hand, the stock grew approximately 564 million to 4.6 billion, mainly as a result of the purchase, again with a view to diversifying the portfolio, of Spanish Bonos amounting to 310 million nominal net (purchases for 785 million in the first quarter and sales for 475 million in the second quarter), Portuguese government securities amounting to 75 million nominal ( 50 million purchased in the first quarter and 25 million in the second quarter) and Belgian government securities purchased for 25 million nominal in April. As also already reported, German Bund were purchased for 250 million nominal in the first three months of the year and subsequently sold in May. Finally, $100 million nominal net of US Treasuries were purchased in April and May (purchases for $700 million and sales for $600 million). Government securities of emerging countries recorded no significant changes. Corporate securities on the other hand increased by 38 million nominal net (purchases of million and sales of million) and by $18.5 million nominal. The item debt securities also includes 0.6 billion of investments relating to BancAssurance Popolari of which approximately 260 million consisting of non-italian government securities. The changes shown in the tables also take account of end of period accounting adjustments. Equity securities, for which the Group has made an OCI election and which were marginal in amount, fell by 8.5 million over six months and by 4.2 million over three months to 50.2 million. These securities are classified entirely within fair value level three and they also include a residual amount of 2 million relating to an equity interest held in the Interbank Deposit protection Fund, representing the junior and mezzanine tranches. 112

113 Financial assets measured at amortised cost Asset item 40 in the consolidated balance sheet, Financial assets measured at amortised cost, includes financial instruments associated with the Hold to Collect business model, which is to say they are held within the framework of a business model the objective of which is to hold the assets in order to collect the cash flows and the contractual terms of which give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (the SPPI test is passed). These assets are measured at amortised cost with impairment losses and reversals of those losses determined in compliance with IFRS 9 impairment rules recognised through profit or loss. Financial assets measured at amortised cost [Asset item 40. 3) in the Reclassified Consolidated Balance Sheet] (*) Changes A-B Carrying amount A Fair value Carrying amount B Fair value Figures in thousands of euro Stages one and two Stage three of which: purchased or originated creditimpaired L 1 L 2 L 3 Total Stages one and two Stage three of which: purchased or originated creditimpaired L 1 L 2 L 3 Total amount % Debt securities 3,029, ,723, ,536 2,728,238 3,037, ,871, ,695 2,876,450-7, % of which: Italian government securities 3,024, ,723, ,723,493 3,031, ,871, ,871,547-7, % Total 3,029, ,723, ,536 2,728,238 3,037, ,871, ,695 2,876,450-7, % (*) Some figures differ from those published in the first quarter financial report due to marginal changes, consisting mainly of figures rounded up or down. Financial assets measured at amortised cost [Asset item 40. 3) in the Reclassified Consolidated Balance Sheet] Figures in thous ands of euro Stages one and two Stage three of which: purchased or originated creditimpaired Carrying amount A Fair value Carrying amount C Fair value L 1 L 2 L 3 Total Stages one and two Stage three of which: purchased or originated creditimpaired L 1 L 2 L 3 Total Changes A-C amount % Debt securities 3,029, ,723, ,536 2,728,238 3,022, ,970, ,695 2,975,391 7, % of which: Italian government securities 3,024, ,723, ,723,493 3,016, ,970, ,970,473 7, % Total 3,029, ,723, ,536 2,728,238 3,022, ,970, ,695 2,975,391 7, % Financial assets measured at amortised cost amounted to 3 billion as at 30 th June 2018 and were composed entirely of securities classified, according to the rules of the new IFRS 9 accounting standard, in stage one, most of which are Italian government securities classified within fair value level one. Since there were no movements, neither in the first half nor in the quarter, the portfolio is almost unchanged compared with the beginning of January and the slight fall relates to end of period accounting adjustments. Riskiness Coverage for FVOCI debt securities (98% of which are classified within stage one and the remainder in stage two) is 0.12% and 2.69% respectively, while debt securities measured at amortised cost have been allocated entirely to stage one with coverage of 0.09%. The coverage for both items remained essentially unchanged in the first half. 113

114 Exposure to sovereign debt risk The relative table shows (presented with separate figures for insurance business, given the different nature of the underlying risk) that the total book value of the sovereign debt risk exposures of the Group as at 30 th June 2018 amounted to 14.4 billion, of which 12.9 billion consisting of securities held in portfolio by Group banks and 1.5 billion attributable to the insurance companies. At single country level the risk is concentrated mainly in Italy accounting for 76% of the total ( 10.9 billion), in the United States accounting for 11% ( 1.5 billion) and in Spain accounting for 7% ( 1 billion). As already reported, details of Group exposures are given on the basis that, according to the instructions issued by the European supervisory authority, (European Securities and Markets Authority, ESMA), sovereign debt is defined as debt instruments issued by central and local governments and by government entities and also as loans granted to them. The table Maturities of Italian government securities, on the other hand, shows the distribution by maturity of Italian government securities held in portfolio. Maturities of Italian government securities Figures in thousands of euro Financial assets held for trading [Asset item 20. a) in the Consolidated Balance Sheet] Financial assets designated as at fair value [Asset item 20. b) in the Consolidated Balance Sheet] Other financial assets mandatorily measured at fair value [Asset item 20. c) in the Consolidated Balance Sheet] Financial assets measured at fair value through other comprehensive income [Asset item 30. 3) in the Reclassified Consolidated Balance Sheet] Financial assets measured at amortised cost [A sset item 40. 3) in the Reclassified Co nsolidated Balance Sheet] Carrying amount % Up to six months ,518-37, % Six months to one year , , , % One year to three years 3 2,076 15,107 68,982-86, % Three years to five years ,863,563-1,864, % Five years to ten years 4 2,030 18,711 3,987,768 1,186,521 5,195, % Over ten years ,321 1,837,817 2,318, % Total 13 5,843 35,568 6,848,166 3,024,338 9,913, % A high concentration of investments is seen in the time range five years to ten years (52.4%) and over ten years (23.4%), which reflects the results of sales and purchases of securities classified within Financial assets measured at fair value through other comprehensive income made during the period. Excluding securities relating to insurance business amounting to approximately 1.2 billion at the end of June, the average life of the Assets held for trading portfolio was 7.48 years, that of the Other financial assets mandatorily measured at fair value portfolio was 4.18 years, that of the Financial assets measured at fair value through other comprehensive income portfolio was 6.15 years, while that of government securities classified within Financial assets measured at amortised cost was years. 114

115 UBI Banca Group: exposures to sovereign debt risk Country/portfolio of classification Figures in thousands of euro Consolidated without insurance Nominal amount Carrying amount Fair value Nominal amount Insurance Carrying amount Fair value - Italy 8,694,314 9,631,488 9,323,755 1,236,927 1,250,458 1,250,458 financial assets and liabilities held for trading (net exposure) financial assets designated as at fair value ,716 5,844 5,844 financial assets mandatorily measured at fair value 31,940 30,967 30,967 4,700 4,601 4,601 financial assets measured at fair value through other comprehensive income * 5,344,415 5,628,306 5,628,306 1,226,511 1,240,013 1,240,013 financial assets measured at amortised cost (government securities) 2,375,000 3,024,338 2,723, loans and advances 942, , , Spain 785, , , , , ,096 financial assets measured at fair value through other comprehensive income 785, , , , , ,676 financial assets designated as at fair value ,362 1,420 1,420 - United States 1,544,005 1,516,458 1,516, financial assets and liabilities held for trading (net exposure) financial assets designated as at fair value financial assets measured at fair value through other comprehensive income 1,544,004 1,516,457 1,516, Austria financial assets designated as at fair value Belgium 25,000 25,281 25, financial assets measured at fair value through other comprehensive income 25,000 25,281 25, financial assets designated as at fair value France 500, , ,440 3,240 3,625 3,625 financial assets and liabilities held for trading (net exposure) financial assets designated as at fair value financial assets measured at fair value through other comprehensive income 500, , ,440 3,000 3,379 3,379 - Germany financial assets and liabilities held for trading (net exposure) financial assets designated as at fair value financial assets measured at fair value through other comprehensive income Latvia ,000 2,161 2,161 financial assets measured at fair value through other comprehensive income ,000 2,161 2,161 - Holland financial assets designated as at fair value loans and advances Portugal 75,000 85,022 85,022 19,060 21,454 21,454 financial assets measured at fair value through other comprehensive income 75,000 85,022 85,022 19,060 21,454 21,454 - Bulgaria ,000 2,325 2,325 financial assets measured at fair value through other comprehensive income ,000 2,325 2,325 - Rumania 26,763 28,263 28,263 2,000 2,283 2,283 financial assets measured at fair value through other comprehensive income 26,763 28,263 28,263 2,000 2,283 2,283 - Greece ,000 4,012 4,012 financial assets measured at fair value through other comprehensive income ,000 4,012 4,012 - Abu Dhabi 11,151 10,654 10, financial assets measured at fair value through other comprehensive income 11,151 10,654 10, Qatar 17,141 17,386 17, financial assets measured at fair value through other comprehensive income 4,460 4,655 4, loans and advances 12,681 12,731 12, Saudi Arabia 8,492 8,102 8, financial assets measured at fair value through other comprehensive income 8,492 8,102 8, Chile 3,860 3,740 3,740 1,500 1,572 1,572 financial assets measured at fair value through other comprehensive income 3,860 3,740 3,740 1,500 1,572 1,572 - Colombia 12,952 13,338 13, financial assets measured at fair value through other comprehensive income 12,952 13,338 13, Philippines 12,867 15,819 15, financial assets measured at fair value through other comprehensive income 12,867 15,819 15, Indonesia 34,979 36,463 36, financial assets measured at fair value through other comprehensive income 34,979 36,463 36, Israel 11,666 11,293 11, financial assets measured at fair value through other comprehensive income 11,666 11,293 11, Kazakhstan 6,862 7,063 7, financial assets measured at fair value through other comprehensive income 6,862 7,063 7, Lithuania 10,722 11,863 11, financial assets measured at fair value through other comprehensive income 10,722 11,863 11, Morocco 11,580 11,565 11, financial assets measured at fair value through other comprehensive income 11,580 11,565 11, Algeria 3,786 3,759 3, loans and advances 3,786 3,759 3, Mexico 30,476 30,722 30, financial assets measured at fair value through other comprehensive income 30,476 30,722 30, Oman 3,646 3,539 3, financial assets measured at fair value through other comprehensive income 3,646 3,539 3, People's Republic of China 1,201 1,164 1, financial assets measured at fair value through other comprehensive income 1,201 1,164 1, Panama 27,964 28,467 28, financial assets measured at fair value through other comprehensive income 27,964 28,467 28, Peru 9,864 12,368 12, financial assets measured at fair value through other comprehensive income 9,864 12,368 12, Poland 14,582 14,851 14, financial assets measured at fair value through other comprehensive income 14,582 14,851 14, Slovak Republic 3,431 3,576 3, financial assets measured at fair value through other comprehensive income 3,431 3,576 3, Slovenia financial assets measured at fair value through other comprehensive income Croatia ,500 2,484 2,484 financial assets measured at fair value through other comprehensive income ,500 2,484 2,484 - Uruguay 8,149 8,551 8, financial assets measured at fair value through other comprehensive income 8,149 8,551 8, Argentina financial assets and liabilities held for trading (net exposure) Egypt 4,289 4,285 4, loans and advances 4,289 4,285 4, Total on-balance sheet exposure 11,900,892 12,888,963 12,581,230 1,441,151 1,499,493 1,499,493 * The carrying amount is different from that reported in the line Italian government securities in the table relating to Financial assets measured at fair value through comprehensive income due to the presence in this table of bonds issued by Cassa Deposito e Prestiti (a state controlled fund and deposit institution a government issuer) amounting to 20.2 million, of which 17.8 million relating to insurance business. 115

116 With a view to greater transparency on credit risk exposures consisting of debt instruments other than sovereign debt as requested by the European Securities and Markets Authority (ESMA) in Document No. 725/2012 of 12 th November 2012 a table has been provided below summarising total debt instruments other than sovereign debt recognised among the assets of the UBI Banca Group balance sheet as at 30 th June The book value of those investments was 1.23 billion, of which 777 million relating to corporate issuers and 458 million to banking issuers. Debt securities other than government securities recognised within consolidated assets Figures in thousands of euro Issuer Nationality Carrying amount Fair value Nominal amount Corporate Italy 128, , ,175 Corporate United Kingdom 121, , ,609 Corporate Holland 87,399 87,399 86,140 Corporate United States 144, , ,074 Corporate France 64,427 64,427 62,803 Corporate Spain 41,894 41,894 41,300 Corporate Luxembourg 34,304 34,304 36,728 Corporate Germany 32,536 32,536 31,400 Corporate Switzerland 19,143 19,143 18,947 Corporate Ireland 13,287 13,287 14,501 Corporate Mexico 11,942 11,942 11,600 Corporate Norway 9,546 9,546 9,000 Corporate Japan 9,296 9,296 9,576 Corporate Panama 8,876 8,876 8,500 Corporate Sweden 7,306 7,306 7,500 Corporate Belgium 6,949 6,949 6,915 Corporate Denmark 5,907 5,907 5,500 Corporate Finland 5,439 5,439 5,000 Corporate Cayman Islands 5,119 5,119 5,000 Corporate Hong Kong 4,006 4,006 4,000 Corporate Canada 3,507 3,507 3,500 Corporate Rumania 3,011 3,011 3,000 Corporate Marshall Islands 2,986 2,986 3,000 Corporate Guernsey 2,549 2,549 2,500 Corporate Russia 2,000 2,000 2,000 Corporate Czech Republic 1,084 1,084 1,000 Corporate Cyprus - - 9,500 Corporate Brazil Total Corporate 776, , ,830 Banking Italy 157, , ,474 Banking United Kingdom 60,375 60,375 58,846 Banking France 71,578 71,578 71,384 Banking Spain 42,630 42,630 43,200 Banking Germany 37,581 37,581 39,930 Banking Ireland 19,515 19,515 19,100 Banking Austria 17,861 17,861 18,970 Banking United States 10,819 10,819 10,346 Banking Sweden 8,828 8,828 9,000 Banking Switzerland 6,173 6,173 6,906 Banking Belgium 5,892 5,892 6,000 Banking Norway 5,554 5,554 5,000 Banking Finland 3,178 3,178 3,000 Banking Australia 1,722 1,722 1,716 Banking Japan 1,330 1,330 1,287 Banking Holland 7,545 7,545 7,250 Total Banking 458, , ,409 Total debt securities 1,234,934 1,234,934 1,262,239 Finally, to complete the disclosures required by the ESMA, the Group held no Credit Default products as at 30 th June 2018, nor did the Group carry out any transactions in those instruments during the first half, either to increase its exposure or to acquire protection. 116

117 Exposures to certain types of products This section provides an update of the position of the UBI Banca Group with regard to some types of financial instruments, which are considered at high risk since the subprime mortgage crisis in Special purpose entities The involvement of the UBI Banca Group in special purpose entities (SPEs 5 ) concerns the following types: 1. conventional securitisation transactions 6 performed by Group companies in accordance with Law No. 130 of 30 th April 1999; 2. synthetic securitisation transactions 7 ; 3. the issuance of covered bonds, in accordance with Art. 7 bis of Law No.130/ The list of special purpose entities (SPEs) used for conventional securitisations in which the Group is involved is as follows: 24-7 Finance Srl; UBI SPV Lease 2016 Srl; UBI SPV Group 2016 Srl. The securitisations concerning 24-7 Finance Srl, UBI SPV Lease 2016 Srl and UBI SPV Group 2016 Srl were performed in order to create a portfolio of assets eligible as collateral for refinancing with the European Central Bank, consistent with Group policy for the management of liquidity risk. They were carried out on the following: performing residential mortgages of the former B@nca 24-7 (24-7 Finance Srl); UBI Leasing lease contracts (UBI SPV Lease 2016 Srl); performing residential mortgages granted to individuals and sole traders by the former Banca Popolare Commercio e Industria, the former Banca Regionale Europea, UBI Banca, the former Banca Popolare di Bergamo, the former Banco di Brescia, forma Banca Popolare di Ancona and Banca Carime (UBI SPV GROUP 2016 Srl). Transfers of assets were made during the course of 2018 regarding UBI SPV Lease 2016 Srl in relation to the revolving period. More specifically the first revolving transfer was completed in January and it involved a portfolio totalling 187 million (in terms of the remaining principal debt) and the second was completed in April for a total of 179 million (in terms of the remaining principal debt). Furthermore, a transfer of assets was made in March 2018 to the special purpose entity UBI SPV Group 2016 Srl amounting to 380 million. Although Group investment in the ownership capital of the SPEs is limited, the entities listed above are included in the consolidated accounts because these companies are in reality controlled, since their assets and liabilities were originated by Group companies. In the securitisations in question the senior securities issued by the entities assigned a rating are listed on the Dublin Stock Exchange. 2. Synthetic securitisations were added to conventional securitisations in They were carried out in order to improve the regulatory capital by reducing the degree of credit risk on the underlying portfolios 8. 5 Special Purpose Entities (SPEs) are special companies formed to achieve a determined objective. 6 With normal securitisations the originator sells the portfolio to a special purpose entity which then issues tranches of asset-backed securities in order to purchase it. 7 With a synthetic securitisation, the originator purchases protection for a pool of assets and transfers the credit risk attaching to the portfolio either fully or in part by using credit derivatives (credit default swaps - CDSs) and CLNs (credit-linked notes) or by means of personal guarantees. 8 Reference is made for further information to the information given in the special section of the Notes to the Financial Statements, Part E, C.1 Securitisations, in the 2017 Annual Report. 117

118 3. With regard to the issue of covered bonds, the creation of the SPEs UBI Finance Srl (in 2008) and UBI Finance CB 2 Srl (in 2011) was performed for the purchase of loans from banks in order to create cover pools for covered bonds issued by the Parent 9. The issuance of covered bonds is designed to diversify sources of funding and to contain its cost as well as to increase eligible reserves. Transfers were made in the first half of 2018 to the SPEs UBI Finance Srl and UBI Finance CB2 Srl involving assets held by UBI Banca for 2,241 million (with effect for accounting purposes from May 2018) and 323 million (with effect for accounting purposes from June 2018). Furthermore, again in the first half of 2018 assets were repurchased from the entities UBI Finance Srl and UBI Finance CB 2 Srl amounting to 118 million (with effect for accounting purposes from May 2018, relating to non-performing loans) and 147 million respectively ( 94 million with effect for accounting purposes from March 2018, relating to performing loans and 53 million with effect for accounting purposes from May 2018, relating to non-performing loans). At the date of this report, UBI Banca has issued covered bonds totalling billion nominal (of which 1.25 billion relating to retained issuances) under the first programme (residential mortgages) for a maximum issuance of 15 billion and for a total of 1.95 billion nominal (all retained issuances) under the second programme (mainly commercial mortgages) with a maximum issuance of 5 billion. The originator banks issued subordinated loans to the SPE UBI Finance Srl and to the SPE UBI Finance CB 2 Srl, equal to the value of the loans progressively transferred, in order to fund the purchase. As at 30 th June 2018 these loans amounted to 15.6 billion for UBI Finance Srl ( 14.2 billion in December 2017) and to 3 billion for UBI Finance CB 2 ( 3 billion in December 2017). Ordinary lines of liquidity existed at the end of the first half granted by the Parent to the SPE 24-7 Finance Srl for a total of 97.6 million, which had been entirely drawn on ( 97.6 million entirely drawn on also in December 2017). No exposures exist to SPEs or other conduit operations with underlying securities or investments linked to United States subprime and Alt-A loans. The total assets of SPEs relating to securitisations and to covered bonds amounted to 24.6 billion ( 23.3 billion at the end of 2017); the table 10 below reports details by asset class: SPE underlying assets Figures in millions of euro Classification of underlying assets of the securitisation Gross of Net of Gross of Net of Entity Total Class of underlying asset Accounting Measurement impairment impairment impairment impairment assets classification criteria losses losses losses losses 24-7 Finance Mortgages L&R AC UBI SPV Lease ,924.7 Leasing L&R AC 2, , , ,793.1 UBI Finance 15,274.5 Mortgages L&R AC 14, , , ,598.7 UBI Finance CB 2 2,820.1 Mortgages L&R AC 2, , , ,597.6 UBI SPV GROUP ,637.3 Mortgages L&R AC 2, , , ,402.2 Total non-performing assets, mortgages and loans 1, , ,015.8 Total non-perrforming assets, leasing TOTAL 24, , , , ,331.1 * * * 9 The transfers are designed to create segregated portfolios to back the issues and do not involve derecognition of the assets in the financial statements of the originators. 10 We report that most of the assets transferred and not derecognised reported in this table are classified within asset item 40 Financial assets measured at amortised cost Loans and advances to customers in the balance sheet and to a residual extent ( 1.7 million), within item 20 Other financial assets mandatorily measured at fair value. 118

119 As concerns the New Banks acquired, a summary is given below of the securitisations originated by them existing at the end of the first half and held by UBI Banca, following their merger into it in the last quarter of 2017: Mecenate , a securitisation of performing residential mortgages held by SPV Mecenate Srl ( Mecenate ), 95% controlled by UBI Banca. The total assets as at 30 th June 2018 amounted to 72 million; Marche Mutui 2 Società per la Cartolarizzazione a r.l. 12, a securitisation of the residential mortgages backed securities (RMBS) type, with residential and commercial mortgages as the underlying. The total assets as at 30 th June 2018 amounted to 65 million; Marche M6 Srl 13, a securitisation of the residential mortgages backed securities (RMBS) type, with residential and commercial mortgages as the underlying. The total assets as at 30 th June 2018 amounted to 1.16 million. Exposures in ABS, CDO, CMBS and other structured credit products As at 30 th June 2018 the Group held a direct investment in ABS instruments with a value of zero, while no indirect exposures existed to structured CDO and CMBS products. Other subprime, Alt-A and monoline insurer exposures As at 30 th June 2018 no indirect exposures to subprime and Alt-A mortgages and to monoline insurers existed. Leveraged Finance The term leveraged finance is used in the UBI Banca Group to refer to finance provided for a company or an initiative which has debt that is considered higher than normal on the market and is therefore considered a higher risk. Usually this finance is used for specific acquisition purposes (e.g. the acquisition of a company by other companies either directly or through vehicles/funds owned by internal [buy-in] or external [buy-out] management teams). They are characterised by non investment grade credit ratings (less than BBB-) and/or by remuneration that is higher than normal market levels. This definition coincides essentially with acquisition finance (AF) business. An acquisition involves a substantial change in the economic, financial and capital profile of the debtor. The main source of funds for the repayment of the debt contracted for the acquisition finance itself is from the future cash flows generated by the entity (a single company or a Group) after the acquisition. The three requirements necessary for the identification and consequent classification of a customer as an acquisition finance client, consistent with the definition used in the validated internal models, are as follows: 11 A securitisation originated on 29 th March 2007 by the former Banca dell Etruria e del Lazio with the transfer en bloc and without recourse of loans, classified as performing, and the relative legal relations attaching to a portfolio of ordinary and regulated mortgage loans, granted to private individual customers in the period between 31 st March 1998 and 30 th June In the May 2007 Mecenate issued notes as a consequence (99.5% of which had been assigned a rating and were listed on the Dublin stock exchange), all at floating rate and with quarterly coupons. The securities were subscribed by institutional investors when they were issued. 12 An RMBS market securitisation, structured in October 2006 by the former Banca delle Marche, with a portfolio of performing loans as the underlying, originated from regulated mortgages backed by first mortgage agreements. The senior and mezzanine classes were listed on the Irish stock exchange and placed with domestic and foreign institutional investors. The junior tranche, on the other hand, was fully subscribed by the originator. The senior notes were assigned a rating. 13 An RMBS securitisation, structured in July 2013 by the former Banca delle Marche, with a portfolio of loans originating from performing residential mortgage loan agreements as the underlying. The three senior classes (A1, A2, A3) were listed on the Luxembourg stock exchange and repurchased by the bank to create a portfolio of assets eligible for principal refinancing operations with the European Central Bank. The junior class was also subscribed by the originator. The senior classes were assigned a rating. The classes A1 and A2 were sold on the market in June

120 credit lines are granted to finance the acquisition of control of one or more third party companies and/or activities held by third parties and/or the refinancing of prior exposures relating to the same companies/activities subject to the acquisition (purpose requirement); the effect of the acquisition consists of an increase in the turnover of the enlarged group of companies, i.e. the sum of the turnover of the acquiring group and the turnover of the target group is 40% greater than that of the acquiring group alone (size requirement) 14 ; no more than four years have passed since the date of the first grant of credit lines to finance the acquisition ( vintage requirement) 15. Once that time has passed the transactions are considered conventional corporate transactions and therefore in the presentation that follows, only transactions classified as acquisition finance as at the dates indicated have been considered. Figures in millions of euro 30 June 2018 UBI Banca leveraged finance business (Acquisition Finance) On-balance sheet exposure gross exposure to customers Unsecured guarantees gross exposure to customers draw n impairment used impairment The UBI Banca Group currently has a project in progress to take account of ECB guidelines regarding the definition of leveraged and therefore account will be progressively taken of this in reporting information resulting from the project activity. The table summarises on- and off-balance sheet exposure for leveraged finance by the UBI Banca Group at the end of June These on-balance sheet loans (inclusive of the relative margins) as a percentage of total on-balance sheet loans amounted to approximately 0.61%. The amounts shown relate to 61 positions (counterparties) for a total average net exposure per position of 12 million. Nine positions existed with net exposures of greater than 20 million accounting for around 52% of the total. The charts below show the distribution of leveraged exposures by geographical area and sector. Distribution of UBI Banca leveraged exposures as at 30 th June 2018 EXPOSURE BY GEOGRAPHICAL AREA EXPOSURE BY SECTOR 14 The threshold has been set at 40% because on the basis of experience it is considered that this percentage of change in dimension involves a significant discontinuity for the Group after the operation compared with before it and therefore the official operating and financial documentation (consolidated/separate financial statements of the acquirer) will not be representative of the new reality. This threshold was also set along the same lines as the requirements for the special procedure set for other counterparties assessed using the corporate rating model. Where an acquisition is concluded by using a specially formed vehicle, a newco (and therefore usually irrelevant from the viewpoint of dimension), this second requirement is deemed always satisfied. 15 This is considered sufficient time to absorb the impacts of the discontinuity determined by the acquisition, described in footnote

121 Financial derivative instruments for trading with customers The periodic analysis performed for internal monitoring purposes confirms that the risks assumed by customers continue to remain generally low and they outlined a conservative profile for UBI Group business in OTC derivatives with customers. A quantitative update as at 30 th June 2018 showed the following: - the notional amount for existing contracts, totalling 7.6 billion, was attributable to interest rate derivatives amounting to 6.9 billion and currency derivatives amounting to 680 million plus a marginal notional amount for commodities contracts ( 48 million); - transactions in hedging derivatives accounted for all the notional amount traded in the case of interest rate derivatives and commodities and 99% of the notional amount in the case of currency derivatives; - the net total mark-to-market value (interest rate, currency and commodities derivatives) amounted to million. Those contracts with a negative mark-to-market for customers were valued at approximately million; - the total negative mark-to-market for customers stood at 3.5% of the notional amount of the contracts, compared with 4% at the end of The rules governing trading in OTC derivatives with customers are contained in the Policy for the trading, sale and subscription of financial products, the Policy for the management of counterparty risk and the relative documents to implement them, updated in 2018, which provide details of the following: customer segmentation and classes of customers associated with specific classes of products, stating that the purpose of the derivatives transactions must be hedging and that transactions containing speculative elements must be of a residual nature; rules for assessing the appropriateness of transactions, defined on the basis of the products sold to each class of customer; principles of integrity and transparency on which the range of OTC derivatives offered to customers must be based, in compliance with the guidelines laid down by the Italian Banking Association (and approved by the Consob) for illiquid financial products and with the recent ESMA opinions and a Consob communication on complex products; rules for assessing credit exposure, which grant credit lines with maximum limits for trading with qualified, professional and non-individual retail counterparties and provide credit lines for single transactions for trading with individual retail counterparties, while counterparty risk is assessed on the basis of Regulation EU 575/2013 (the CRR ); rules for managing restructuring operations, while underlining their exceptional nature; the rules for the settlement of transactions in OTC derivative instruments with customers that are subject to verbal or official dispute; the catalogue of products offered to customers and the relative credit equivalents. OTC derivatives: first five counterparties by bank (amounts in euro) Data as at 30th June 2018 Bank Classification MtM of which negative MtM UBI Banca 2: Non private individual retail -53,884,206-53,884,206 2: Non private individual retail -8,388,737-8,388,737 3: Professional -7,461,666-7,461,666 3: Professional -6,795,775-6,795,775 3: Professional -4,888,909-4,888,

122 OTC interest rate derivatives: details of instrument types and classes of customer (amounts in euro) Product class 1 Type of instrument Customer classification Number of transactions Notional MtM Data as at 30th June 2018 of which negative MtM Purchase of caps Qualified ,136, ,809-3: Professional ,655, ,032-2: Non private individual retail ,470,513 1,204,903-1: Private individual retail ,327, ,222 - Purchase of caps Total 1, ,589,825 1,989,966 - Purchase of floors 3: Professional 3 68,594, ,863 - Purchase of floors Total 3 68,594, ,863 - Capped swaps Qualified 2 18,371, , ,497 3: Professional ,930,967-2,817,654-2,817,654 2: Non private individual retail ,217,513-7,927,535-7,927,535 1: Private individual retail ,523,619-1,760,238-1,760,238 Capped swaps Total 1, ,043,212-12,859,924-12,859,924 Plain Vanilla IRS Qualified 13 88,949, , ,239 3: Professional 408 2,476,888,131-61,778,637-61,986,560 2: Non private individual retail ,870,033,027-96,541,149-97,146,796 1: Private individual retail ,900,317-2,540,721-2,603,585 Plain Vanilla IRS Total 2,353 4,517,770, ,594, ,508,180 IRS Step Up 3: Professional 7 29,748,839-2,794,057-2,794,057 2: Non private individual retail ,094,434-61,160,250-61,160,250 IRS Step up Total ,843,273-63,954,307-63,954,307 Floored Swaps 3: Professional ,217,861-3,653,156-3,663,690 2: Non private individual retail ,875,619-1,977,032-2,024,686 1: Private individual retail 21 5,541,463-84,940-86,012 Floored Swaps ,634,943-5,715,128-5,774,388 Purchase of collars 2: Non private individual retail 2 6,017, , ,413 Purchase of collars Total 2 6,017, , ,413 Total Class 1: hedging derivatives 5,462 6,867,494, ,041, ,281,212 Class 1: % of Group total 99.8% 99.5% 96.5% 96.5% 2 Purchase of caps with KI/KO 3: Professional 1 7,978,724-64,841-64,841 2: Non private individual retail 1 389,210-1,832-1,832 Purchase of caps with KI/KO Total 2 8,367,934-66,673-66,673 Purchase of collars with KI/KO 2: Non private individual retail 4 26,365,469-8,572,469-8,572,469 Purchase of collars with KI/KO Total 4 26,365,469-8,572,469-8,572,469 IRS Convertible 3: Professional 1 1,458,333-16,603-16,603 2: Non private individual retail 2 1,089, , ,513 IRS Convertible Total 3 2,547, , ,116 Total Class 2: hedging derivatives with possible exposure 9 37,280,777-8,785,258-8,785,258 to contained financial risks Class 2: % of Group total 0.2% 0.5% 3.5% 3.5% Total UBI Banca Group 5,471 6,904,774, ,826, ,066,

123 OTC currency derivatives: details of instrument types and classes of customer (amounts in euro) Product Type of instrument class 1 Forward synthetic Customer classification Number of transactions Notional MtM Data as at 30th June 2018 of which negative MtM 3: Professional ,375, ,552-2,927,462 2: Non private individual retail 23 11,073,976-37, ,597 Forward synthetic Total ,449,133-1,034,164-3,066,059 Plafond Qualified 1 211,872-1,585-1,584 3: Professional ,958,824-3,007,681-4,433,902 2: Non private individual retail ,423,289-1,797,624-2,911,095 Plafond Total ,593,985-4,806,890-7,346,581 Currency collars 3: Professional 7 4,402,985-51,758-92,600 Currency collars Total 7 4,402,985-51,758-92,600 Vanilla currency options purchased 3: Professional 3 24,256, ,949-2: Non private individual retail 1 257,334 14,671 - Vanilla currency options purchased 4 24,513, ,620 - Total Class 1: hedging derivatives ,959,742-5,545,192-10,505,240 Class 1: % of Group total 92.7% 85.5% % 2 Bonus forwards 3: Professional 1 643,335-8,537-8,537 Bonus forwards Total 1 643,335-8,537-8,537 Knock in collars 3: Professional 5 12,079,903 16,886-17,272 2: Non private individual retail 1 884,586 51,259 - Knock in collars Total 6 12,964,489 68,145-17,272 Knock In Forward 3: Professional 31 69,841,187 30, ,675 2: Non private individual retail 4 4,899,394-36,488-50,883 Knock in forwards Total 35 74,740,581-5, ,558 Plafond with accelerated condition 3: Professional 2 481, ,317 2: Non private individual retail 4 1,207,929-11,957-27,771 Plafond with accelerated condition Total 6 1,689,466-11,639-33,088 Total Class 2: hedging derivatives with possible exposure 48 90,037,871 42, ,455 to contained financial risks Class 2: % of Group total 6.2% 13.2% - 5.1% 3b Knock out knock in forwards 3: Professional 4 2,675,234-5,047-6,859 Knock out knock in forwards Total 4 2,675,234-5,047-6,859 Knock out forwards 3: Professional 1 1,114,590-4,037-4,037 Knock out forwards 1 1,114,590-4,037-4,037 Knock out forwards 3: Professional 2 3,615,810-19,147-36,948 Vanilla currency options sold by the customer Total 2 3,615,810-19,147-36,948 Vanilla currency options sold by the customer 3: Professional 1 857, Vanilla currency options sold by the customer Total 1 857, Total Class 3: derivatives not for hedging 8 8,263,414-28,849-48,462 Class 3: % of Group total 1.1% 1.3% - 0.4% Total UBI Banca Group ,261,027-5,531,633-11,119,157 OTC commodities derivatives: details of instrument types and classes of customer (amounts in euro) Product class 2 Type of instrument Customer classification Number of transactions Notional MtM Data as at 30th June 2018 of which negative MtM Commodity swaps 3: Professional ,595,817 1,614,407-1,008,948 2: Non private individual retail 3 1,231,750-8,515-27,043 Commodity swaps Total ,827,567 1,605,892-1,035,991 Total Class 2: hedging derivatives with possible exposure ,827,567 1,605,892-1,035,991 to contained financial risks Class 2: % of Group total 100.0% 100.0% % Total UBI Banca Group ,827,567 1,605,892-1,035,991 TOTAL UBI BANCA GROUP 6,430 7,632,863, ,752, ,221,

124 Equity and capital adequacy Changes in consolidated shareholders equity In order to make the changes that occurred to consolidated equity more comprehensible, a six-month analysis has been conducted on the basis of figures for the end of December 2017 restated as at 1 st January 2018 to take account of the first-time adoption of the financial reporting standard IFRS 9 and the 5 th update of Bank of Italy Circular No. 262/2005. The section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this document may be consulted for details of the reconciliation of figures as at 31 st December 2017 and those resulting from first-time adoption of the new standards as at 1 st January Reconciliation between equity and profit for the period of the Parent with consolidated equity as at 30th June 2018 and profit for the period then ended Figures in thousands of euro Equity of which: Profit for period Equity and profit for the period in the accounts of the Parent 8,611, ,276 Effect of the consolidation of subsidiaries including joint ventures 437,352 59,218 Effect of measuring other significant equity investments using the equity method 15,686 9,013 Dividends received during the period - -68,811 Other consolidation adjustments (including the effects of the PPA) -99,620 5,171 Equity and profit for the period in the consolidated accounts 8,964, ,867 Changes in consolidated equity of the Group in the first half of 2018 Figures in thousands of euro Balances as at Restatement of opening balances Balances as at Allocation of prior year profit Reserves Dividends and other uses Changes in reserves Changes January-June Equity Equity transactions Consolidated attributable comprehensive to the New share Stock options income shareholder issues s of the Share capital: 2,843,177-2,843, ,843,177 a) ordinary shares 2,843,177-2,843, ,843,177 b) other shares Share premiums 3,306,627-3,306,627-12, ,294,604 Reserves 3,209, ,855 2,342, , ,415 1, ,921,489 Valuation reserves -114,820 80,076-34, , ,315 Treasury shares -9, , , ,929 Result for period 690, , , , ,867 Equity attributable to the shareholders of the Parent 9,925, ,779 9,138, ,415-6, ,699 8,964,893 The equity attributable to the shareholders of the Parent, UBI Banca, as at 30 th June 2018, inclusive of profit for the period, was 8,964.9 million, down compared with 9,138.4 million as at 1 st January 2018 which included the impacts of First-Time Adoption of IFRS 9. As shown in the table Changes in the consolidated equity of the Group in the first half of 2018, the decrease of million is the result of the Valuation reserves attributable to the Group: composition Figures in thousands of euro Equity securities designated as at fair value through other comprehensive income -15,915-14,550 Financial assets (other than equity securities) measured at fair value through other comprehensive income -218,794 31,687 Cash flow hedges Currency translation differences Actuarial gains (losses) for defined benefit pension plans -110, ,452 Special revaluation laws 60,065 60,801 Total -285,315-34,

125 following: a decrease of million in the balance on valuation reserves, generated mainly by the impact of other comprehensive income as follows: million for financial assets measured at fair value through other comprehensive income; million for actuarial gains/losses relating to defined benefit pension plans; million for cash flow hedges. Furthermore, reserves relating to special revaluation laws were impacted by million; an aggregate negative change of 8.1 million which reflects recognition of the purchase of UBI Banca ordinary shares at the service of a long-term incentive scheme for identified staff of the Group which took place in two tranches: 1,162,580 shares in April (at a weighted average price of per share) for 4.34 million and 1,162,580 shares in June (at a weighted average price of per share) for 3.77 million; the allocation of million of 2017 consolidated net profit to dividends and other uses; an overall increase of 1.7 million in other reserves, the aggregate result of small increases including 0.5 million attributable to currency translation impacts; the posting of a profit for the period of million. Fair value reserves of financial assets measured at fair value through other comprehensive income attributable to the Group: composition Figures in thousands of euro Positive reserve Negative reserve Total Total 1. Debt securities 3, , ,794 31, Equity securities ,318-15,915-14, Financing Total 4, , ,709 17,137 Fair value reserves of financial assets measured at fair value through other comprehensive income attributable to the Group: changes in the first half of 2018 Figures in thousands of euro Debt securities Equity securities Financing Total 1. Opening balances as at 1st January ,687-14,550-17, Positive changes 80,285 5,129-85, Increases in fair value 64,165 3,798-67, Impairment losses for credit risk 4,709 X - 4, Transfer to the income statement of negative reserves from disposal 11,220 X - 11, Transfers to other equity items (equity securities) Other changes 191 1,322-1, Negative changes -330,766-6, , Reductions in fair value -312,567-3, , Reversals for credit risk Transfer to income statement of positive reserves from disposal -16,140 X - -16, Other changes -1,574-2, , Closing balances as at 30th June ,794-15, ,709 As shown in the table, the decrease mentioned above of million in the fair value reserve for financial assets measured at fair value through other comprehensive income is attributable to debt securities held in portfolio (for which the balance, affected by volatility on markets at the end of the first half, decreased by million to million net of tax and minority interests) and to Italian government securities in particular. The relative reserve, which became negative by million (positive by 68.9 million in March), recorded a decrease of 70.7 million compared with million in December 2017 (inclusive of the impact of first-time adoption of IFRS 9), attributable primarily to the Parent s portfolio. In the first six months of the year, the reserve for debt securities recorded increases in fair value of 64.2 million, of which 6.8 million relating to the Parent (mainly on Italian and French government securities), and 57.4 million to Lombarda Vita (primarily on Italian government securities). The table also shows Impairment losses for credit risk amounting to 4.7 million, attributable entirely to UBI Banca, and Transfers to the income statement of negative reserves from disposal amounting to 11.2 million, relating primarily to government securities held by the Parent. 125

126 Decreases mainly include the following: reductions in fair value amounting to million, of which, million relating to UBI Banca (mainly on Italian government securities), 56.6 million to Lombarda Vita and 1.2 million to BancAssurance Popolari (life) and BancAssurance Popolari Danni (non-life); Transfers to the income statement from positive reserves from disposals amounting to 16.1 million and relating primarily to the Parent for the disposal of Italian government securities. As concerns equity securities, increases of 3.8 million were recorded in fair value and decreases in fair value of 4 million, both relating primarily to Lombarda Vita. Capital adequacy The new prudential rules for banks and investment companies contained in EU Regulation 575/2013 (the Capital Requirements Regulation, known as the CRR) and in the EU Directive 2013/36/EU (the Capital Requirements Directive, known as CRD IV), came into force on 1 st January These transpose standards defined by the Basel Committee on Banking Supervision (known as the Basel 3 framework) into European Union regulations. The CRR came directly into force in member states, while the regulations contained in CRD IV were implemented in national legislation with Legislative Decree No. 72 of 12 th May 2015, which came into force on 27 th June On conclusion of a public consultation process started in November 2013, on 17 th December the Bank of Italy published Circular No. 285 Regulations for the prudential supervision of banks, which updated, within the scope of its remit, the new EU regulations, together with Circular No. 286 Instructions for compiling supervisory reports for banks and stock brokerage firms and an update to Circular No. 154 Supervisory reporting for credit and financial institutions. Tables for data and instructions for filing reports. As already reported, the introduction of Basel 3 rules is subject to a transitional (phased-in) regime during which, in most cases, the new rules will be applied to an increasing degree, generally over a five-year period of time ( ), when they will reach full application. At the same time, capital instruments that no longer qualify will be gradually excluded from total capital for regulatory purposes by We therefore report in particular that the rules relating to the inclusion of capital items in own funds subject to the transitional treatment until 31 st December 2017 will apply fully from 1 st January 2018 (amongst others these include the shortfall on IRB positions, which is to say negative amounts resulting from the calculation of expected losses, DTA s on future profits, minority interests and valuation reserves). Furthermore, the financial reporting standard IFRS 9 Financial Instruments replaces the provisions of IAS 39 Financial Instruments: Recognition and Measurement as from 1 st January IFRS 9 was published by the IASB on 24 th July 2014 and its endorsement by the EU took place with the publication in the Official Journal of the European Union of Regulation (EU) No. 2016/2067 of 22 nd November As concerns the impacts on regulatory own funds, the Group has opted for the adhesion to the transitional regime provided for by Regulation EU 2017/2395, which amends Regulation 575/2013 ( CRR ). These measures allow the negative impacts of the adoption of the standard in question to be applied gradually, with the benefit allowed on the basis of decreasing quotas over a five-year period (95% in the 2018, 85% in the 2019, 70% in the 2020, 50% in the 2021, 25% in 2022). Consolidated capital requirements for the UBI Banca Group for 2018, reported in the correspondence received on 28 th December 2017 from the ECB are as follows: a minimum phased-in CET1 ratio requirement of 8,625% 2, compared with 7.5% set for 2017; a minimum SREP Total Capital ratio requirement of 10.25% 3. If the capital conservation buffer of 1.875% is added, this then gives a minimum requirement in terms of the overall total capital requirement of % (11% in 2017). The supervisory report as at 30 th June 2018 was the second based on the new models resulting from the implementation of the Model Change which updated the Bank s internal models for credit risk to comply with the new regulatory framework by introducing, amongst other things, a capital requirement for default positions. 1 See the section Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this Interim Financial Report. 2 The result of the sum of the minimum Pillar 1 capital requirement (4.5%), the Pillar 2 requirement (2.25%) and the capital conservation buffer (CCB 1.875%), calculated according to the transitional phased-in rules laid down by the Bank of Italy (in % was included in the CCB, while when fully loaded in 2019 this will be 2.5%). 3 The result of the sum of the minimum Pillar 1 regulatory capital ratio (8%) and the Pillar 2 requirement (2.25%). 126

127 At the end of the first half, the Common Equity Tier 1 (CET1) capital of the UBI Banca Group, which includes the part destined to charity and a dividend assumption, amounted to 7,090.1 million, down by approximately 664 million compared with the amount shown in the supervisory report at the end of 2017, prior to the adoption of the financial reporting standard IFRS 9 and therefore not directly comparable with the end of June amount. The performance of the CET1 capital in the first half is attributable primarily to the following main factors: million resulting from several factors including: the overall capital impact following first-time adoption (FTA) of IFRS 9 (approximately million) 4 ; profit for the period with pro rata account taken of a dividend assumption; changes recorded in the OCI reserve due to the absence of the transition treatment 5 and a contraction in the first half of the reserve for government debt securities following the widening of the spread in relation to sovereign debt risk; million relating to the capital component which incorporates a positive contribution, resulting from the transitional regime provided for by Regulation No. 2017/2395, of provisions (approximately million) recognised on credit positions subject to the standardised approach 6 carried out on first-time adoption; + 35 million relating to the change in the shortfall 7 attributable primarily to the combined impacts of the increase in impairment losses subject to AIRB models and to the calculation of expected credit losses following the application of the model change authorised at the end of March. The model change had already involved a change in the first quarter in the mix of capital absorptions between performing positions and non-performing exposures, which for the latter determined an increase in the regulatory expected credit loss on portfolios subject to internal models with a virtually nil overall impact on capital ratios. The increase in the regulatory expected credit loss would have involved a theoretical increase in the shortfall which was substantially offset by the recognition of greater provisions on credit positions subject to internal models carried out on first-time adoption of IFRS 9; - 64 million in relation to the absence of the effects of transitional provisions relating to DTAs on future profits 8. Similarly, the Tier 2 capital fell to 1,412 million over the six-month period, mainly due to less inclusion compared with December 2017 of the excess of impairment losses over expected credit losses on the non-performing portfolio subject to advanced models (AIRB) (approximately million) and also to a reduction in other issuances eligible as a result of regulatory amortisation instalments for the period (- 191 million). Total own funds therefore came to 8.5 billion, compared with 9.5 billion at the end of 2017 prior to the adoption of IFRS 9 ( 8.7 billion in March). RWAs fell to 60.2 billion from 67.1 billion at the end of 2017, benefiting not only from a significant reduction as a consequence of the adoption of the new internal models on performing positions (the model change ), but also from lower capital absorption for the product companies and from the recovery of the eligibility of guarantees. At the end of the period,the UBI Banca Group s capital ratios consisted of a Common Equity Tier 1 ratio and a Tier 1 ratio of 11.78%, well above the target thresholds set on conclusion of the 2018 SREP (8.625%), and a Total Capital ratio of 14.13%, also well above the required level. The pro forma CET1 ratio calculated on the basis of the rules that will be in force at the end of the transitional period, currently relating exclusively to IFRS 9, (known as the fully phased-in CET1 ratio) is estimated at 11.42% (a total capital ratio of 13.77%). 4 Reference is made to the section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this document for further details. 5 Inclusion of 100% of profits/losses in 2018 compared with 80% of profits/losses for 2017 in the transition period. 6 Those impairment losses will only be included in the amount of 5% in the phased-in CET1 ratio and fully in the fully loaded CET1 ratio. 7 The term shortfall is defined as the shortfall of provisions to expected credit losses, which forms part of the calculation of own funds for regulatory purposes. 8 As already reported, as a result of the transitional provisions, a deduction of 80% of total DTAs was to be made for 2017 that are based on future profits. The CET1 therefore benefited by 20% of the amount as a transitional adjustment. 127

128 As also already reported, banks have been obliged to hold a countercyclical capital buffer since 1 st January If it is considered that, as reported in the press release dated 23 rd March 2018, the Bank of Italy set the countercyclical capital buffer for the second quarter of 2018 at 0% for exposures to counterparties resident in Italy and also that the Group mainly has exposures to domestic counterparties, then the Group s countercyclical capital buffer is negligible. With a communication dated 22 nd June 2018, the Bank of Italy also confirmed a coefficient of 0% for the counter cyclical buffer again for the third quarter of Finally the leverage ratio according to Basel 3, stood at 5.37%, while the fully loaded ratio 9 stood at 5.19%. With regard to the insurance business, we report that management accounting measurements of the solvency ratio comply with Solvency II regulations. Capital ratios (Basel 3) Figures in thousands of euro Common Equity Tier 1 capital net of prudential filters 7,090,112 7,290,560 7,789,237 Deductions from Common Equity Tier 1 capital in relation to negative items for shortfall of provisions to expected losses * - -95,315-34,735 Common Equity Tier 1 capital 7,090,112 7,195,245 7,754,502 Additional Tier 1 capital before deductions Deductions from Additional Tier 1 capital of which: negative items due to shortfall of provisions to expected losses * Additional Tier 1 capital Tier 1 capital ( Common Equity Tier 1 + Additional Tier 1) 7,090,112 7,195,245 7,754,502 Tier 2 capital before transitional provisions 1,463,405 1,536,336 1,775,601 Effects of grandfathering provisions on Tier 2 instruments Tier 2 capital after transitional provisions 1,463,405 1,536,336 1,775,601 Deductions from Tier 2 capital -51,650-55,350-54,630 of which: negative items due to shortfall of provisions to expected losses * ,859 Tier 2 capital after specific deductions 1,411,755 1,480,986 1,720,971 Total own funds 8,501,867 8,676,231 9,475,473 Credit risk 4,383,497 4,374,312 4,946,639 Credit valuation adjustment risk 4,246 4,705 4,943 Market risk 75,404 79,349 75,680 Operational risk 350, , ,033 Total prudential requirements 4,814,108 4,795,399 5,364,295 Risk weighted assets 60,176,350 59,942,487 67,053,683 Following the authorisations received from the Bank of Italy, the UBI Banca Group uses internal models to calculate capital requirements to meet credit risk relating to the corporate segment (exposures to companies) and to operational risks from the consolidated supervisory report as at 30 th June 2012 and relating to the retail regulatory segment (exposures to small and medium-size enterprises and exposures backed by residential properties) from the consolidated supervisory report as at 30 th June We report that the capital absorptions relating to portfolios originating from the New Banks acquired are still calculated with the use of standardised models. Internal models are expected to be rolled out in the course of Common Equity Tier 1 ratio (Common Equity Tier 1 capital after filters and deductions / Risk w eighted assets) 11.78% 12.00% 11.56% Fully Loaded Common Equity Tier 1 ratio 11.42% 11.64% 11.43% Tier 1 ratio (Tier 1 capital after filters and deductions / Risk w eighted assets) 11.78% 12.00% 11.56% Fully Loaded Tier 1 ratio 11.42% 11.64% 11.43% Total capital ratio (Total ow n funds / Risk w eighted assets) 14.13% 14.47% 14.13% Fully Loaded Total Capital ratio 13.77% 14.13% 13.99% * As at 31 st December 2017 the items included the effects of the applicable transitional provisions. More specifically, with regard to the shortfall of provisions to expected losses deducted from the Additional Tier 1 Capital, since there was no capital of that type, the relative amount was deducted entirely from the CET1 capital. 9 According to Basel 3 the leverage ratio is calculated as the ratio between the Tier 1 capital and the measure of the institution s total exposure. The ratio was calculated according to the provisions of the CRR, as amended by the Delegated Act (EU) No. 62/

129 Subordinated securities ISSUER TYPE OF ISSUE COUPON MATURITY DATE EARLY REDEMPTION CLAUSE NOMINAL AMOUNT IAS AMOUNT / mixed rate ISIN IT Currency euro Listed on MOT (electronic bond market) Half year fixed rate 4.15% until 2014; subsequently floating rate Euribor 6M % , , , / mixed rate ISIN IT Currency euro Listed on MOT (electronic bond market) Half year fixed rate 4% until 2014; subsequently floating Euribor 6M % , , ,003 UNIONE DI BANCHE ITALIANE SPA / fixed rate ISIN IT Currency euro Listed on MOT (electronic bond market) Half year fixed rate 5.40% Redemption by fixed rate annual amortisation schedule from ,000 80,000 80, / mixed rate ISIN IT Currency euro Listed on MOT (electronic bond market) Quarterly fixed rate 6.25% until 2014; subsequently floating rate Euribor 3M + 1% , , ,512 Ordinary subordinated bond issues (Lower Tier 2) / mixed rate ISIN IT Currency euro Listed on MOT (electronic bond market) 2012/ fixed rate ISIN IT Currency euro Listed on the MOT (electronic bond market) * Quarterly fixed rate 7.25% until 2014; subsequently floating rate Euribor 3M + 5% Half year fixed rate 6% , , ,107 Redemption by fixed rate annual amortisation schedule from , , , / fixed rate EMTN ISIN XS Currency euro Listed on the Irish Stock Exchange Annual fixed rate 4.25% until 2021; subsequently floating Mid-Swap Rate 5Y % , , , / fixed rate EMTN ISIN XS Currency euro Listed on the Irish Stock Exchange Annual fixed rate 4.450% until 2022; subsequently floating Mid-Swap Rate 5Y +4.24% , , ,847 BANCASSURANCE POPOLARI SPA / fixed rate ISIN IT Currency euro Annual fixed rate 6.50% ,150 3,150 3, / fixed rate ISIN IT Currency euro Annual fixed rate 6.50% ,700 1,700 1,755 Total 2,880,372 2,880,372 2,912,818 Total eligible 2,492,189 2,492,189 2,518,890 * In compliance with an interpretation given by the authorities on the qualification for the inclusion of subordinated liabilities, because that bond was issued after 31 st December 2011 and has an amortisation schedule which starts to run before five years since issuance, it has not been included among the eligible liabilities. 129

130 Information on share capital, the share, dividends paid and earnings per share Information on share capital and shareholder structure At the date of this report the share capital of UBI Banca amounted to 2,843,177, divided into 1,144,285,146 shares with no nominal value. In addition to the information given in UBI Banca s Annual Report for the year ended 31 st December 2017, the Bank received two new communications pursuant to Art. 120 of the Consolidated Finance Law (Legislative Decree No. 58/1998): the first was made on 23 rd March 2018 by HSBC Holdings Plc regarding its stake of 4.668% of UBI Banca s share capital and the second on 9 th May 2018 by Capital Research and Management Company regarding its 5.049% stake. The following shareholders held interests of greater than 3% at the date of this report: Fondazione Cassa di Risparmio di Cuneo with a 5.910% stake reported on 29 th June 2017; Silchester International Investors LLP with a 5.123% stake reported on 4 th November : Capital Research and Management Company with a 5.049% stake reported on 9 th May 2018; Fondazione Banca del Monte di Lombardia with a 4.959% stake reported on 7 th December 2017; HSBC Holdings Plc (indirect) with a 4.668% stake (of which 4.630% relating to HSBC Bank Plc) reported on 23 rd March Furthermore, with regard to investments in financial instruments and aggregate investments, we report the following: On 23 rd March 2018 HSBC Holdings Plc declared an overall indirect stake of 6.224% consisting of the above-mentioned investment (4.668%) and an overall long position with settlement in cash (an equity swap) amounting to 1.556% with maturity dates on 12 th April 2018 and 10 th February 2023; Edoardo Mercadante reported, on 16 th November 2017, in accordance with Art. 119 of the Issuers Regulations, that he held indirectly through the subsidiary management company, Parvus Asset Management Europe Ltd an overall long position with settlement in cash accounting for 5.091% of the share capital composed as follows: % an equity swap contract with maturity date on 3 rd May 2018; % an equity swap contract with maturity date 3 rd July 2018; % an equity swap contract with maturity date 7 th August 2018; % an equity swap contract with maturity date 27 th March 2019; % an equity swap contract with maturity date 5 th July It must in any case be considered that the percentage interests reported may no longer be those actually held if a change has occurred in the meantime which does not involve disclosure obligations in accordance with the applicable regulations. Furthermore, those shareholders (investment management companies) who have taken advantage of the exemption pursuant to Art. 119-bis of the Issuers Regulations have not been included. On the basis of reports received from financial intermediaries, shareholders of UBI Banca numbered approximately 145 thousand when the dividend for 2017 (for the financial year 2016) was paid. 1 On the basis of reports received relating to payment of the 2017 dividend, Silchester held a 7.258% stake in the share capital of UBI Banca (this information is prior to the increase in the share capital concluded in July 2017). 130

131 Shareholders' agreements known to UBI Banca in accordance with Art. 122 of the Consolidated Finance Law The Bank has received communications in relation to the existence of the following shareholders pacts: Patto dei Mille (Pact of the Thousand), formed on 27 th January 2016: on the basis of the latest communication received on 23 rd July 2018, a number of ordinary shares amounting to 3.108% of the total voting rights representing the share capital of UBI Banca are bound by the pact. UBI Banca Spa Shareholders Syndicate, formed on 17 th February 2016: on the basis of the latest report received on 9 th March 2018, ordinary shares, amounting to 12.95% of the total voting rights representing the share capital of UBI Banca had been brought to the syndicate. The Essential Information pursuant to Art. 130 of the Issuers Regulations and the updated List of Participants are available in the Shareholders section of the corporate website Treasury shares As at 30 th June 2018 UBI Banca held 5,310,040 treasury shares with no nominal value, accounting for 0.46% of the share capital, of which: - 1,807,220 shares resulting from the exercise of a right of withdrawal, purchased with value date 8 th April 2016 on the basis of an authorisation issued by the ECB on 31 st March 2016; - 3,502,820 shares at the service of incentive schemes. During the first half UBI Banca, in implementation of a shareholders resolution dated 7 th April 2017 relating to the purchase of treasury shares at the service of a long-term incentive scheme for identified staff of the Group, took steps to purchase a total of 2,325,160 ordinary shares, as follows: with value date 3 rd April, 1,162,580 shares at an average weighted price per share of ; with value date 28 th June, 1,162,580 shares at an average weighted price per share of The transactions were performed on the regulated MTA market managed by Borsa Italiana Spa in compliance with the limits set in the shareholders authorisation. Purchases amounting to a total of approximately 8.8 million have therefore been made in relation to the aforementioned shareholders resolution authorising the purchase of shares with a maximum value limited to 16.4 million (including the 150,000 shares purchased on 4 th October 2017 at an average weighted price per share of ). After the end of the first half, at the start of July, 141,031 treasury shares were granted at the end of the retention periods set in the 2013 and 2015 incentive schemes. Following the above and changes to the perimeter of those classified as beneficiaries, at the date of this report 3,361,789 treasury shares have been fully committed at the service of short and long-term incentive schemes for identified staff that have already commenced. * * * As already reported, the 2018 Shareholders Meeting also authorised the purchase of shares with a maximum value of 8.5 million. 131

132 Share performance The UBI Banca share is traded on the Mercato Telematico Azionario (electronic stock exchange) of Borsa Italiana in the blue chip segment and forms part of the 40 shares in the FTSE/Mib Index. Performance comparisons for the Unione di Banche Italiane share Amounts in euro A B C % change A/C D E % change A/E Unione di Banche Italiane shares - official price % % - reference price % % FTSE Italia All-Share index 23,827 24,661 24, % 25,025 22, % FTSE Italia Banks index 10,045 11,704 10, % 12,213 11, % Source: Datastream The first six months of the year ended with a fall in the UBI Banca share price to approximately 3.30, a performance that was wholly due to the second quarter of 2018 since it reflects the effects of world and domestic market turbulence in the period. As discussed more fully in the section entitled The macroeconomic scenario, the tariff war started by the United States has created tensions in stock markets around the world. At the national level however, Italian stock markets have been subject to great volatility generated at the time of the formation of the new government which aggravated investor fears and uncertainties about the strength of public finances and the changing role of Italy in Europe, penalising the banking sector in particular. More specifically, the UBI Banca share fell by approximately 10% over the six months, reducing the positive performance of the first three months to zero: this trend (which was also adversely affected by market rumours about potential acquisitions) relates to the -8.1% recorded by the FTSE Italia Banks compared to the -1.5% for the FTSE Italia All-Share. After the first half reporting date the share has recovered partially, despite continuing volatility, to close at 3.50 on 31 st July In the first half of 2018, 1.5 billion UBI Banca shares were traded on the electronic stock market for a value of 5.8 billion, (trades in the first half of last year involved approximately 2 billion shares for a value of 6.6 billion). At the end of the period the stock market capitalisation (calculated on the official price) had risen to around 3.8 billion from 4.2 billion at the end of 2017, which ranked UBI Banca in fourth place among Italian commercial banking groups listed on the FTSE MIB 2. At European level, the UBI Group was again among the first 45 institutions on the basis of the classification drawn up by the Italian Banking Association in its European Banking Report, which considers the EU14 countries plus Switzerland (EBR International Flash, June 2018). 2 The Group is positioned in the sixth place if all listed banking groups are considered. It should be remembered that since 15 th May 2017 Banca Mediolanum shares have returned to the FTSE/Mib index, after 5 months in the Mid Cap index (since 18 th December 2017). They replaced Yoox net-a-porter which was delisted from the Italian Stock Exchange following the success of the public tender offer launched by Richemont. 132

133 Performance of the UBI Banca since 2nd January 2017 and volumes traded J F M A M J J A S O N D J F M A M J Volumes 85,000,000 80,000,000 75,000,000 70,000,000 65,000,000 60,000,000 55,000,000 50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 reference prices in euro* Performance of the FTSE Italia All-Share index, the FTSE Italia Banks index and the UBI Banca share since 2nd January UBI Banca 70 FTSE Italia All-Share 60 FTSE Italia Banks G F M A M G L A S O N D G F M A M G reference prices in euro* 133

134 The main information concerning the UBI Banca share is summarised below, along with the principal stock market indicators, which have been calculated using consolidated figures. The UBI Banca share and the main stock market indicators First half 2018 FY 2017 (*) Number of shares outstanding at the end of period/year 1,144,285,146 1,144,285,146 Average price of the UBI share (average of the official prices quoted daily by Borsa Italiana Spa) - in euro Minimum price (recorded during trading) - in euro Maximum price (recorded during trading) - in euro Dividend per share - in euro Dividend yield (dividend per share/average price) % Dividend totals - in euro (**) - 125,415,145 Book Value [Consolidated equity attributable to the shareholders of the Parent (excluding the part of profit for the period not relating to badwill/inclusive of the loss/no. shares] - in euro Book value calculated by deducting intangible assets attributable to the shareholders of the Parent from consolidated equity - in euro Stock market capitalisation at the end of period/year (official prices) - in millions of euro 3,771 4,212 Price/book value [Stock market capitalisation at the end of period/year divided by (consolidated equity attributable to shareholders of the Parent excluding profit for the period/year for the part not relating to badwill/including the loss)] Price / book value calculated by deducting intangible assets attributable to the shareholders of the Parent from consolidated equity (*) The book value and price/book value for 2017 were calculated using equity data as at 31 st December 2017 in accordance with IAS 39. (**) The total dividend payment for 2017 was calculated on 1,140,137,686 outstanding shares net of 4,147,460 treasury shares repurchased. Dividends paid The 2017 dividend, drawn from the extraordinary reserve and totalling 125,415, corresponding to 0.11 on each of the 1,140,137,686 UBI Banca shares in issue (excluding treasury shares repurchased), was paid with value date 23 rd May 2018 (ex dividend date 21 st May and record date 22 nd May) against coupon No. 21. Earnings per share January-June 2018 Consolidated earnings attributable (in thousands of euro) Weighted average ordinary shares Consolidated earnings per share (in euro) Basic EPS 204,781 1,140,709, Annualised Basic EPS* 204,781 1,140,709, Diluted EPS 413,648 1,140,850, Annualised diluted EPS 413,648 1,140,850, January - June 2017 Consolidated earnings attributable (in thousands of euro) Weighted average ordinary shares Consolidated earnings per share (in euro) Basic EPS 687,968 1,140,709, Annualised Basic EPS* 771,113 1,140,709, Diluted EPS 687,968 1,140,850, Annualised diluted EPS 771,113 1,140,850, * The numerator used for the purposes of the calculation does not indicate a forecast of profitability for the whole year because it has been obtained by annualising the net result achieved in the first half. It will be recalled that in accordance with IAS 33, the weighted average of the ordinary shares in issue in the reporting period is used for the calculation of earnings per share. Consequently, the figures shown for the period January June 2017 are different from those published in the financial report for the period ended 30 th June

135 Information on risks and hedging policies The measurement of risks in the strategic and competitive scenarios in which the UBI Banca Group has set its annual and medium-term planning takes the form of defining limits and rules for the assumption of risk, which are able to guarantee capital strength and value creation oriented towards sustainable growth. The key principles on which Group risk analysis and management are based are as follows: - rigorous containment of financial and credit risks and strong management of all types of risk; - the use of a sustainable value creation approach to the definition of risk appetite and the allocation of capital; - definition of the Group s risk appetite with reference to specific types of risk and/or specific activities in a set of policy regulations for the Group and for the single entities within it. The assessments performed by the Parent were carried out with account taken of the operating nature and the relative profiles of each company in the Group in order to formulate integrated and consistent policies and guidelines. In order to achieve that objective, the governing bodies of UBI Banca perform their functions with reference not only to their own corporate reality but also by assessing the operations of the Group as a whole. The policies set by the Supervisory Board are then translated into operational regulations by the Management Board. 1 Banking Group risks 1.1 Credit risk Qualitative information The strategies, policies and instruments for the assumption and management of credit risk are defined at the Parent by the Chief Risk Officer in co-operation with the Chief Lending Officer, with the support and co-ordination of the relative specialist units. There is a particular focus in the formulation of policies to manage credit risk on maintaining an appropriate risk-yield profile and on taking risks that are consistent with the risk appetite defined by senior management and, more generally, with the mission of the Group. Key factors are reported below which impacted risk management in the first half of 2018, while full details on organisational aspects, management, measurement and control systems and credit risk mitigation techniques used by the UBI Banca are given in the Notes to the Consolidated Financial Statements in the 2017 Annual Report (Part E Information on risks and on the relative hedging policies). With regard to the Basel 2 project, in 2012 and 2013 the Bank of Italy authorised the Group to use the advanced internal rating based (AIRB) approach to calculate capital requirements to meet credit risk for the regulatory retail segments exposures backed by residential properties (individuals), exposures backed by properties (SME-retail), other retail exposures (SMEretail) and for the corporate regulatory segment. During the course of the first half of 2018 the Group received authorisation to also roll out advanced internal systems to the retail regulatory segment exposures backed by non-residential properties (individuals). For these portfolios the authorisation involves the use of internal estimates of the probability of default (PD) and loss given default (LGD) parameters. For all the other portfolios, the standardised approach is used, to be applied in accordance with the roll-out plan submitted to the Supervisory Authority, which involves specific deadlines for regulatory segments and risk parameters. At the date of this report, the scope of application of the approaches authorised in terms of companies is as follows: 135

136 AIRB: UBI Banca 1 and IW Bank 2 ; the remaining legal entities in the Group as well as the exclusive customers acquired following the merger of the New Banks will continue to use the standardised approach until the date of the respective authorisation/roll-out. The output of the models consists of nine rating classes that correspond to the relative PDs, updated as at December These PDs are mapped on the Master Scale to 14 classes (comparable with the ratings of the main external rating agencies) exclusively for reporting purposes. As concerns LGD, LGD models have been developed, differentiated by regulatory class. Master Scale PD THRESHOLDS Min PD Max PD UBI INTERNAL RATING MODELS Corporate and Large Corporate Small Business Retail Business Private individuals EXTERNAL RATINGS Moody's (1) Class Class Class Class Class MS % 0.049% Aaa Aa1 Aa2 Aa3 MS % 0.084% 1 1 A1 A2 A3 MS % 0.174% Baa1 MS % 0.298% 2 Baa2 Baa3 MS % 0.469% 2 2 Ba1 MS % 0.732% Ba1 / Ba2 MS % 1.102% 4 Ba2 MS % 1.867% Ba3 MS % 2.968% B1 MS % 5.370% 6 5 B2 B3 Caa1 MS % 9.103% Caa1/Caa2 MS % % Caa2 MS % % Caa2 / Caa3 MS % % Caa3 Ca-C (1) Cf "Moody's "Corporate Default and Recovery Rates, ", Exhibit 29, Average One-Year Alphanumeric. Rating Migration Rates, Furthermore, with specific reference to the methodological framework for calculating impairment losses, from 1 st January 2018 the Group has adopted the new financial reporting standard IFRS 9 which introduces important new changes regarding lending: changeover from the present incurred loss approach calculated over a 12-month time horizon to an expected loss approach calculated over the entire useful lifetime of the loan; classification of loans in three different stages for which different methods for calculating losses to be recognised are used. Stage 1 contains performing positions which have undergone no significant increase in credit risk 3 and which are otherwise positioned in stage 2. Stage 3 contains all positions classified as non-performing according to the current rules employed by the Group. One of the changes introduced by the new IFRS 9 standard is the inclusion of forward-looking factors in the methods of assessing performing positions. In this context, in its estimates of impairment losses on performing loans the Group has adopted a methodology for determining significant increases in credit risk which involve the classification of instruments in stages 1 and 2, by combining statistical factors (i.e. quantitative) with performance factors (i.e. qualitative). In this regard the main indicator (the significant indicator ) consists of the change beyond determined thresholds in the lifetime probability of default since the time of initial recognition of the financial instrument. Once the allocation to stages 1 and 2 has been made, determination of the expected credit losses is achieved by applying regulatory risk parameters adjusted for compliance with IFRS 9 for example by employing them on a point-in-time basis. More specifically, the determination of loss given default is carried out by applying specific corrective factors to regulatory internal LGDs in line with IAS 39 approaches (i.e. management accounting LGD). Where internal models are not applicable, models are applied starting with the empirical recovery rates of the ECAI agencies, or with simplified risk information such as for example the default rates for specific segments or portfolios. 1 The legal entity, UBI Banca, incorporates the exposures of the former B@nca 24-7, the former Centrobanca and the former network banks (merged into the Parent) and the former new banks (Banca Adriatica, Banca Tirrenica and Banca Teatina); the exclusive customers acquired from the latter entities will continue to use the standardised approach until the date of the respective roll-out. 2 The company IW Bank incorporates the exposures of the former UBI Banca Private Investment and the former IW Bank. 3 The main factors defined by the UBI Banca Group to identify a significant increase in credit risk with respect to the origination (approval of the extension of credit) and which therefore determine the passage to stage 2 are linked to the occurrence of one or more staging trigger events, verified monthly (deterioration of the lifetime probability of default; classification as forborne; the existence of an exposure continuously past due or in arrears at counterparty level for at least 30 days, with the amount 5% higher than the overall exposure of the position). 136

137 Forward-looking components are incorporated in risk parameters with the use of internal satellite models developed for credit risk stress test purposes. Underlying the forward-looking component there are expected macroeconomic scenarios the indicators of which are estimated for three possible future scenarios (baseline, best and worst) for which a likelihood of occurrence is associated to each one. With regard to the inclusion of forward-looking information, we report that this component has also been broadened for the bad loan component along the same lines as the framework adopted for performing loans by including a multi-scenario analysis which prudentially considers two scenarios: baseline and worst. The baseline scenario considers estimates of recovery resulting from the ordinary and internal management of loans. The worst scenario considers a scenario of sales and consists of quantifying impairment losses on the basis of a sales price observable on the market. The two scenarios are adjusted by adopting a probability of disposal determined on the basis of criteria that take into account the price applied to the portfolio to be disposed compared with the current market for these transactions. Quantitative information Classification of exposures on the basis of internal ratings The following is given below: a) regulatory coverage determined on the basis of the rules set by EU Regulation 575/2013 (the CRR ) and by Bank of Italy Circular No. 285 of 17 th December 2013 and subsequent updates; b) the distribution of the IRB perimeter on the classes of the master scale: exposures to corporate clients, retail exposures: exposures backed by residential real estate and exposures other, businesses (SMEs). UBI Banca Group: regulatory coverage for internal ratings by regulatory class and subclass 85.0% 80.0% 80.8% 81.4% 82.5% 30.0% 25.0% IRB perimeter (UBI Banca + IW Bank): distribution of EAD on the Master Scale (30 th June 2018) 75.0% 20.0% 70.0% 15.0% 65.0% 10.0% 5.0% 60.0% Corporate Retail: exposures Retail: exposures other secured by real estate businesses (SMEs) property 0.0% 137

138 1.2 Market risk Interest rate risk and Price risk Supervisory trading portfolio Qualitative information General aspects Information on organisational and methodological aspects, which are unchanged, is given in Part E, section 1, subsection 2, Part 1.2 the Banking Group Market risk of the Notes to the Consolidated Financial Statements in the 2017 Annual Report, which may be consulted. The main operational limits set for 2018 (including reallocations and any new limits set during the year) are as follows: UBI Banca Group Trading Book Capital Allocated 50 million Early Warning Threshold on UBI Banca Group Trading Book Capital Allocated 40 million Early Warning Threshold on UBI Banca Group Trading Book 1-day Expected Shortfall (ES) 10 million Quantitative information Supervisory trading book: internal models and other methods of sensitivity analysis Change in market risk: daily market ES for the UBI Banca Group trading portfolios in the first six months of ,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 Changes in the trend shown in the chart were related to movements in the portfolio since no exogenous shocks were recorded. 500,000 0 The expected shortfall by risk factor calculated on the entire trading book of the UBI Group as at 30 th June 2018 is given below. Trading book Average Minimum Maximum Currency risk 1,249,703 1,423,083 32,356 2,002, ,380 Interest rate risk 525, , , , ,507 Equity risk 204, , , , ,458 Credit risk 656, ,377 55,774 1,411, ,282 Volatility risk 549, ,233 63, ,303 75,267 Diversification effect (1) (955,972) (672,652) Total (2) 2,230,177 2,296,032 1,026,652 3,071,028 1,302,242 (1) The diversification effect is due to the imperfect correlation between the different risk factors present in the Group s portfolio. (2) The maximum ES was recorded on 9th February, the minimum ES on 2nd January. 138

139 Backtesting analyses UBI Banca Group trading book: backtesting for the first half of Million Profit & Loss ES /01 16/01 30/01 13/02 27/02 13/03 27/03 10/04 24/04 08/05 22/05 05/06 19/06 Actual backtesting analysis of the supervisory portfolios of the Group found one day when the P&L was worse than the ES calculated by the risk management system. Theoretical stress tests The analysis shows a heightened sensitivity of the portfolios to credit spread shocks (consistent with the presence of Italian government securities and corporate securities, especially in the HTC&S portfolio) and to interest rate shocks (consistent with the presence of bonds and interest-rate derivatives within the portfolios). Data as at 30th June 2018 UBI BANCA GROUP Supervisory Trading Book 30th June 2018 UBI BANCA GROUP Banking Book 30th June 2018 TOTAL UBI BANCA GROUP 30th June 2018 in whole euro Change in NAV Change in NAV Change in NAV Risk Factors IR Shock Shock +1bp -6, % -887, % -893, % Risk Factors IR Shock Shock -1bp 5, % 887, % 892, % Risk Factors IR Shock Bear Steepening 204, % -84,042, % -83,838, % Risk Factors IR Shock Bull steepening 3,188, % 49,405, % 52,593, % Risk Factors IR Shock Bear Flattening -2,257, % -45,047, % -47,305, % Risk Factors IR Shock Bull Flattening 947, % 89,343, % 90,290, % Risk Factors Equity Shock -10% -447, % -6,809, % -7,256, % Risk Factors Credit Spread Shock 14, % -5,258, % -5,243, % Flight to quality scenario 583, % -430,059, % -429,475, % Interest rate risk and price risk Banking book Qualitative information Information on organisational and methodological aspects, which are unchanged, is given in Part E, section 1, sub-section 2, Part 1.2 the Banking Group Market risk of the Notes to the Consolidated Financial Statements in the 2017 Annual Report, which may be consulted. 139

140 Quantitative information The exposure of the UBI Banca Group to interest rate risk as at 30 th June 2018 measured in terms of the sensitivity of the net economic value of the component relating to the HTC&S portfolio, was approximately million, thereby remaining within the limits set by the Policy to Manage Financial Risks. In detail, the sensitivity originated by the product companies was million, while the Parent contributed a total of million. In compliance with the Policy to Manage Financial Risks, the exposure includes an estimate of the impact of early repayments and modelling of on-demand items on the basis of the internal model. On the basis of the standard scenario set by current supervisory regulations, the end of period measurement as at 30 th June 2018 recorded a change in economic value of Although negative, that threshold fell within the risk limit set. Sensitivity analysis of net interest income focuses on changes in profits resulting from a set of scenarios for changes in interest rates measured over a time horizon of twelve months. UBI Banca Group s exposure to interest rate risk as at 30 th June 2018, estimated in terms of an impact on net interest income of a reduction in reference interest rates of -100 bp, was million, a figure which stood within the limits set by Group policy. The total level of exposure includes an estimate of the impact of early repayments and of the viscosity of demand items. The impact on net interest income showed the effects of changes in interest rates on the portfolio monitored, excluding hypotheses of future changes in the mix of assets and liabilities. These factors mean that the indicator cannot be used to assess the Bank s future strategy. * * * The main operational limits for 2018 (including reallocations and any new limits set during the year) are as follows: UBI Banca Group Banking Book Capital Allocated 815 million Early Warning Threshold on UBI Banca Group Banking Book Capital Allocated 728 million Early Warning Threshold on UBI Banca Group Banking Book 1-day Expected Shortfall (ES) 100 million Change in market risk: daily market ES for the Group banking book in the first six months of ,000, ,000, ,000,000 90,000,000 80,000,000 70,000,000 60,000,000 Changes in the trend shown in the chart were related to movements in the portfolio and to exogenous shocks that occurred in the period (widening of the spread on Italian government securities). 50,000,000 40,000,

141 The expected shortfall by risk factor calculated on the entire banking book of the Group as at 30 th June is given below. Banking book Average Minimum Maximum Currency risk 142, ,049 97, , ,866 Interest rate risk 5,465,482 5,993,489 5,101,477 14,305,946 5,623,488 Equity risk 619,723 1,482, ,143 6,727,002 2,648,987 Credit risk 109,454,438 62,520,641 45,682, ,794,103 62,111,816 Volatility risk Diversification effect (1) (5,133,046) (6,352,209) Total (2) 110,548,821 64,543,855 45,755, ,243,814 64,276,948 (1) The diversification effect is due to the imperfect correlation between the different risk factors present in the Group s portfolio. (2) The maximum ES was recorded on 22nd June, the minimum ES on 2nd January Currency risk Further information on general aspects and on processes for the management and methods for the measurement of currency risk is given in Part E, section 1, sub-section 2, Part 1.2 Banking Group Market risk of the Notes to the Consolidated Financial Statements in the 2017 Annual Report, which may be consulted. 1.3 Liquidity risk Qualitative information The section on the interbank market in this interim report on consolidated operations may be consulted for information on net interbank debt recognised and details of the UBI Banca Group s liquidity reserve. Short-term liquidity analysis is monitored using a net liquidity balance model of analysis at consolidated level, supplemented with stress tests designed to assess the Group s ability to withstand crisis scenarios characterised by an increasing level of severity. The position as at 30 th June 2018 was one of ample funds. Medium to long-term liquidity indicators (structural liquidity) also recorded values within the limits set by the Policy to Manage Financial Risk. Further information on liquidity risk is given in Part E, section 1, sub-section 3 Banking Group Liquidity risk of the Notes to the Consolidated Financial Statements in the 2017 Annual Report, which may be consulted. 1.4 Operational risks Part E section 1, sub-section 4 Banking Group Operational risks of the Notes to the Financial Statements in the 2017 Annual Report may be consulted for qualitative information (general aspects, management processes, measurement methods and the reporting system). Legal risk The companies in the UBI Banca Group are party to a number of disputes and proceedings of a legal nature arising from the ordinary performance of their business. As a result of those disputes and proceedings, appropriate provisions have been made in the accounts on the basis of a calculation of the amounts potentially at risk and an assessment of the risk in terms of the degree of probability and/or possibility, as defined in the accounting standard IAS 37, and considering the most established legal opinion. Therefore, while it is not possible to predict final outcomes with certainty, it is considered that an unfavourable conclusion of these proceedings, both taken singly or as a whole, would not have a significant effect on the financial and operating position of the Group. Specific sections of this consolidated condensed interim financial report may be consulted for information on corporate litigation, including tax litigation, which may be consulted. 141

142 Quantitative information Descriptive data Between 1 st July 2013 and 30 th June 2018 the main sources of operational risk for the Group were processes (89% of frequencies and 83% of the total impacts detected) and external causes (9% of frequencies and 12% of the total impacts detected). The process risk driver includes, amongst other things, unintentional errors and incorrect application of regulations. The external causes risk driver includes, amongst other things, human actions performed by third parties and not directly under the control of the Bank. Percentage of operational losses by risk driver (detection 1 st July th June 2018) Event frequency Profit impact The types of event 4 which recorded the greatest concentration of operational losses during the period examined were customers, products and professional practices (81% of frequencies and 54% of the total impacts detected), execution, delivery and process management (9% of frequencies and 29% of the total impacts detected) and external fraud (6% of frequencies and 10% of the total impacts detected). 4 Reference is made to regulatory types of event laid down by EU Regulation 575/2013 as follows: - internal fraud: losses due to acts of fraud, misappropriation of property, circumvention of the articles of association, laws, regulations or company policies, (excluding discrimination events or diversity events) which involve at least one internal party of the company; - external fraud: losses due to acts of fraud, misappropriation of property, circumvention of the articles of association, laws regulations or company policies, (excluding discrimination events) carried out by third parties; - employment and workplace safety: losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims or from diversity/discrimination events; - customers, products and business practices: losses arising from the failure to meet professional obligations to specific clients (inclusive of fiduciary requirements and requirements to disclose information on investments) or from the nature or design of a product; - damage from external events: losses arising from damage to, destruction or loss of physical assets, and from human and other losses due to natural disasters or other events; - business disruption and system failures: losses arising from malfunctions and faults in systems and/or consequent business disruptions; - execution, delivery and process management: losses arising from failed transaction processing or process management and from relations with trade counterparties and vendors. 142

143 Percentage of operational losses by type of event (detection 1 st July th June 2018) Event frequency Profit impact Operational losses in the first six months of 2018 were concentrated on the following risk factors: processes (97% of frequencies and 85% of the total impacts detected) and external causes (3% of frequencies and 14% of the total impacts detected). Percentage of operational losses by risk driver (detection 1 st January th June 2018) Event frequency Profit impact Operational losses incurred in the period were concentrated mainly in the following types of event Customers, products and professional practices (95% of frequencies and 70% of the total impacts detected), execution, delivery and process management (3% of frequencies and 16% of the total impacts detected) and external fraud (1% of frequencies and 12% of the total impacts detected). 143

144 Percentage of operational losses by type of event (detection 1 st January th June 2018) Event frequency Profit impact Capital requirement The capital requirement net of expected losses for which provisions for risks and charges had been made was 351 million (+4% compared with 337 million as at 31 st December 2017). That increase was mainly caused by changes in the severity distribution parameters by the AMA component due to updates of the loss amounts for tail events of the distributions. As a form of risk mitigation, the UBI Banca Group has taken out adequate insurance policies to cover the principal transferable operational risks with due account taken of the requirements of supervisory regulations. The UBI Banca Group has not taken up the option available under the regulations in force to deduct the effects of insurance policies and other risk transfer mechanisms from the capital requirement. 2 Insurance company risks The information that follows has been prepared on the basis of the provisions of paragraphs 38 and 39 letters a) and b) of IFRS 4 which states the following: An insurer shall disclose information that helps users to understand the amount, timing and uncertainty of future cash flows from insurance contracts (ref. par. 38) and To comply with paragraph 38, an insurer shall disclose: (a) its objectives in managing risks arising from insurance contracts and its policies for mitigating those risks. (b) those terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of the insurer s future cash flows (ref. par. 39). Qualitative information Information on organisational and methodological aspects, which are unchanged, is given in Part E, section 1, sub-section 2, Part 1.2 the Banking Group Insurance company risks of the Notes to the Consolidated Financial Statements in the 2017 Annual Report, which may be consulted. Specific capital for insurance risk was identified in the 2018 Risk Appetite Framework in consideration of the investments that the Parent holds in the insurance companies Vita BancAssurance Popolari Spa (life business sector and pensions business sector) and BancAssurance Popolari Danni (non-life business sector) following the acquisition of the New Banks concluded in The internal capital is calculated in compliance with the framework provided for the calculation of regulatory capital by the relative supervisory regulations. 144

145 Quantitative information The main operational limits for 2018 are as follows: UBI Banca Group Insurance Risk Capital Allocated 60 million The limits reported above were complied with in the first half of The principal risks and uncertainties for the second half of the year Risks The UBI Banca Group attributes primary importance to the measurement, management and monitoring of risk, as activities necessary to the sustainable creation of value over time and to the consolidation of its reputation on its markets. Consequently, it has a system of risk governance and management in place which takes account of organisation, regulations and methods in order to ensure consistency in its operations and its relative risk appetite (RAF - Risk Appetite Framework). More specifically, the Group has adopted a risk management framework consistent with Group regulations and strategies which have been developed over the years, consistent in turn with developments in the regulatory framework. The main parts of the current framework regard the following: definition of the risk appetite (Risk Appetite Statement - RAS); definition of the framework to verify future risk as an integral part of the strategic planning process; definition of the stress test framework; definition of risk management policies; definition of RAF-related methodologies; definition of the non-viability risk management framework associated with the Group Recovery Plan; definition, interpretation and management of the RAF in Group companies; definition of the framework and criteria for the identification of transactions of greater significance (TGS). definition of the risk monitoring and self-assessment framework from an SREP viewpoint. Articles 97 and following of Section III of Directive 2013/36/EU ( CRD IV ) regulate the Supervisory Review and Evaluation Process (SREP), and that is the regulatory control, review and assessment process for which the supervisory authority is responsible by which it formulates an overall opinion on the bank and institutes corrective measures if necessary. To achieve this, in accordance with Art. 107 (3) of CRD IV, the European Banking Authority (EBA) has published Guidelines 5 with the objective of generating procedures and methodologies common to the competent authorities in order to support the Supervisory Review and Evaluation Process (SREP). Internal processes make a considerable contribution to the calculation and assessment of capital adequacy (Internal Capital Adequacy Assessment Process ICAAP) and liquidity adequacy (Internal Liquidity Adequacy Assessment Process ILAAP) and on the basis of these the Group carries out a self-assessment each year focused on identifying risks and the conditions of its current and future capital and liquidity adequacy including under stress conditions 6. In compliance with the regulations in force, by the end of April the UBI Banca Group had submitted its 2017 ICAAP and ILAAP reports to the supervisory authority. The results of the 5 Cf. Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP), EBA/GL/2014/13 of 19 th December 2014 These guidelines are currently under review. Reference is made in this respect to the document entitled Draft Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing, 31 st October Cf. Final Report Guidelines on ICAAP and ILAAP information collected for SREP purposes, EBA/GL/2016/10, 3 rd November

146 capital and liquidity adequacy assessments contained in those reports confirmed the availability of significant margins sufficient to maintain the capital and liquidity position, both current and future and under stress conditions above the requirements requested. With regard to these processes, very careful identification of risks to be subjected to measurement is carried out on a continuous basis Risk identification activity is designed to verify the magnitude of risks already subject to measurement and to detect signals of other types of risk which may manifest. Identification involves precise conceptual definition of the risks to which the Group is exposed, an analysis of the factors which combine to generate them and a description of the relative manner in which they manifest. This activity is achieved by means of a centralised process of analysis supplemented by self-assessment conducted on all the entities of the Group. Once the activity to identify significant risks is completed, the ICAAP process involves measuring the risks to which internal capital is attributed and calculating the available financial resources (AFR) 7 required to meet them (capital adequacy), both at present and in the future. The Bank also makes use of specific stress tests (by assessing impacts on a single risk) and global stress tests (by assessing impacts on all risks at the same time) to perform a better assessment of exposure to risk and of systems for mitigating and monitoring them and calculating capital requirements. Use of these tests is also based on instructions provided by the European Central Bank as part of the official stress test exercise organised by the EBA. Details are given below of risks which have potential significant impacts for the UBI Banca Group and the action taken to mitigate them. It is considered that risks other than those reported below, which are of marginal importance within the Group, will not change during the course of the year. Credit risk Credit risk, which consists of the risk of incurring losses resulting from the default of counterparties with whom credit exposure exists, constitutes the most important characteristic risk of the UBI Banca Group. On a historical basis it absorbs over 90% of the regulatory risk capital. The Group has always considered the quality of its loan portfolio and efficient management of non-performing loans to be one of its top strategic priorities. In this sense, the development of credit monitoring and credit recovery models has produced a profound organisational overhaul in terms of processes and support instruments and it has allowed the Group to come to terms with the difficult economic environment existing in recent years. The main strengths included the following: the definition of a comprehensive system of limits which, in the context of credit risk management policy, directs the Bank s activities and requires them to comply with the Risk Appetite Framework (RAF); the definition and introduction of strategies for the sale of loans customised by type of customer, based on the level of risk and sector outlook and carried out by the implementation of special purpose tools used to monitor the correct assignment of credit policies; support for digital innovation in lending in order to drive growth in loans with high standards of credit quality selection by means in particular of granting personal loans to individuals after first carrying out automated processes to pre-assess requirements relating to counterparty reliability; the introduction of a new organisational model for Loan Settlement (the former Arrears Management Model), with a view to improving effectiveness of the management and settlement of irregular positions by reorganising and improving the operational and organisational model in order to provide useful assistance to the distribution network in loan settlement. 7 Available financial resources (AFR) or alternatively total capital, is defined as the sum of the capital items that the Group considers can be used to meet internal capital and total internal capital requirements. Internal capital is defined as risk capital, the capital requirement for a determined risk that is considered necessary to cover losses above a given expected level. Total internal capital is defined as internal capital required for all significant risks assumed by the Group, including possible internal capital requirements due to considerations of a strategic character. 146

147 effective local management of credit exposures by means of qualified/experienced specialised staff who work on positions that present irregularities, supporting distribution network units in the relative settlement; the introduction and refinement of early warning indicators designed to achieve substantial benefits in terms of focus on the detection of irregularities, by detecting more of these earlier and by interrupting flows to non-performing status, in compliance with the recommendations given in recent ECB regulations (Guidance to Banks on Non-performing Loans); expansion of the centralised management unit for non-performing counterparties, which involves specialised treatment of the positions based on the clusters to which they belong, with a view to regularising positions and supervising the credit quality of the portfolios assigned to them, with the introduction of dedicated specialist roles ( NPL Account Managers ); the introduction of default detection triggers, in compliance with ECB guidance on nonperforming loans and IFRS 9 international reporting standard rules, which constitute specific indicators of the deterioration of positions, which when triggered require the Bank to assess the classification of the counterparty as either unlikely-to-pay or bad, or alternatively to intervene directly in the presence of high degrees of risk; the development, as support for the new credit governance model (divided into Performing Processes and Non-performing Processes ), of new and unequivocal reporting (a Credit Control Framework ) with a high degree of automation which allows data to be presented in a standardised manner with an adequate level of detail and showing divergences from budget figures, Strategic NPL Plan figures and Business Plan figures; improvement of the credit recovery model by revising the structure of the organisational area and refining the rules for the assignment of customers classified as bad loan status in order to render the management of these positions by credit recovery units faster and more effective. the approval by senior management of a strategic plan to reduce total non-performing loans (the NPL Strategy ) and the relative monitoring process. In the second half of 2018 the UBI Banca Group intends to further develop its infrastructure to support credit management activities across the various stages of the credit life cycle by means of specific action designed to: carry out specific assessments and gap analyses aimed at integrating corporate processes and procedures in view of regulatory developments resulting from the new guidelines issued by the ECB and the EBA; improve the efficiency of the monitoring process for performing positions by introducing further new early warning indicators (at single position and portfolio level) designed to intercept customer problem events as early as possible; optimise the new organisational model for loan settlement by reviewing credit rules and improving IT support tools in view of the recent introduction of the new model; further support the growth of loans with high standards of credit quality selection by monitoring loan grant strategies that are customised by type of customer, based on the level of risk and on recently introduced sector outlooks and additionally by commencing the grant of personal loans to businesses in the POE (small economic operators) segment with support from automated processes to pre-assess requirements relating to counterparty reliability; further strengthen credit processes with particular reference to the settlement of unlikelyto-pay positions, by, amongst other things, developing the management model by revising and broadening the perimeter of counterparties to be assigned to outside specialist firms; with regard to bad loans, further optimise the credit recovery model by taking IT action designed to increase the efficiency of both administrative and management activities. 147

148 Business risk The current scenario of slow and moderate economic recovery is continuing to have a negative impact on operating conditions in the banking system. This has been accompanied by a strongly expansionary monetary policy in a scenario of interest rates at extremely low levels. More specifically, in this context there is strong competition on prices with regard to the loans granted by banks following access to forms of funding regulated by the European Central Bank (i.e. Targeted Longer Term Refinancing Operations - TLTROs). The macroeconomic environment, the extreme volatility on markets and the pressure of competition resulting from the substantial liquidity flooding credit markets are continuing to compress margins and the profitability of operators. The UBI Banca Group is therefore continuing to take appropriate action on its distribution network designed to achieve goals identified in terms of volumes and pricing of loans consistent with targets for the quality of credit. Sovereign risk While exposure to government securities still remains substantial (and to Italian government securities in particular 8 ), a plan is in progress to diversify and gradually reduce the concentration of the banking book portfolio in accordance with strategic guidelines laid down in the Business Plan. The banking Group s securities portfolio has therefore been reduced and diversified precisely by decreasing the concentration in Italian government securities over the course of the Business Plan. Uncertainties An uncertainty is defined as a possible event for which the potential impact, attributable to one of the risk categories just mentioned, cannot be determined and therefore quantified at present. The Group is operating in a scenario in which growth expectations are confirmed as favourable, but which is nevertheless overshadowed by specific risk factors that are potentially negative for growth. These factors of uncertainty could manifest with impacts attributable primarily to credit, but without affecting the capital strength of the UBI Banca Group. In detail, the main uncertainties identified for 2018 are linked to the following aspects: - developments in the macroeconomic situation. After synchronised global growth in 2017, which in many cases was higher than expected, the figures published over the last few months have shown a slight slackening of the trend. FMI analyses report uncertainties related to commercial pressures due to potential protectionist measures which could represent a threat to growth; - political developments. An increase in political uncertainty in Europe is one of the risks hovering over the global economy. The EU is facing fundamental political challenges over migrants, the governance of budgets and the institutional architecture of the euro area, as well as over agreeing the terms of Brexit. As concerns the Italian political context, uncertainties are being seen at the moment over the country s economic policies which will be set as part of the formulation of the Documento di Economia e Finanza (DEF economic finance planning document) which is expected to be approved in the last quarter of the year. Current uncertainty could involve further tensions over Italian government spreads and the institutional monetary market, which is to say sources of funding that banks draw on to finance the country s businesses; - developments in the regulatory framework. The regulatory context is subject to various processes of change following both (i) the issue of a number of regulatory provisions at European and national level, with the introduction of the relative regulations to implement them, relating to the provision of banking services and (ii) the related legal recommendations. This scenario requires particular effort both in terms of interpretation and implementation as well as in terms of the speed of adaptation and has at times directly affected the profits of banks, and/or costs for customers. The UBI Banca Group constantly 8 See the sub-section Exposure to sovereign debt risk in the section Financial Activities of this report for details of the value of sovereign debt risk exposures. 148

149 assesses actions it might take to mitigate the consequences of the various measures. Remaining important aspects include the application of the new financial reporting standard IFRS 9, which took place from the beginning of 2018, and proposals to amend supervisory regulations with impacts on loan write-offs and capital adequacy. As regards the management of non-performing exposures, we report the uncertainty over the contents defined as part of the addendum to the ECB NPL Guidance and over the European Parliament proposal to amend Regulation EU No. 575/2013 which introduces common levels of minimum coverage for new grants of loans that become non-performing. Proposals have also emerged concerning the following: the revision of the calculation of regulatory requirements with the objective of greater alignment at European level of some regulations through the reduction of national discretion and changes to internal models relating to credit risk by the supervisory authorities. In this respect we report an ECB initiative commenced at the end of 2015 and to be concluded by the end of 2019 consisting of a Targeted Review of Internal Models (TRIM) designed to assess the compliance of internal models currently in use by banks with regulatory requirements, as well as their reliability and comparability. These compliance proposals could lead to changes to internal rating and LGD models with possible impacts on capital adequacy and on loan write-downs; a revision of the Basel 3 regulatory framework concerning methods for calculating riskweighted assets, credit risk, operational risk and market risk. The definition of these rules, which fall within the Basel 4 framework, is intended: to limit the use of internal models and return to a more stringent standard methodology for credit risk on some types of portfolio (i.e. low default portfolios) and instruments (i.e. capital instruments); to eliminate the use of internal models for the management of operational risk; and to introduce more sophisticated and stringent models, both internal and standardised, for market risk. Factors to which attention should be paid in terms of operations, reputation and implementation could also be determined by the new directive on payment services (PSD2), which involve raising levels of competition between banks and introducing a new threat of disintermediation in favour, amongst other things, of new types of competitor permitted to operate in the financial sector. * * * The risks and uncertainties described above were subject to a process of assessment designed, amongst other things, to examine the impacts of changes in market parameters and conditions on corporate performance. The Group does in fact possess instruments to measure the possible impacts of risks and uncertainties on its operations (sensitivity analysis and stress tests in particular), which allow it to rapidly and continuously adapt its strategies in terms of its distribution, organisation and cost management systems to changes in the operating context. Risks and uncertainties are also under constant observation through the implementation of the policies and regulations to manage risk adopted by the Group: policies are updated in relation to changes in strategy, context and market expectations. Periodic monitoring of policies is designed to verify their state of implementation and their adequacy. The findings of the analyses performed show that the Group is able to meet the risks and uncertainties to which it is exposed, which therefore confirms the assumption that it is a going concern. 149

150 Consolidated companies: the principal figures Profit for the period Figures in thousands of euro First half nd Quarter st Quarter 2018 Change 1Q-2Q 2018 % change 1Q-2Q 2018 Unione di Banche Italiane Spa 204,276 66, ,248 (72,220) (52.2%) Centrobanca Sviluppo Impresa Spa (81) (27) (54) (26) (49.1%) IW Bank Spa 2, ,881 (1,739) (92.5%) UBI Pramerica SGR Spa 37,592 21,509 16,083 5, % Zhong Ou Asset Management Co. Ltd (25%) 3,963 2,109 1, % UBI Leasing Spa 10,224 4,435 5,789 (1,354) (23.4%) UBI Factor Spa 1, n.s. Prestitalia Spa 10,679 6,113 4,566 1, % BPB Immobiliare Srl (270) (83) (187) (103) (55.3%) UBI Sistemi e Servizi SCpA 8,218 1,536 6,682 (5,146) (77.0%) BancAssurance Popolari Spa 4,387 2,190 2,197 (7) (0.3%) BancAssurance Popolari Danni Spa 41 (48) 89 (137) n.s. Aviva Vita Spa (20%) (1,680) (4,380) 2,700 (7,080) n.s. Lombarda Vita Spa (40%) 6,528 3,952 2,576 1, % UBI Management Co. Sa (*) % UBI Trustee Sa (*) 115 (103) 218 (321) n.s. CONSOLIDATED 208,867 91, ,660 (26,453) (22.5%) (*) The result shown is from the financial statements prepared for the consolidation according to the accounting policies followed by the Parent. 150

151 Net loans and advances to customers Figures in thousands of euro A B Change A-B % change A/B C Change A-C % change A/C Unione di Banche Italiane Spa (*) 90,708,049 91,182, , % 90,454, , % Prestitalia Spa 1,431,103 1,361,698 69, % 1,317, , % IW Bank Spa 553, ,785-15, % 595,643-42, % UBI Factor Spa 2,325,959 1,978, , % 2,458, , % UBI Leasing Spa 6,641,511 6,746, , % 6,845, , % CONSOLIDATED 91,656,223 91,916, , % 91,343, , % These figures are inclusive of asset items 20. 2) and 40. 2) in the reclassified balance sheet. Risk indicators Net bad loans/net loans Total net non-performing loans/net loans Percentages Unione di Banche Italiane Spa (*) 2.90% 2.90% 2.93% 6.40% 6.59% 6.70% Prestitalia Spa 0.42% 0.51% 0.59% 3.32% 3.85% 4.36% IW Bank Spa 1.83% 1.67% 1.66% 3.65% 3.64% 3.52% UBI Factor Spa 8.75% 10.27% 8.43% 10.35% 12.73% 10.47% UBI Leasing Spa 9.47% 9.49% 9.59% 15.75% 15.93% 15.65% CONSOLIDATED 3.80% 3.82% 3.87% 7.82% 8.06% 8.19% (*) The data as at 1 st January 2018 includes that relating to Banca Teatina, merged with effect from 26 th February

152 Direct banking funding from customers Figures in thousands of euro A B Change A-B % change A/B C Change A-C % change A/C Unione di Banche Italiane Spa 92,666,800 91,975, , % 90,744,765 1,922, % Banca Teatina Spa (*) ,575,543-1,575, % IW Bank Spa 2,879,623 2,872,043 7, % 2,812,196 67, % CONSOLIDATED 95,010,055 94,212, , % 94,449, , % Direct funding from customers includes amounts due to customers and debt securities issued, with the exclusion of bonds and other securities subscribed directly by companies in the Group. Indirect banking funding from ordinary customers (market prices) Figures in thousands of euro A B Change A-B % change A/B * C Change A-C % change A/C Unione di Banche Italiane Spa 87,465,086 86,885, , % 84,841,154 2,623, % Banca Teatina Spa , , % UBI Pramerica SGR Spa 35,323,384 35,130, , % 34,758, , % IW Bank Spa 9,085,674 9,242, , % 9,666, , % BancAssurance Popolari + BancAssurance Popolari Danni Spa (1) 1,956,735 1,962,293-5, % 1,741, , % Lombarda Vita Spa (2) 7,843,069 7,498, , % 7,205, , % Aviva Vita Spa (2) 13,686,117 13,010, , % 12,271,377 1,414, % CONSOLIDATED 98,528,550 97,663, , % 96,465,661 2,062, % * In accordance with standard accounting practice, the 31 st December 2017 is shown as a.m. on 1 st January Assets under management (at market prices) Figures in thousands of euro A B Change A-B % change A/B * C Change A-C % change A/C Unione di Banche Italiane Spa 60,229,531 58,893,349 1,336, % 57,125,189 3,104, % Banca Teatina Spa , , % UBI Pramerica SGR Spa 35,323,384 35,130, , % 34,758, , % IW Bank Spa 6,459,499 6,424,226 35, % 6,564, , % BancAssurance Popolari + BancAssurance Popolari Danni Spa (1) 1,956,735 1,962,293-5, % 1,741, , % Lombarda Vita Spa (2) 7,843,069 7,498, , % 7,205, , % Aviva Vita Spa (2) 13,686,117 13,010, , % 12,271,377 1,414, % CONSOLIDATED 68,682,945 66,870,798 1,812, % 65,443,496 3,239, % * In accordance with standard accounting practice, the 31 st December 2017 is shown as a.m. on 1 st January (*) The merger of Banca Teatina into the Parent, UBI Banca, came into effect on 26 th February (1) Figure stated is for the total managed by the two companies. As they are fully consolidated, the total is included in consolidated funding in full: the portion subscribed by customers of UBI Banca is included in the aggregate relating to the Parent. (2) The figure stated is for the total managed by the companies. Since these companies are consolidated with the equity method, it is underlined that only the part subscribed by Group customers is considered in the calculation for consolidated funding. 152

153 Transactions with related parties and with connected parties Related parties With Resolution No of 12 th March 2010 amended by the subsequent Resolution No of 23 rd June 2010 the Consob (Italian securities market authority) approved a Regulation concerning related-party transactions. The regulations concern the procedures to be followed for the approval of transactions performed by listed companies and the issuers of shares with a broad shareholder base with parties with a potential conflict of interest, including major or controlling shareholders, members of the management and supervisory bodies and senior managers including their close family members. The regulations currently apply within the UBI Banca Group to the Parent, UBI Banca Spa, only, as a listed company. In November 2010 the Supervisory Board had already appointed a specific committee from among its members to which transactions falling within the scope of the regulations must be submitted in advance. In order to implement Art bis of the Italian Civil Code and the Consob (Italian securities market authority) regulation on related parties, UBI Banca has adopted a special regulation, available on the corporate website of the Bank 1, which lays down rules for the identification, approval and implementation of related-party transactions performed by UBI Banca, either directly or through its subsidiaries, in order to ensure their transparency and substantive and procedural fairness. In compliance with Consob recommendations, transactions with related-parties of UBI Banca performed by subsidiaries are also subject to the regulations in question if, under the provisions of the Articles of Association or internal regulations adopted by the Bank, the Management Board, the Supervisory Board, in response to a proposal of the Management Board, or even an officer of the Bank on the basis of powers conferred on that officer, must preliminarily examine or approve a transaction to be performed by subsidiaries. Transactions of greater importance In accordance with Art. 5, paragraph 8 of Consob Resolution No /12 March 2010, Public disclosures on related-party transactions, the following related-party transactions of greater importance concluded in the first half of 2018 were excluded from the scope of application of the Regulations for related-party transactions with UBI Banca, because they were concluded with subsidiaries: - approval of six credit lines of the type other industrial unsecured for UBI Leasing on 2 nd February for a total of 700 million and on 24 th May for a total of 1,850 million; - approval of 20 credit lines of the type subordinated unsecured for securitisation of which 16 on 24 th May for UBI Finance Srl for a total of 15.6 billion and four on 20 th June for UBI Finance CB 2 Srl for a total of 3 billion; - the approval of one transfer of assets by UBI Banca on 30 th April to the special purpose entity UBI Finance Srl, to back the first covered bond programme for a total of 2,233.7 million; - six repurchase agreement transactions by UBI Banca, with UBI Leasing as the counterparty relating to the senior tranches of securitisations amounting to 2.1 billion nominal each on 2 nd January, 1 st February, 28 th February, 29 th March, 30 th April and 31 st May. We also report that: 1 Corporate website at in the section Corporate Governance, Corporate Documents. 153

154 - with regard to the Group reorganisation process which started in November 2016 with the integration of UBI Banca s seven network banks, concluded in February 2017, and continued with the integration of the three New Banks acquired in May 2017, markets were informed in a press release dated 26 th February 2018 of the signing of the deed that concluded the merger of Banca Teatina into UBI Banca; - on conclusion of its examination and in view of the considerations of the Related and Connected Parties Committee, which it shared, on 19 th April 2018 the Supervisory Board approved the text, submitted by the Management Board, of the Group s Single Policy for the management of conflicts of interest, considering it appropriate to (i) safeguard the integrity, transparency and proper nature of decision-making processes regarding the transactions of the Bank and other UBI Banca Group companies with parties defined as Related Parties, Connected Parties, Identified Staff, Significant Parties in accordance with Art. 136 of the Consolidated Banking Law and Other Significant Parties and (ii) also to guard against the risk that the closeness of persons to decision-making centres might compromise the objectivity and impartiality of decisions. The policy was submitted to the European Central Bank on 24 th April On 14 th June 2018 the Supervisory Board also approved the version of the Group s Single Regulation on the management of conflicts of interest issued by the Management Board on 13 th June 2018, scheduled to come into force in the fourth quarter of the current year. We report that no other transactions with related parties were performed in the reporting period, as defined within the meaning of Art. 2427, paragraph 2 of the Italian Civil Code, which influenced the capital position or the results of the companies. Finally we report that in the first half of 2018 UBI Banca s Related and Connected Parties Committee maintained a high and continuous level of monitoring over the question of Related Parties and Connected parties. In particular it made a favourable assessment of activities to increase the awareness of the organisational units involved of the importance of proper and timely periodic reporting and recommended that specific occasions for informing and training units in the bank on these matters should be scheduled. Information is reported in the notes to the condensed consolidated interim financial statements in compliance with IAS 24 on balance sheet and income statement transactions between related parties of UBI Banca and Group member companies and on balance sheet and income statement transactions between UBI Banca and its own related parties, together with those items as a percentage of each item in the condensed consolidated interim financial statements. Connected parties In implementation of article 53, paragraphs 4 et seq of the Consolidated Banking Act and Inter-Ministerial Credit Committee Resolution No. 277 of 29 th July 2008, on 12 th December 2011 the Bank of Italy issued the ninth update of the New regulations for the prudential supervision of banks (published in the Official Journal of 16 th January 2012) regarding risk assets and conflicts of interest concerning parties connected to banks or banking Groups, where connected parties are defined as a related party and all the parties connected to it. The regulations are designed to guard against the risk that the closeness of persons to decision-making centres might compromise the objectivity and impartiality of decisions concerning loans to and/or other transactions with those persons. The first measure therefore regards the introduction of supervisory limits for risk assets (of a bank and/or of a group) lent to connected parties. These limits differ according to the type of related party, with stricter levels for relations between banks and industry. The supervisory limits have been supplemented in the regulations with special approval procedures, together with specific recommendations concerning organisational structure and internal controls. 154

155 In compliance with the provisions of Title V, Chapter 5 of Circular No. 263 of 27 th December 2006, UBI Banca has adopted a specific regulation containing measures concerning risk assets and conflicts of interest with regard to connected parties, available on the corporate website of the Bank, which regulates procedures designed to preserve the integrity of decisionmaking processes concerning transactions with connected parties carried out by UBI Banca and by the banking and non-banking members of the Group that it controls including foreign subsidiaries, compatibly with the laws and regulations of the country in which these are registered. The regulations also require the bodies of Group companies with strategic supervisory responsibility to oversee (with support from the competent functions) the proper application of the provisions of the regulations governing transactions carried out by the respective companies. In order to achieve this, each of those bodies shall update, on at least a quarterly basis, a list of all the transactions concluded in the previous quarter, inclusive of those not subject to a prior opinion from the committee in accordance with the regulations. It shall specify the connected party, the type of transaction and its value and, if the transaction has not been subjected to prior examination by the committee, the reasons given for the exemption, the maximum limit set for the General Approvals and a detailed report on its periodic use. Also in order to allow the Parent to constantly comply with the consolidated limit on risk assets, the Supervisory Board oversees compliance of the Regulations with the principles recommended in the Supervisory Provisions and also observance, at consolidated level, of the procedural and substantive rules contained in them and it reports to shareholders in accordance with Art. 153 of the Consolidated Finance Law. To achieve this, bodies of other Group companies with responsibility for strategic supervision submit lists quarterly to the Supervisory Board, through the Management Board, of all transactions with connected parties concluded in the previous quarter. The UBI Banca Group has always been within the time limits laid down by supervisory regulations in all the consolidated quarterly reports to the Supervisory Authority in the first half of 2018 (in March and June) (Bank of Italy Circular No. 263 of 27 th December 2006 New Regulations for the Prudential Supervision of banks and subsequent amendments). * * * Further information is given on the Related and Connected Parties Committee in the Report on corporate governance and the ownership structure of UBI Banca Spa which may be consulted on the corporate website (corporate governance section, corporate documents), in which information is also given on internal policies on controls for risk assets and conflicts of interest relating to connected parties. 155

156 Other information Inspections On 26 th February 2016 the Central European Bank commenced inspections into the Parent, UBI Banca, on the subject of the business model and profitability. The inspections were concluded on 20 th May On the basis of the results of the final report received on 10 th January 2017, on 7 th February the Management Board and the Supervisory Board of UBI Banca examined the response to the recommendations made by the ECB together with the multi-year action plan designed to overcome the situations identified. On 10 th March 2017 the Bank sent the Authority the reply and action plan, followed by regular updates on the actions taken. At the date of this report all the actions were found to have been implemented, with a single activity remaining that is currently underway. It is due to be completed by the end of 2018 and relates to a new view of management reporting in terms of size. On 13 th May 2016, the ECB gave notice that it had begun inspections of the UBI Banca Group into INTERNAL AND EXTERNAL REPORTING QUALITY. The main focus of this inspection was on data aggregation processes, with particular regard to credit risk. The inspections were concluded on 28 th July The exit meeting took place on 23 rd November 2016, where the results of the inspection were discussed in depth. Areas for improvement were identified, particularly with regard to financial reporting (FINREP), common reporting (COREP), reporting large exposures, and the operational report on credit risk that is submitted to the government bodies. Details of further areas for improvement were also provided for which the Group has planned the relative action. On 12 th December 2016, the final report was received, in which the ECB officially noted the corrective actions requested of the UBI Banca Group in the areas cited above. On 11 th January 2017, the Parent provided a response in which it formalises the corrective actions undertaken. Following this detailed updates were sent to the Authorities on a regular basis: most recently on 24 th May 2018 they were notified of the completion of the aforementioned actions. In a letter of 17 th November 2016, the ECB announced the commencement of an inspection relating to CAPITAL POSITION CALCULATION ACCURACY. The inspections were concluded on 3 rd March 2017, while the official presentation of the preliminary results took place on the following 12 th April. These reported room for improvement on internal control processes and areas for study on credit risk mitigation techniques for use on financial instruments issued by the bank. On 3 rd July 2017 the ECB sent its final report together with the draft of a letter containing the supervisory authority s recommendations, which were discussed in the closing meeting on 7 th July. The final version of the aforementioned letter was received on 20 th July. The Bank replied to the ECB about this on the following 14 th August, followed by progress updates on the actions implemented sent on 30 th November 2017 and 6 th April The planned actions were completed in the first half of 2018, with the exception of a proposal for a minor improvement to the articles of association to be submitted to the first subsequent Extraordinary Shareholders' Meeting. With a letter dated 11 th January 2017, the European Central Bank gave notification of an inspection into internal models as a consequence of an application made to implement a model change in order to modify the Bank s internal models for credit risk for compliance with the new regulatory framework, with the introduction, amongst other things, of a capital requirement for default positions. The on-site investigations were commenced on 6 th February and concluded on 7 th April On 23 rd September the authority sent a draft assessment report, to be discussed in the closing meeting on 29 th September. The Bank submitted its observations on the contents of the report on 11 th October and received the final version of the assessment report from the ECB on the following 23 rd October Authorisation for the application of the new models was issued on 21 st March On 20 th April the Bank submitted an action plan to bring the 1 See in this respect the information given in the section Significant events in the first quarter of 2018 of this report. 156

157 new models into full compliance with the observations made by the ECB at the time when the Model Change was authorised; this action plan provides for the Bank to complete the required actions by the end of the third quarter of 2019, in preparation for the Supervisory Authority to start the next stage of its inspections. With a letter dated 26 th June 2017 the European Central Bank announced the start of an inspection on the subject of CREDIT AND COUNTERPARTY RISK MANAGEMENT AND RISK CONTROL SYSTEMS. The inspection, which regarded the Group s portfolio of performing and nonperforming loans to corporates (specialised lending, large corporate, corporate and small business, with the exclusion of retail businesses) (UBI Banca, UBI Leasing and UBI Factor), commenced on 18 th September 2017 and was concluded on 23 rd February The outcomes were presented during the exit meeting of 7 th May and the Bank sent its considerations to the ECB on 18 th May. On 25 th June the final outcome arrived from the Authority. The Bank is currently waiting for the recommendation letter containing the definitive findings. The additional provisions requested by the ECB in terms of additional adjustments are essentially accepted in the half-year accounts. An examination of the updating of some valuation methods is currently underway and will be completed by the end of this year. On 9 th October 2017 a Bank of Italy inspection commenced, following on from a communication sent by that authority on the preceding 22 nd September entitled THE INTRODUCTION ONTO THE MARKET AND THE REVISION OF RETAIL BANKING PRODUCTS. The inspection is into the stages of the production and distribution process and governance and control mechanisms. The inspection was concluded on 10 th November On 31 st May 2018 the Bank of Italy communicated the results in question which show the overall adequacy and reliability of the provisions adopted by the Group to regulate product governance, in relation to which some areas for improvement have been identified with reference to: increased oversight of organisation and control and greater structuring of corporate processes and procedures; overall strengthening of Product Governance, including the increased involvement of the governing bodies; an increased focus on monitoring systems (complaints and customer satisfaction), the analysis of the suitability of individual products to meet customer needs and the consequent enhancement of the current reporting system. The associated remedial actions were sent to the Bank of Italy on 29 th June, within the required time limit. On 6 th November 2017 the Bank of Italy commenced inspections designed to assess: (i) the state of implementation of corrective action requested following the latest inspections on ANTI- MONEY LAUNDERING, reported in detail in the 2016 annual report; (ii) the suitability of the organisational structure for producing accurate reports of overall average effective interest rates and preventing violations of USURY regulations. The inspection was concluded on 14 th February On 17 th April the Bank of Italy communicated the results of the inspections in question, giving a partially negative assessment, which included some allegations (with the commencement at the same time of administrative sanctioning procedures against the Bank, in accordance with Law No. 241 of 7 th August 1990). UBI Banca sent its objections to the penalty on 15 th June 2018; on the following 13 th July it sent its full reply and plans for corrective actions of a procedural and operational organisational nature with an indication of the time needed to complete them. As already announced in a letter dated 22 nd December 2017, on 19 th February 2018 the European Central Bank started an internal model investigation in the context of a TARGETED REVIEW OF INTERNAL MODELS for the retail mortgages model perimeter, which was concluded on 4 th May. At the date of this report UBI Banca is awaiting the outcomes of the inspection. As already anticipated by the European Central Bank in a communication dated 28 th March, on 7 th May 2018 it commenced an inspection into INTERNAL GOVERNANCE AND RISK MANAGEMENT with a focus on IT strategy and governance, management of the IT projects portfolio and on recent initiatives taken regarding the digital distribution channel and payment services in the light of regulatory developments. The on-site inspection was concluded on 27 th July On 14 th May 2018, as previously announced by the European Central Bank with a letter dated 6 th April, an investigation of the INTERNAL MODEL commenced, for the approval of the extension 157

158 of the perimeter of internal models relating to credit risk, consistent with the Group s roll-out plan. The on-site inspection was concluded on 3 rd August In a letter dated 26th June 2018, the European Central Bank announced an on-site inspection of CREDIT QUALITY REVIEW for the Retail and SME portfolios, to start in September. In a letter dated 12 th July 2018, the European Central Bank announced the start on the following 10 th September of an internal model investigation in the context of a TARGETED REVIEW OF INTERNAL MODELS in the perimeter of the Corporate - Other and Corporate - SME models. Finally, with a formal notification of dispute issued on 23 rd July 2018, the Bank of Italy announced the commencement of a sanctioning procedure against the Bank for violations subject to administrative fines. This procedure originates from the inspections carried out at the UBI Group by the European Central Bank during the period between 27 th June 2016 and 5 th August 2016, intended to assess the Group s ability to prevent and manage CONFLICTS OF INTEREST. The Bank will submit its objections within the time limits set in current regulations. * * * The aforementioned inspections, which take place in the form of on-site inspections by ECB or Bank of Italy inspectors at UBI Banca, are accompanied (as part of the Supervisory Examination Programme formulated by the supervisory authority) by many remote inspection activities conducted by means of exchanges and periodic meetings which have taken the form to-date of initiatives entitled Thematic Review, "Deep Dive" and "Quality Assessment". The thematic reviews currently in progress in the UBI Banca Group regard the following areas: - IFRS 9 (for the purpose of learning the latest developments in the process of adopting this new accounting standard): the review was concluded on 31 st March The preliminary results of the analysis were discussed with the ECB on 13 th July and on 22 nd August the supervisory authority delivered its relative draft letter, on which UBI Banca submitted its comments on the following 18 th September. On 12 th October 2017 the ECB sent its final letter containing the results of its review. The authority s findings were that management involvement in the project to implement the new standards was adequate, but that the formalisation of the methodological and implementation choices could be improved. On 15 th November the Bank provided the ECB with the required reply concerning the actions identified for the management of the recommendations made by the same authority, followed on 21 st December 2017 and 12 th January 2018 by two updates on setting out the corrective actions undertaken, to be completed by the end of 2018; - Profitability drivers Business Model and Profitability (examination of the business model as part of the SREP): the analysis started on 9 th March 2017; on 22 nd March a request was received to fill in a template designed, amongst other things, to provide assessments relating to the Thematic Review; this was submitted on 3 rd April. On 24 th October 2017 the ECB formulated requests which the Bank answered on 26 th October. On 19 th January 2018 a meeting was held with the authority in which preliminary observations on the activity conducted were discussed: the Bank is still waiting to receive the relative official results. * * * Details are given below of updates on specific issues. On the question of the proceedings opened by the Consob with a letter dated 30 th April 2014, in accordance with Art. 195 of the Consolidated Finance Law (concerning a possible infringement of Art. 149 of the Consolidated Finance Law relating to aspects of the disclosures made in corporate governance reports published from 2009 until 2013), on the conclusion of which in October 2015 the supervisory authority decided to impose administrative fines in an amount equal to or close in percentage terms to the minimum penalty allowed on those members of the Supervisory Board who were in office in the year 2009 or who were appointed to the board in subsequent years, but were members of the Management Board in 2009: UBI Banca, as jointly liable, and the individuals concerned, lodged separate appeals against the Consob decision. 158

159 With ruling No. 879/2017 of 17 th May 2017, published on 19 th June 2017, the Brescia Court of Appeal annulled the Consob fine, finding under a variety of aspects that no objective evidence existed of the infringement. More specifically, the judgment found, amongst other things, that: - the equal partnership principle, expressly provided for in the Articles of Association (until 10 th May 2014) is of a programme-based nature; - the Memorandum of Intent signed before UBI Banca was established, attached to the merger project and the merger deed, cannot be considered as one of those external agreements forbidden by the Articles of Association; - no inconsistencies exist between the Articles of Association and the Regulations of the Appointments Committee and the existence of circumstances which might lead the market to believe that those regulations were no longer current must be excluded; - the version of the Regulations of the Appointments Committee disclosed to the market in 2007 was sufficiently adequate to allow the procedures for the functioning of the committee to be understood. Therefore the members of the Supervisory Board cannot be considered to have failed in their duty to supervise with regard to the absence of relevant information pursuant to Art. 13 bis of the Consolidated Finance Law on Corporate Governance Reports from 2009 to 2013, because the market had already been informed of the rules contained in the Regulations mentioned). On 14 th November 2017 UBI Banca received notification of an appeal by the Consob against ruling No. 879/2017 before the Supreme Court of Cassation and it immediately filed its defence. The Consob immediately filed a counter appeal against the Bank s incidental appeal. On conclusion of the investigations commenced in 2014 by the Public Prosecutor s Office of Bergamo, in November 2016 a Notice of conclusion of the preliminary investigations Concomitant notification of investigation and right to defence articles 369, 369 bis and 415 bis of the Italian Code of Criminal Procedure was notified to current senior officers of the Bank in which the crimes of Hindrance of the Public Supervisory Authorities in the exercise of their duties (Art of the Italian Civil Code and Art. 170 bis of the Consolidated Finance Law) and Illicit influence on a shareholders meeting (article 2636 of the Italian Civil Code) in relation to the meeting held in April 2013, were alleged against various suspects on various grounds. In that notice, accusations were also made against additional persons for Fraud (article 640 of the Italian Criminal Code) and for Failure to comply with regulations regarding the duties of senior officers of banks (Art. 136 of the Consolidated Banking Law), in addition to some infringements of tax laws. Altogether this provision has been issued and notified to 39 persons, including 28 directors and senior managers, at the time, of the UBI Banca Group and senior officers of UBI Leasing. At the same time, the Public Prosecutor also issued and notified a notice of the conclusion of preliminary investigations to UBI Banca which alleges the existence of the administrative liability of the Institution within the meaning of Legislative Decree No. 231/2001, in relation to the crime of Hindrance of the Public Supervisory Authorities in the exercise of their duties (article 2638 of the Italian Civil Code) and illicit influence on a shareholders meeting (article 2636 of the Italian Civil Code). As part of the proceedings in question, on 1 st August 2017 UBI Banca received a notification of committal for trial and consequent notification of the date set for the preliminary hearing on 10 th November 2017 for the administrative violations provided for by article 25 ter, letter q) and letter s) of Legislative Decree No. 231/2001. The Public Prosecutor s Office of Bergamo asked in particular for committal for trial for the administrative violations mentioned in relation to the offences pursuant to articles 2636 and 2638 of the Italian Civil Code for which charges have been brought against, amongst others, some senior officers currently in office, who then received notification of the date set for the preliminary hearing which was 10 th November With regard to the preliminary hearing, the only civil claimant admitted by the judge was that presented by the Consob and solely for those charged with the crime pursuant to Art of the Italian Civil Code. UBI Banca was not summoned for civil liability. On 2 nd October 2017 the Public Prosecutor s Office of Bergamo made an official request for the case regarding the charges of fraud and failure to comply with provisions regarding the duties of senior officers of banks and infringements of tax laws, originally brought against (amongst others) some senior officers of UBI Leasing and which are now no longer included 159

160 in the application for committal to trial, to be closed with no further action taken. The judge presiding over the preliminary hearing responded to that application by ruling that the case should be closed on 4 th January With a ruling dated 27 th April 2018, the Examining Magistrate of Bergamo ordered the committal to trial of UBI Banca for administrative infringements pursuant to Art. 25 ter, letter q) and letter s) of Legislative Decree No. 231/2001 and also the committal to trial of some senior officers currently in office in relation to crimes pursuant to articles 2636 (undue influence over a shareholders meeting) and 2638 of the Italian Civil Code (hindrance of the supervisory authorities in the exercise of their duties). At the first trial hearing of 25 th July 2018 the case was adjourned until the following 17 th September. The Bank stresses that it has conducted itself properly and is confident that its compliance with the provisions of the law and with organisational regulations will be confirmed in the courts at all levels, as already clearly demonstrated by the decision reached on 19th June 2017 by the Court Appeal of Brescia which recognised UBI Banca s proper conduct and that of its senior officers in their relations with the supervisory authorities and with the market. In consideration of the nature of the matter, it is considered that it can have no repercussions on Group assets. Lastly, with reference to IW Bank, as already reported in the last financial report, on 3 rd December 2015 some past and current board members of IW Bank were notified of a search and seizure order which also contained a notice of investigation in their capacity as persons subject to investigations pursuant to articles 369 and 369 bis of the code of criminal procedure, issued against them by the Public Prosecutor s Office of Milan. The alleged offences are: criminal conspiracy (Criminal Code Art. 416), money-laundering and conspiracy to launder money (ibid, art. 110 and 648-bis), self-money laundering, conspiracy to commit self-money laundering (ibid, Art. 110 and ter), as well as the criminal tax offence (and relative conspiracy offence as per Criminal Code Art. 110) of fraudulent concealment of assets in relation to the payment of taxes (pursuant to Art. 11 of Legislative Decree No. 74/2000). Finally, criminal violation of customer due diligence obligations was alleged (pursuant to Art. 55 of Legislative Decree No. 231/2007). In relation to the proceedings in question, on 20 th July 2017 the Guardia di Finanza (finance police) notified the Bank that it was a suspect in investigations, with the closure at the same time of the preliminary investigations in which the Public Prosecutor alleged liability of the members of IW Bank s Board of Directors and its Board of Statutory Auditors in the period running from May 2008 to May 2014 for the offence of hindrance of the public supervisory authorities in the exercise of their duties (pursuant to Art. 2638) and in particular to have failed to make full reports to the Bank of Italy on alleged shortcomings regarding anti-money laundering controls and procedures. With regard to that same predicate offence of hindrance of the public supervisory authorities in the exercise of their duties, the public prosecutor s office charged IW Bank with administrative liability in accordance with Legislative Decree No. 231 of 2001 (pursuant to Art. 25 ter of the aforementioned decree). With sole reference to the alleged offence of hindrance of the public supervisory authorities in the exercise of their duties (pursuant to Art of the Italian Civil Code), on 26 th October 2017 the Office of the Judge for the preliminary hearing at the Court of Milan notified IW Bank, in its capacity as the entity responsible pursuant to legislative Decree No. 231 of 2001, of an order setting the date for the preliminary hearing for 12 th April 2018, following a request for committal to trial filed by the Public Prosecutor on 17 th October It is underlined that the more serious offences cited in the search warrant executed in December 2015 do not appear in both the notice of the closure of the preliminary investigations and in the subsequent application for committal to trial. During the preliminary hearing held on 12 th April 2018, following the application made by IW Bank and all the accused individuals for trial using the abbreviated procedure, the judge adjourned to the hearing of 26 th November 2018 for the presentation of the case by the Public Prosecutor, and also indicated the additional dates of 28 th and 30 th November and 12 th December 2018 for the presentation of the case for the defence. Reference is also made to the 2016 Consolidated Annual Report for additional facts and the affairs, already reported there, for which no developments have occurred in first half. 160

161 Tax aspects Various developments occurred regarding tax in the first half of Those considered important are reported below. Legislative Decree No. 60 of 18 th May 2018 implementing Directive 2016/2258/EU Legislative Decree No. 60 of 18 th May 2018 (implementing Directive 2016/2258/EU) provides that during tax inspections the tax authorities and Guardia di Finanza are to have access to documents, data and information collected by banks and other intermediaries while carrying out their proper customer due diligence obligations in order to prevent money laundering. The new provisions are applied to visits made by the tax authorities from 1 st January Council Directive (EU) No. 2018/822 (DAC 6) DAC 6 (the Directive on Administrative Cooperation) on the mandatory automatic exchange of information in the field of taxation was finally adopted by the Council of the European Union on 25 th May The DAC 6 Directive introduces a new obligation for intermediaries (including banks) to report information to the tax authorities if they are involved in designing, marketing, organising or managing the implementation of aggressive cross-border tax-planning arrangements. The schemes involved include those intended to circumvent reporting obligations under the CRS (Common Reporting Standard) regulations and the use of opaque offshore structures to shield the effective beneficiaries of specific income. Intermediaries that fail to report will be liable to penalties to be laid down by individual Member States when they implement DAC 6. DAC 6 must be implemented by all Member Countries by 31 st December 2019 and applied from 1 st July There is also a detail affecting, amongst others, banks: they will be subject to an obligation, by 31 st August 2020, to report cross-border arrangements existing since 25 th June The impacts of the introduction of this Directive for UBI Banca Group are currently being assessed. Ministry of the Economy and Finance Decree of 10 th January 2018 on IFRS 9 The Ministry of the Economy and Finance Decree of 10 th January 2018 containing coordination provisions for International Financial Reporting Standard 9 and the rules for determining the tax base for corporate income tax (IRES) and regional production tax (IRAP) was published in the Official Journal of the Italian Republic on 24 th January The provisions of the Decree are of great interest for UBI Banca Group companies, which are required to show the effects of the introduction of the new accounting standard in their financial statements and provide important information relating to the tax implications of loans and financial instruments. Ministry of the Economy and Finance Decree of 6 th April 2018 containing implementation provisions on Group VAT The Ministry of the Economy and Finance Decree of 6 th April 2018 containing implementation provisions on Group VAT was published in the Official Journal of the Italian Republic on 18 th April 2018 and it will become operational from 1 st January This decree regulates the following aspects of Group VAT: - constitution; - rights and obligations; - invoicing and certification of consideration paid; - registrations, returns and payments; - periodic communications and the annual return; - VAT rebates. In accordance with the decree, Group VAT will be assigned its own VAT number, which must be cited on all returns, communications or other documents regarding the Group. 161

162 Ministry of the Economy and Finance Decree of 14 th May 2018 containing guidelines for the application of the measures relating to transfer pricing and Provision of the Director of the Tax Authorities of 30 th May 2018 The Ministerial Decree of 14 th May 2018, published in the Official Journal of the Italian Republic on 23 rd May 2018, contains guidelines for the application of the measures relating to the recognition in Italy of a downward adjustment of Italian taxable income as a direct consequence of an upward adjustment (final and in line with the principle of free competition) performed by a State in application of the provisions relating to the assessment of transfer pricing. The implementation procedures have since been specified in the Provision of the Director of the Tax Authorities of 30 th May The measures in question are applicable only to adjustments made by the tax authorities of states with which Italy has exchange of information agreements in place. Decree Law No. 87 of 12 th July 2018 (the Dignity Decree) Decree Law No. 87 (the Dignity Decree), published in the Official Journal of the Italian Republic on 12 th July 2018, contains measures mainly relating to employment. Among the tax changes introduced by the Decree attention should be drawn to the abolition of the split payment regime for invoices issued by, amongst others, professionals. The parliamentary procedure to convert it into law is in progress at the time of publishing this report. Mention is made of the following administrative practices documents issued in 2018: * * * Circular No. 1/E/2018: the tax authorities commented on changes concerning VAT allowances following changes introduced by Decree Law No. 50 of 24 th April 2017; Circular No. 3/E/2018: the tax authorities illustrated the main characteristics of the regime for long-term individual savings schemes ; Circular No. 5/E/2018: this document analyses the main problems concerning the tax regime for result and welfare bonuses; Circular No. 8/E/2018: the tax authorities provided clarification on means of payment considered appropriate for the deductibility of fuel costs; Circular No. 9/E/2018: the tax authorities provided further details of the VAT regime for split payments to which UBI Banca is subject; Resolution No. 26/E/2018: the tax authorities examine the consequences for the VAT regime for services provided by depository banks resulting from the implementation in Italy of Directive 2014/91/EU; Resolution No. 54/E/2018: the tax authorities provide instructions on submission procedures for applications for the exclusion or inclusion of taxable persons in a VAT Group; Answer to opinion request No /2017: the tax authorities examine some specific problems relating to the VAT regime for investment advisory services. 162

163 Outlook for consolidated operations Under current market conditions, the gradual growth in net interest income is expected to continue in the second half of The prudent management of the government securities portfolio, oriented towards reducing this exposure is confirmed. Net fee and commission income is forecast to remain resilient. Attentive monitoring of costs will continue. In the third quarter of 2018 an assessment will be made to verify the premises for signing a new trade union agreement which will allow further redundancies in line with Business Plan forecasts. The trend for the reduction in loan losses compared with 2017 is forecast to continue. Finally, in addition to the securitisation (backed by a government guarantee) of a portfolio of bad loans just concluded, a new disposal of bad loans (without securitisation) is planned for the end of 2018/beginning of 2019, which will help to achieve a ratio of gross non-performing loans below 10%, ahead of schedule compared with previous disclosures. Both operations are consistent with the sales scenarios considered on first-time adoption of IFRS 9. Bergamo, 3 rd August 2018 THE MANAGEMENT BOARD 163

164 164

165 CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED 30 TH JUNE 2018

166

167 MANDATORY INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED 30 TH JUNE 2018

168 Consolidated Balance Sheet Consolidated balance sheet Figures in thousands of euro restated ASSETS 10. Cash and cash equivalents 616, , Financial assets measured at fair value through profit or loss 1,488,445 1,972,209 a) financial assets held for trading 453, ,153 b) financial assets designated as at fair value 10,085 11,271 c) other financial assets mandatorily measured at fair value 1,025,151 1,073, Financial assets measured at fair value through other comprehensive income 11,527,974 12,369, Financial assets measured at amortised cost 103,886, ,648,875 a) loans to banks 9,513,921 7,821,132 b) loans to customers 94,372,378 94,827, Hedging derivatives 59, , Fair value change in hedged financial assets (+/-) 33,826-2, Equity investments 240, , Technical reserves of reinsurers Property, plant and equipment 1,799,295 1,811, Intangible assets 1,711,908 1,728,328 of which: goodwill 1,465,260 1,465, Tax assets 4,122,268 4,170,387 a) current 1,455,973 1,497,551 b) deferred 2,666,295 2,672,836 - of which pursuant to Law No. 214/2011 1,795,497 1,817, Non-current assets and disposal groups held for sale 1, Other assets 1,415,721 1,451,059 TOTAL ASSETS 126,904, ,376,

169 Consolidated Balance Sheet Figures in thousands of euro restated LIABILITIES AND EQUITY 10. Financial liabilities measured at amortised cost 111,617, ,182,776 a) due to banks 16,607,300 16,733,006 b) due to customers 70,582,753 68,434,827 c) debt securities issued 24,427,302 26,014, Financial liabilities held for trading 386, , Financial liabilities designated as at fair value 75,488 43, Hedging derivatives 102, , Fair value change in hedged financial liabilities (+/-) 54, Tax liabilities 208, ,397 a) current 54,853 68,565 b) deferred 153, , Other liabilities 2,654,081 2,694, Provision for post-employment benefits 328, , Provisions for risks and charges: 565, ,609 a) commitments and guarantees granted 73,964 47,344 b) pension and similar obligations 130, ,213 c) other provisions for risks and charges 360, , Technical reserves 1,879,072 1,780, Valuation reserves -285,315-54, Reserves 2,921,489 3,149, Share premiums 3,294,604 3,306, Share capital 2,843,177 2,843, Treasury shares (-) -17,929-9, Minority interests (+/-) 67,336 79, Profit for the period (+/-) 208, ,557 TOTAL LIABILITIES AND EQUITY 126,904, ,376,

170 Consolidated Income Statement Consolidated income statement Figures in thousands of euro 1H H 2017 restated 10. Interest and similar income 1,118,476 1,056,171 of which: interest income calculated with effective interest method 1,027, Interest and similar expense (180,342) (302,707) 30. Net interest income 938, , Fee and commission income 909, , Fee and commission expense (101,082) (99,899) 60. Net fee and commission income 808, , Dividends and similar income 9,811 10, Net trading income 34,180 42, Net hedging loss (4,227) (1,368) 100. Income from disposal or repurchase of: 40, ,407 a) financial assets measured at amortised cost (14,867) 28,609 b) financial assets measured at fair value through other comprehensive income 59,179 81,628 c) financial liabilities (4,126) (5,830) 110. Net income (loss) from other financial assets and liabilities measured at fair value through profit or loss (15,308) 10,859 a) financial assets and liabilities designated as at fair value (531) 10,859 b) other financial assets mandatorily measured at fair value (14,777) Gross income 1,811,586 1,682, Net impairment losses for credit risk relating to: (266,340) (401,947) a) financial assets measured at amortised cost (259,730) (282,628) b) financial assets measured at fair value through other comprehensive income (6,610) (119,319) 140. Losses from contractual modifications without derecognition (22,072) Net financial income 1,523,174 1,280, Net insurance premiums 257,661 57, Other income/expenses of insurance operations (261,533) (68,159) 180. Net income from banking and insurance operations 1,519,302 1,270, Administrative expenses (1,268,525) (1,226,784) a) staff costs (749,859) (719,177) b) other administrative expenses (518,666) (507,607) 200. Net provisions for risks and charges (2,573) 15,162 a) commitments and guarantees granted 14,540 20,481 b) other net provisions (17,113) (5,319) 210. Depreciation and net impairment losses on property, plant and equipment (42,072) (39,726) 220. Amortisation and net impairment losses on intangible assets (37,866) (33,237) 230. Other net operating income/expense 159, , Operating expenses (1,191,992) (1,114,854) 250. Profits of equity investments 9,013 10, Negative consolidation difference - 612, Profits on disposal of investments Pre-tax profit from continuing operations 337, , Taxes on income for the period from continuing operations (114,681) (70,997) 310. Post-tax profit from continuing operations 222, , Profit for the period 222, , Profit for the period attributable to minority interests (13,738) (12,267) 350. Profit for the period attributable to the shareholders of the Parent 208, ,045 Annualised basic earnings per share Annualised diluted earnings per share

171 Consolidated statement of comprehensive income Consolidated statement of comprehensive income Figures in thousands of euro 1H H 2017 restated 10. PROFIT (LOSS) FOR THE PERIOD 222, ,312 Other comprehensive income net of taxes without transfer to the income statement 20. Equity securities designated as at fair value through other comprehensive income (1,288) 50. Property, plant and equipment (736) 70. Defined benefit plans 2,210 9, Shares of valuation reserves of equity accounted investees (77) Other comprehensive income net of taxes with transfer to the income statement 120. Cash flow hedges (190) (49) 140. Financial assets (other than equity securities) measured at fair value through other comprehensive income (249,176) (28,521) 160. Share of valuation reserves of equity-accounted investees (1,468) 5, Total other comprehensive income net of taxes (250,725) (13,401) 180. COMPREHENSIVE INCOME (Item ) (28,120) 694, CONSOLIDATED COMPREHENSIVE LOSS ATTRIBUTABLE TO MINORITY INTERESTS 13,579 12, CONSOLIDATED COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT (41,699) 682,

172 Statement of changes in consolidated equity for the period ended 30 th June 2018 Figures in thousands of euro Balances as at Restatement of opening balances Balances as at Allocation of prior year profit Reserves Dividends and other uses Changes in reserves New share issues Repurchase of treasury shares Extraordinary distribution of dividends Changes January - June 2018 Equity transactions Change in equity instruments Derivatives on treasury shares Stock options Changes in equity stakes Consolidated comprehensive income Equity 30th June 2018 attributable to the shareholder s of the Parent attributabl e to minority interests Share capital: 2,859,257-2,859, ,859,252 2,843,177 16,075 a) ordinary shares 2,859,257-2,859, ,859,252 2,843,177 16,075 b) other shares Share premiums 3,323,321-3,323,321-12, ,311,292 3,294,604 16,688 Reserves 3,229, ,855 2,363, , ,341 1, ,942,529 2,921,489 21,040 a) retained earnings 1,329, , , , ,341 1, ,041, ,398 80,087 b) other 1,900,343-1,900, ,901,044 1,960,091-59,047 Valuation reserves -114,866 80,076-34, , , , Equity instruments Treasury shares -9, , , ,929-17,929 - Profit for the period 716, , , , , ,867 13,738 Equity 10,004, ,779 9,218, ,341 1, , ,120 9,032,229 8,964,893 67,336 Equity attributable to the shareholders of the Parent 9,925, ,779 9,138, ,415 1, , ,699 8,964,893 X X Equity attributable to minority interests 79,688-79, , ,579 67,336 X X 172

173 Statement of changes in consolidated equity for the period ended 30 th June 2017 Statement of changes in consolidated equity for the period ended 30th June 2017 Figures in thousands of euro Balances as at Restatement of opening balances Balances as at Allocation of prior year profit Reserves Dividends and other uses Changes in reserves New share issues Repurchase of treasury shares Extraordinary distribution of dividends Changes January - June 2017 Equity transactions Change in equity instruments Derivatives on treasury shares Stock options Changes in equity stakes Consolidated comprehensive income Equity 30th June 2017 attributable to the attributable shareholders of to minority the Parent interests Share capital: 2,451,729-2,451, , ,832-2,859,145 2,840,335 18,810 a) ordinary shares 2,451,729-2,451, , ,832-2,859,145 2,840,335 18,810 b) other shares Share premiums 3,817,846-3,817, , , ,730-3,323,314 3,306,627 16,687 Reserves 3,720,909-3,720, , ,387 2,185-7, ,373-3,230,050 3,210,258 19,792 a) retained earnings 1,810,697-1,810, , , ,329,642 1,250,070 79,572 b) other 1,910,212-1,910, ,185-7, ,373-1,900,408 1,960,188-59,780 Valuation reserves -73, , ,401-87,234-87,238 4 Equity instruments Treasury shares -9, , ,869-9,869 - Loss for the period -845, , , , , ,045 12,267 Equity 9,061,605-9,061, ,387 2, , ,911 10,023,718 9,956,158 67,560 Equity attributable to the shareholders of the Parent 8,989,578-8,989, ,163 2, , , ,557 9,956,158 X X Equity attributable to non-controlling interests 72,027-72, , ,403 12,354 67,560 X X 173

174 Consolidated Statement of Cash Flows (indirect method) Figures in thousands of euro 1H H 2017 restated A. OPERATING ACTIVITIES 1. Ordinary activities 600, ,275 - profit for the period (+/-) 222, ,312 - gains/losses on financial assets held for trading and on other assets/liabilities measured at fair value through profit or loss (+/-) -8,673-53,707 - gains/losses on hedging activities (-/+) 4,227 1,368 - net impairment losses for credit risk (+/-) 266, ,433 - depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (+ 79,938 72,963 - net provisions for risks and charges and other expense/income (+/-) 2,573 5,352 - net premiums not received (-) -1,025-57,914 - other insurance income/expense not received (-/+) 5,180 68,159 - outstanding taxes, duties and tax credits (+/-) 29,738-87,223 - net impairment losses on discontinued operations net of tax (-/+) other adjustments (+/-) , Net cash flows from/used by financial assets -1,198, ,656 - financial assets held for trading 461, ,445 - financial assets designated as at fair value ,140 - other financial assets mandatorily measured at fair value 37, financial assets measured at fair value through other comprehensive income 531,046 2,117,259 - financial assets measured at amortised cost -2,334,912-1,782,751 - other assets 104, , Net cash flows from/used by financial liabilities 590, ,996 - financial liabilities measured at amortised cost 434,579-2,182,751 - financial liabilities held for trading -24, ,971 - financial liabilities designated as at fair value 32, other liabilities 147,880 2,154,726 Net cash flows from/used in operating activities -7, ,935 B. INVESTING ACTIVITIES 1. Cash flows from 12,504 10,575 - disposals of equity investments dividends received on equity investments 9,811 10,473 - disposals of property, plant and equipment 2, disposals of intangible assets disposals of subsidiaries and lines of business Cash flows used in -40,342 1,409,748 - purchases of equity investments purchases of property, plant and equipment -18,765-14,454 - purchases of intangible assets -21,577-11,122 - purchases of subsidiaries and lines of business - 1,435,324 Net cash flows from/used in investing activities -27,838 1,420,323 C. FINANCING ACTIVITIES - issues/purchases of treasury shares -8, ,863 - issues/purchases of equity instruments distribution of dividends and other uses -151, ,387 - sale/purchase of minority interests - - Net cash flows from/used in financing activities -159, ,476 NET CASH GENERATED/USED DURING THE PERIOD -195,210 2,466,734 Reconciliation Figures in thousands of euro 1H H 2017 restated Cash and cash equivalents at beginning of period 811, ,357 Total net cash flows generated/absorbed during the period -195,210 2,466,734 Cash and cash equivalents: effect of changes in exchange rates - - Cash and cash equivalents at the end of the period/year 616,368 2,986,

175 EXPLANATORY NOTES

176 Accounting policies Basis of preparation The Interim financial report as at and for the period ended 30 th June 2018 of the UBI Banca Group 1, approved by the Management Board on 3 rd August 2018 which authorised its publication in compliance, amongst other things, with IAS 10, comprises the interim management report on consolidated operations and the condensed interim consolidated financial statements. It has been prepared in compliance with article 154 ter of Legislative Decree No. 58/1998, with the IFRS international accounting standards issued by the International Accounting Standards Board (IASB) and with the relative interpretations of the International Financial Reporting Interpretations Committee (IFRIC) as endorsed by the European Commission and in force on 30 th June 2018 to which no exceptions have been made. Those standards, implemented in Italian law by Legislative Decree No. 38/2005, which took advantage of the option allowed under EC Regulation 1606/2002, are applied on the basis of events occurring that are disciplined by them from the date on which their application becomes compulsory, unless specified otherwise. More specifically, the condensed interim consolidated financial statements include the following: the Balance Sheet, Income Statement, Statement of Comprehensive Income, Statements of Changes in Equity, Statement of Cash Flows and the Explanatory Notes. They have been prepared in compliance with IAS 34 which regulates interim financial reporting and in view of the option allowed by the standard just mentioned, they have been presented in condensed form and therefore they do not provide all the full information required for annual financial statements and must be read in conjunction with the annual report prepared for the year ended 31 st December the Parent, UBI Banca and the companies comprised within the scope of the consolidation 2 and they have been prepared by using the positions of the single companies included within the consolidation, corresponding to their individual interim financial statements examined and approved by their respective governing bodies and appropriately modified and reclassified, where necessary, for compliance with the accounting policies adopted by the Group. The condensed interim consolidated financial statements contain a statement by the Chief Executive Officer and the Senior Officer Responsible pursuant to Art. 154 bis of Legislative Decree No. 58/1998 and they have been subjected to a limited audit by the independent auditors Deloitte & Touche Spa. * * * These condensed interim consolidated financial statements as at and for the period ended 30 th June 2018 have been clearly stated and give a true and fair view of the capital and financial position, the result for the period, the changes in equity and the cash flows generated. The condensed interim consolidated financial statements result from the application of IFRS and measurement criteria, adopted on the basis of a going concern assumption and in compliance with the principles of accrual accounting, the relevance of the information and the predominance of substance over form. Those standards and criteria were updated as at 1 st January 2018, with respect to those applied until 31 st December , due to the entry into force of the IFRS 9 financial reporting 1 The business of the Group is not significantly subject to seasonal and/or cyclical factors. 2 Details are given in the section The scope of the consolidation, in which changes that occurred during the period are also given. 3 Reference is made in this respect to the Main items of the financial statements illustrated in the subsequent sub-section Other aspects

177 standard Financial instruments and IFRS 15 Revenue from contracts with customers. Reference is made to the section Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this report for a discussion and details of the relative impacts. Where it is impossible to measure items in the financial statements with precision, the application of the aforementioned standards involves the use of estimates and assumptions which may have a significant effect on the amounts recognised in the balance sheet and in the income statement. The use of reasonable estimates forms an essential part of the preparation of financial statements and we have listed here those items in the financial statements in which the use of estimates and assumptions is most significant: - determination of expected losses on loans and receivables, securities, guarantees issued and commitments; - measurement of financial assets not listed on active markets; - measurement of indefinite useful life intangible assets and equity investments; - quantification of provisions for risks and charges; - quantification of deferred taxes; - definition of the depreciation and amortisation charges for property, plant and equipment and intangible assets with finite useful lives; - measurement of post-employment benefits: - measurement of technical reserves. With specific reference to the determination of expected losses on loans and receivables, securities, guarantees issued and commitments, it is underlined that with the entry into force of IFRS 9 that determination is based on forward-looking information and particularly on developments in macroeconomic scenarios employed in the calculation of impairment losses. In this respect reference is made to the detailed information given in the section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 of this interim financial report. In compliance with the provisions of IAS 34, income taxes are recognised on the basis of the best estimate of the weighted average rate expected for the full year. An estimate may be adjusted following changes in the circumstances on which it was based or if new information is acquired or yet again on the basis of greater experience. A change in an estimate is applied prospectively and it therefore generates an impact on the income statement in the year in which it is made and, if it is the case, also in future years. In this respect we report that no changes were made in the first half to the criteria already employed for estimates in the preparation of the financial statements as at and for the year ended 31 st December 2017, except for that which mainly regards the calculation of expected losses on financial instruments which, in accordance with IFRS 9, are subject to provisions on impairment. In this respect reference is made for details to the information given in the section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 of this interim financial report. The information contained in this report is expressed, unless otherwise indicated, in euro as the accounting currency. The mandatory financial statements and the explanatory notes have been prepared in thousands of euro 4 and comply with those defined in Bank of Italy Circular No. 262/ and in addition to the financial statements as at 30 th June 2018 they provide the following comparative information 6 : - Consolidated balance sheet: 31 st December 2017; - Income statement: for the period ended 30 th June 2017; - Statement of comprehensive income: for the period ended 30 th June 2017; - Statement of changes in equity: for the period ended 30 th June 2017; 4 The relative rounding of the figures has been performed on the basis of Bank of Italy instructions. 5 The balance sheet lists assets and liabilities in order of decreasing liquidity and the income statement recognises expenses according to their nature. 6 See also in this respect the information given in the sub-section Notes to the reclassified consolidated financial statements in the section Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules in the Interim Consolidated Management Report

178 - Statement of cash flows (indirect method) 7 : for the period ended 30 th June As already occurred for the interim consolidated financial report as at and for the year ended 31 st March 2018, the statements in question are therefore different from those used for the consolidated financial statements of the UBI Banca Group as at and for the period ended 31 st December 2017, prepared in accordance with the provisions of the 4 th update of Bank of Italy Circular No. 262/2005. In accordance with the international reporting standard IAS 1 Presentation of Financial Statements, comparative balance sheet and income statement figures have therefore been reclassified into the new items of the financial statements in accordance with the methodology described later in this document. It is also underlined that the balance sheet and income statement figures for the first half of 2018 are not fully comparable with those for the comparative periods because the latter had been calculated by applying international reporting standard IAS 39, which was in force during the relative reporting periods. In fact in accordance with par of IFRS 9, there is no obligation to restate figures for comparative purposes. In order to provide full information, a reconciliation of the balance sheet figures pursuant to IAS 39 published in the Consolidated Financial Statements of the UBI Group as at 31 st December 2017 with those calculated as at 1 st January 2018 in application of the provisions of IFRS 9, in terms of classification, measurement and impairment is provided in the section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this financial report. Balance Sheet The restatement of the asset items of the balance sheet published in the Consolidated Financial Statements as at 31 st December 2017 on the basis of the new presentation introduced by the 5 th update of Bank of Italy Circular No. 262/2005 was carried out on the same accounting figures pursuant to IAS 39, in compliance with the business models identified by the Group in applying IFRS 9. The provisions of the new standard have therefore been observed in carrying out that restatement in terms of the classification of financial instruments, with consideration also taken of the results of the SPPI test which constitutes an integral part of the classification process. The restatements carried out are presented below. 7 For the purposes of determining cash flows generated and used by financial assets and liabilities, the balance sheet figures as at 30 th June 2018, inclusive of the impacts the application of the standard IFRS 9, are compared with those as at 1 st January The section entitled Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this publication may be consulted for details of the reconciliation of figures as at 31 st December 2017 and those resulting from first-time adoption of the new standards as at 1 st January

179 IAS 39 IFRS 9 Financial statements pursuant to Bank of Italy Circular No. 262/2005, 4 th update 20. Financial assets held for trading 30. Financial assets designated at fair value 40. Available-for-sale financial assets Financial statements pursuant to Bank of Italy Circular No. 262/2005, 5 th update 20a. Financial assets measured at fair value through profit or loss: financial assets held for trading 20c. Financial assets measured at fair value through profit or loss: other financial assets mandatorily measured at fair value 20b. Financial assets measured at fair value through profit or loss: financial assets designated as at fair value 20c. Financial assets measured at fair value through profit or loss: other financial assets mandatorily measured at fair value 20c. Financial assets measured at fair value through profit or loss: other financial assets mandatorily measured at fair value 30. Financial assets measured at fair value through other comprehensive income 40b. Financial assets measured at amortised cost: loans and advances to customers 50. Held-to-maturity investments 60. Loans and advances to banks 70. Loans and advances to customers 30. Financial assets measured at fair value through other comprehensive income 40b. Financial assets measured at amortised cost: loans and advances to customers 20c. Financial assets measured at fair value through profit or loss: other financial assets mandatorily measured at fair value 40a. Financial assets measured at amortised cost: loans and advances to banks 20c. Financial assets measured at fair value through profit or loss: other financial assets mandatorily measured at fair value 40b. Financial assets measured at amortised cost: loans and advances to customers The restatement of the liability and equity items of the balance sheet published in the Consolidated Balance Sheet as at 31 st December 2017 on the basis of the new presentation introduced by the 5 th update of Bank of Italy Circular No. 262/2005 was carried out in continuity with the amounts pursuant to IAS 39, according to the following procedures with regard to the main items of the financial statements affected: IAS 39 IFRS 9 Financial statements pursuant to Bank of Italy Circular No. 262/2005, 4 th update 10. Due to banks 20. Due to customers 30. Debt securities issued 100. Other liabilities (relating to loan commitments and financial guarantees granted) 140. Valuation reserves (relating to available-for-sale financial assets) Financial statements pursuant to Bank of Italy Circular No. 262/2005, 5 th update 10a. Financial liabilities measured at amortised cost: due to banks 10b. Financial liabilities measured at amortised cost: due to customers 10c. Financial liabilities measured at amortised cost: debt securities issued 100a. Provisions for risks and charges: commitments and guarantees granted 150. Reserves

180 Income statement The restatement of the income statement items for the comparative periods for the new presentation was carried out according to the procedures presented in the table that follows with regard to the items most affected by the new accounting standard IFRS 9: IAS 39 IFRS 9 Financial statements pursuant to Bank of Italy Circular No. 262/2005, 4 th update 100a. Income (loss) from disposal or repurchase of: loans and receivables Financial statements pursuant to Bank of Italy Circular No. 262/2005, 5 th update 100a. Income (loss) from disposal or repurchase of: financial assets measured at amortised cost 100b. Income (loss) from disposal or repurchase of: available-for-sale financial assets 100c. Income (loss) on the disposal or repurchase of: held-to-maturity investments 100b. Income (loss) from disposal or repurchase of: financial assets measured at fair value through other comprehensive income 100a. Income (chipped Chichester it loss) from disposal or repurchase of: financial assets measured at amortised cost 100d. Income (loss) from disposal or repurchase of: financial liabilities 110. Net profit (loss) on financial assets and liabilities at fair value 130a. Net impairment losses on: loans and receivables 100c. Income (loss) from disposal or repurchase of: financial liabilities 110a. Net income (loss) from other financial assets and liabilities measured at fair value through profit or loss: financial assets and liabilities designated as at fair value 130a. Net impairment losses for credit risk relating to: financial assets measured at amortised cost 130b. Net impairment losses on: available-for-sale financial assets 130b. Net impairment losses for credit risk relating to: financial assets measured at fair value through other comprehensive income 130d. Net impairment losses on: other financial transactions 200a. Net provisions for risks and charges: commitments and guarantees granted It is also reported that the income statement figures for the comparative period ended 30 th June 2017 are not comparable with those for the period ended 30 th June 2018 also due to a change in the scope of consolidation, because the UBI Group did not include the contribution of the New Banks, consolidated as at 1 st April 2017 in the first three months of the comparison period. * * * The minimum information required under paragraphs 15 B and 16 A of IAS 34 relating to dividends paid and to trends for loan provisions is given in the interim consolidated management report. With regard, on the other hand, to the provisions of IAS 10, concerning events occurring subsequent to the balance sheet date of the condensed interim consolidated financial statements, subsequent to 30 th June 2018, the balance sheet date, and until 3 rd August 2018, the date on which the Interim Financial Report was approved by the Management Board, no events occurred to make adjustments to the figures presented in the report necessary. Furthermore, account was also taken in the preparation of this half-year financial report of the following: - provisions introduced with documents issued jointly by the supervisory authorities 8 ; - ESMA and Consob documents which refer to the application of some IFRS provisions. 8 In detail, the joint Bank of Italy/Consob (securities market authority)/isvap (insurance authority) Document No. 4 of 3 rd March See the subsequent sub-section Other aspects in relation to impairment of goodwill

181 Regulatory developments The most important aspects of changes in international accounting standards are given below with the periods from which they run. INTERNATIONAL ACCOUNTING STANDARDS IN FORCE FROM 2018 Reference is made to the section Transition to the new financial reporting standards IFRS 9 and IFRS 15 in this report for a discussion and details of the relative impacts of the introduction from 1 st January 2018 of the IFRS 9 financial reporting standard Financial instruments and IFRS 15 Revenue from contracts with customers. In addition we report that the European Commission published the following Regulations on 9 th November 2017: - Regulation (EU) No. 2017/1987 which endorses amendments to IFRS 15 Revenue from contracts with customers Clarifications of IFRS 15. The amendments are designed to clarify certain requirements and to further facilitate the transition for companies that apply the standard 9 ; - Regulation (EU) No. 2017/1988 which endorses amendments to IFRS 4 Joint application of IFRS 9 Financial Instruments and IFRS 4 Insurance Contracts 10. The amendments to IFRS 4 designed to solve the problems of the temporary accounting consequences of the differences between the date of entry into force of IFRS 9 and the date of entry into force of the new accounting standard on insurance contracts (IFRS 17) which will replace IFRS 4 from 1 st January More specifically financial groups which constitute financial conglomerates 11 may opt for none of its entities operating in the insurance sector to apply IFRS 9 to their consolidated financial statements (termed a deferral approach ) for financial years commencing prior to 1 st January 2021, if the following conditions are met: a) no financial instruments are transferred after 29 th November 2017 between the insurance sector and other sectors of the financial conglomerate other than financial instruments measured at fair value for which the changes in fair value are recognised through profit or loss for the year by both sectors involved in the transfers; b) the financial conglomerate discloses those insurance entities in the Group that apply IAS 39 in its financial statements; c) the additional disclosures requested by IFRS 7 are provided separately for the insurance sector that applies IAS 39 and for the rest of the group which applies IFRS 9. The option in question is also granted to companies whose activities are predominantly connected with insurance activities. For companies that issue insurance contracts (required to apply IFRS 9), the Regulation allows resort to an overlay approach, when these companies adopt IFRS 9 for the first time. That option allows the amount needed for the income statement result to be the same as it would have been had the company applied the provisions of IAS 39 in place of IFRS 9 to be reclassified from the income statement to the statement of OCI (i.e. in equity). Only those financial assets can be designated for the aforementioned approach which: 9 Compulsory application from 1 st January Compulsory application from 1 st January In accordance with Art. 2 of Directive 2002/87/EC, a group or sub-group of a group constitutes a financial conglomerate when it satisfies the following conditions: a) a regulated entity is at the head of the group or at least one of the subsidiaries in the group is a regulated entity; b) where there is a regulated entity at the head of the group, this is either a parent undertaking of another entity in the financial sector, an entity which holds a participation in another entity in the financial sector, or an entity linked with an entity in the financial sector by a relationship which involves management on a unified basis pursuant to a contract concluded with that undertaking or provisions in the articles of association or in which the administrative, management or supervisory bodies consist for the major part of the same persons; c) where there is no regulated entity at the head of the group, the group's activities mainly occur in the financial sector; d) at least one of the entities in the group is within the insurance sector and at least one is within the banking or investment services sector; e) the consolidated and/or aggregated activities of the entities in the group within the insurance sector and the consolidated and/or aggregated activities of the entities within the banking and investment services sector are both significant

182 - are measured at fair value and recognised through profit or loss, but would not have been measured in that manner in accordance with IAS 39; - are not held in relation to activities with no connection (e.g. banking activities) with contracts that fall within the scope of application of IFRS 4. Finally, the Regulation introduces a temporary exemption from some of the provisions of IAS 28. In other words, controlling entities that apply IFRS 9 are permitted for the financial years that commence prior to 1 st January 2021 to maintain the accounting standards applied by associates (and joint ventures) for the purposes of accounting according to the equity method, if those companies do not apply IFRS 9 making use of the deferral approach. Companies shall apply the amendments to IFRS 4 from the date of the start of the first financial year beginning 1 st January 2018 or on a subsequent date. Nevertheless, while the conditions mentioned above still apply, financial conglomerates can choose to apply the amendments to IFRS 4 from the date of the start of the first financial year beginning 1 st January 2018 or on a subsequent date. Having stated the above, it is underlined that, as already reported in the section Transition to the new financial reporting standards IFRS 9 and IFRS 15, because the Group does not constitute a financial conglomerate in accordance with IFRS 4 Insurance contracts rules, the insurance companies that are subsidiaries of the Parent, UBI Banca, and which are therefore consolidated on a line-by-line basis, have not opted to apply an overlay approach in the preparation of their financial statements. On 8 th February 2018, Regulation (EU) No. 2018/182 was published with which the European Commission endorsed the Annual improvements to IFRS Standards Cycle with some marginal amendments to the following reporting standards: IFRS 1 First-time adoption of international financial reporting standards, IFRS 12 Disclosure of interests in other entities 12 and IAS 28 Investments in associates and Joint ventures. On 27 th February Regulation (EU) No. 2018/289 was published with which the European Commission endorsed an amendment to IFRS 2 Classification and Measurement of Sharebased Payment Transactions, which makes marginal amendments to the reporting standard IFRS 2 Share-based payments. On 15 th March 2018 Regulation (EU) No. 2018/400 was published with which the European Commission endorsed an amendment to IAS 40 Transfers of Investment Property, which makes marginal amendments to the reporting standard IAS 40 Investment Property. On 3 rd April Regulation (EU) No. 2018/519 was published with which the European Commission endorsed IFRIC 22 Foreign Currency Transactions and Advance Consideration, an interpretation designed to clarify procedures for establishing the date of transactions in order to determine the exchange rate to be applied to transactions that involve the payment or receipt of an advance in foreign currency. The introduction of amendments pursuant to EU Regulations No. 2018/182, No. 2018/289, No. 2018/400 and No. 2018/519 did not lead to any significant impacts for the UBI Banca Group. INTERNATIONAL ACCOUNTING STANDARDS IN FORCE AFTER 2018 As already reported in the information contained in the notes to the financial statements in the 2017 Consolidated Annual Report, on 9 th November 2017 Regulation (EU) No. 2017/1986 was published with which the European Commission endorsed IFRS 16 Leases 13, designed to improve the financial reporting of lease contracts. The reporting standard will supersede IAS 17 Leases 14 from 1 st January Specifically, the new standard introduces new rules for accounting lease contracts for the lessees (i.e. the users of the goods under contract in the lease). These rules are based on the 12 These amendments were already applicable for financial statements for the year ended 31 st December Published by the IASB on 13 th January Together with the interpretations IFRIC 4 Determining whether an agreement contains a lease, SIC 15 Operating leases Incentives and SIC 27 Evaluating the substance of transactions involving the legal form of a lease

183 definition of lease as a contract in which the right to control the use of an identified asset is granted for a specified period of time, in exchange for payment. As a result of this definition, the lessee must recognise the right-of-use of the underlying asset as an asset on the balance sheet, and that asset will subsequently be subject to depreciation; the lessee must then also recognise the present value of lease payments (to be made over the full lifetime of the contract) as a liability. The Group has conducted a preliminary analysis of the key new elements introduced by this accounting standard and, at present it is carrying out a more detailed analysis on contracts stipulated in which the Group acts as lessor or lessee, i.e. on contracts that can be considered leases according to IFRS 16. Once this analysis is complete, the Group will move on to the design and implementation stages, which are to be completed by the end of 2018, in order to then adopt the new standard as from Updates on the progress of this project activity will be provided in the notes to the consolidated financial statements for the year ended 31 st December Additionally, on 26 th March 2018, Regulation (EU) No. 2017/498 was published with which the European Commission endorsed the Amendment to IFRS 9: Prepayment Features with Negative Compensation which makes some marginal amendments to IFRS 9 Financial instruments designed to specify that the instruments which involve early repayment could pass the SPPI test even in cases where reasonable additional compensation, to be paid in cases of early repayment, constitutes negative compensation for the lending entity. INTERNATIONAL ACCOUNTING STANDARDS NOT ENDORSED AS AT 30 TH JUNE 2018 Standard (IAS/IFRS) Interpretation (SIC/IFRIC) Amendments Date of publication IFRS 14 Regulatory deferral accounts 30/01/2014 IFRS 10, IAS 28 Sale contribution of assets between an investor and its Associate or Joint Venture 11/09/2014 IFRS 17 Insurance Contracts 18/05/2017 IFRIC 23 Uncertainty over Income Tax Treatments 07/06/2017 IAS 28 IFRS 3, IFRS 11, IAS 12, IAS 23 IAS 19 Conceptual framework Amendments to IAS 28: Long Term Interests in Associates and Joint Ventures Annual improvements to IFRS Standards Cycle Amendments to IAS 19: Plan Amendment, Curtailment or Settlement Amendments to References to the Conceptual Framework in IFRS Standards 12/10/ /12/ /02/ /03/2018 The standards listed above are not applicable for the purposes of the preparation of the 2018 first half report because their application is subject to endorsement by the European commission through the issue of specific EU Regulations With regard to IFRS 14, we report that the European Commission has decided to suspend the endorsement process for the standard while waiting for the definition of the new standard relating to rate regulated activities

184 Other aspects The main items of the financial statements Details are given below of the accounting criteria adopted as of 1 st January 2018 with regard to the recognition, classification, measurement and derecognition of the various items in the financial statements. Those criteria have changed with respect to those employed as at 31 st December 2017 following the introduction of the reporting standards IFRS 9 and IFRS 15 and, in compliance with the 5 th update of Bank of Italy Circular No. 262/2005, those same criteria will be reported in Part A.2 on the main items of the financial statements, in the notes to the Consolidated financial statements for the year ended 31 st December Assets measured at fair value through profit or loss (FVTPL) 1.1. Definition and classification Those financial assets that are not classified within Financial assets measured at fair value through other comprehensive income and within Financial assets measured at amortised cost are classified within item 20 Financial assets measured through profit or loss. In detail: a) Financial assets held for trading A financial asset (debt security, equity security, loan, UCITS share) is recognised within item 20. a) Financial assets measured at fair value through profit or loss: financial assets held for trading if it is: managed with the objective of realising cash flows through the sale of the asset, and is therefore associated with Other business models, because it is: - acquired or incurred principally for the purpose of selling or repurchasing it in the short-term; - part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or it is a financial asset which is a derivative 16 (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument 17 ). b) Financial assets designated as at fair value A financial asset (debt securities and loans) may be designated on initial recognition on the basis of the fair value option recognised by IFRS 9, as classified within Financial assets designated as at fair value and therefore recognised within item 20. b) Financial assets measured at fair value through profit or loss: financial assets designated as at fair value. A financial asset can only be designated as at fair value through profit or loss on initial recognition when that designation eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ), which otherwise would result in the measurement of assets or liabilities or recognition of profit or loss on a different basis. c) Other financial assets mandatorily measured at fair value A financial asset (debt security, equity security, loan, UCITS share and loan) is recognised within item 20. c) Financial assets measured at fair value through profit or loss: financial assets mandatorily measured at fair value if it is: 16 A derivative is defined as a financial instrument or other contract with the following characteristics: its value changes in response to the change in an interest rate, in the price of a financial instrument, in a commodity price, in a foreign currency exchange rate, in a price, interest rate or credit rating index, or credit worthiness index or other specific variable; it requires no initial investment, or a net initial investment that is smaller than would be required for other types of contract from which a similar response to changes in market factors would be expected; it is settled at a future date. With regard to derivative financial instruments, these are subject to netting of current positive and negative values in the balance sheet where they relate to the same counterparty if the legal right currently exists to offset those amounts and they are then settled on a net basis. Derivatives also include those that are embedded in complex financial contracts in which the host contract is not a financial asset that falls within the scope of application of IFRS 9, which are subject to separate recognition because: their economic risks and characteristics are not closely related to the economic risks and characteristics of the host contract; the embedded instruments would meet the definition of a derivative even if separated; the hybrid instruments to which they belong are not measured at fair value with changes in fair value recognised in profit or loss. 17 Reference is made to point 4 Hedging transactions for further details

185 a financial instrument for which the return is measured on the basis of the fair value and it is therefore associated with the Other business models; an instrument for which the objective contractual characteristics do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding where the solely payment of principal and interest test ( SPPI test) has not been passed Recognition criteria Financial assets measured at fair value through profit or loss are recognised initially when, and only when, the entity becomes party to the contractual provisions of the instruments, which is to say: at the time of settlement for debt securities equity securities or loans; or, on the subscription date if they are derivative contracts. Measurement on initial recognition is at the fair value of the instrument (generally the same as its cost) without considering any transaction costs or income directly attributable to the instruments themselves Measurement criteria Subsequent to initial recognition, these assets are measured at fair value 19 with changes in fair value recognised through profit or loss, within the following items: within item 80. Net trading income for financial assets recognised within item 20. a) Financial assets held for trading ; within item 110. a) Net income from other financial assets and liabilities measured at fair value through profit or loss: financial assets and liabilities designated as at fair value for financial assets recognised within item 20. b) Financial assets designated as at fair value ; within item 110. b) Net income from other financial assets and liabilities measured at fair value through profit or loss: other financial assets mandatorily measured at fair value for financial assets recognised within item 20. c) Other financial assets mandatorily measured at fair value. Interest on financial instruments which are loans and debt securities classified within item 20. Financial assets held for trading under balance sheet assets is also classified within the item 10. Interest and similar income Derecognition criteria Financial assets measured at fair value through profit or loss are derecognised from the balance sheet when one of the following situations occurs: the contractual rights to the cash flows from the financial assets expire; or the financial assets are transferred with the substantial transfer of all the risks and rewards of ownership of them; or the entity retains the contractual right to receive the cash flows from them, but at the same time it assumes a contractual obligation to pay those cash flows to a third party; or contractual modifications are made that constitute substantial modifications 20. The profit or loss resulting from the derecognition of financial assets is recognised through profit or loss within the following items: 80. Net trading income for financial assets recognised within item 20. a) Financial assets held for trading ; 110. a) Net income from other financial assets and liabilities measured at fair value through profit or loss: financial assets and liabilities designated as at fair value for financial assets recognised within item 20. b) Financial assets designated as at fair value ; 110. b) Net income from other financial assets and liabilities measured at fair value through profit or loss: other financial assets mandatorily measured at fair value for financial assets recognised within item 20. c) Other financial assets mandatorily measured at fair value. 18 In fact IFRS 9 states that the classification of financial assets should be made on the basis of: the entity's business model for managing the financial assets; the contractual cash flow characteristics of the financial asset. 19 The measurement of the fair value of the financial assets is based on prices quoted on active markets or on internal valuation models which are generally used in financial practice as described in greater detail in Part A.4 Information on fair value of the Notes to the 2017 consolidated financial statements of the UBI Banca Group. 20 Information concerning the identification of cases of substantial modifications is given in section 16 Other information

186 2. Financial assets measured at fair value through other comprehensive income (FVOCI) 2.1. Definition and classification The following financial assets (debt securities, equity securities and loans) are classified within asset item 30. Financial assets measured at fair value through other comprehensive income in the balance sheet: financial instruments (debt securities and loans) associated with the hold to collect and sell business model, the contractual terms of which give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding and which therefore have passed the SPPI test; equity securities (shareholdings that do not qualify as control, an associate or a joint arrangement) for which an OCI election has been made to present changes in the fair value in other comprehensive income 21. Financial instruments held within the framework of a business model the objective of which is achieved both through the receipt of cash flows and through selling the instruments themselves can be associated with a hold to collect and sell business model Recognition criteria Financial instruments measured at fair value through other comprehensive income are recognised initially when, and only when, the entity becomes a party to the contractual provisions of the instrument and that is at the time of settlement, at an amount equal to the fair value which is generally the same as their cost. This value includes costs or income directly connected with the instruments themselves Measurement criteria Subsequent to initial recognition, these assets continue to be measured at fair value 22 with changes in fair value recognised within item 120. Valuation reserves. Interest on financial instruments 23 which are loans and debt securities classified within asset item 30. Financial assets measured at fair value through other comprehensive income in the balance sheet is recognised in the income statement within item 10. Interest and similar income. An estimate is made at the end of each annual or interim reporting period and solely for instruments associated with the hold to collect and sell business model of impairment losses on these assets, calculated in compliance with IFRS 9 impairment rules 24. Impairment losses are recognised immediately in the income statement within the item 130. Net impairment losses for credit risk, against the item 120. Valuation reserves, as are recoveries of a portion or the entirety of impairment losses previously recognised. Reversals are recognised when the quality of the asset improves sufficiently to reduce the overall impairment loss previously recognised. The amount which represents the progressive release of the discounting of the time value calculated at the time of recognition of an impairment loss is recognised in the income statement within item 10. Interest and similar income. Additionally, dividends relating to equity securities for which an OCI election has been made are recognised within item 70. Dividends and similar income. 21 In fact in compliance with the provisions of IFRS 9, an entity may make an irrevocable election at initial recognition for particular investments in equity instruments that would otherwise be measured at fair value through profit or loss to present subsequent changes in fair value in other comprehensive income. 22 The measurement of the fair value of the assets in question is based on prices quoted on active markets or on internal valuation models which are generally used in financial practice as described in greater detail in Part A.4 Information on fair value of the Notes to the 2017 consolidated financial statements of the UBI Banca Group. 23 This interest is recognised through profit or loss by applying the effective interest rate. Details in this respect are given under the following point Details are given in section 16 Other information

187 2.4. Derecognition criteria Financial assets measured at fair value through other comprehensive income are derecognised from the balance sheet when one of the following situations occurs: the contractual rights to the cash flows from the financial assets expire; or the financial assets are transferred with the substantial transfer of all the risks and rewards of ownership of them; or the financial asset is written off and that is when there is no reasonable expectation of recovering the financial assets, inclusive of cases of giving up the asset; or the entity retains the contractual right to receive the cash flows from them, but at the same time it assumes a contractual obligation to pay those cash flows to a third party; or contractual modifications are made that constitute substantial modifications. The profit or loss resulting from the derecognition of these assets is recognised as follows: in P&L within item 100. b) Income (losses) from disposal or repurchase of: financial assets measured at fair value through other comprehensive income for financial instruments associated with the hold to collect and sell business model. Otherwise, in all other cases it is recognised within item 130. Net impairment losses for credit risk ; as equity within item 120. Valuation reserves for equity instruments for which an OCI election has been made. Following the derecognition of these assets, the balance of the amounts recognised within item 120. Valuation reserves is reclassified into item 150. Reserves. 3. Financial assets measured at amortised cost 3.1. Definition and classification Financial assets (debt securities and loans) associated with the hold to collect business model for which the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding and which therefore have passed the SPPI test are recognised within item 40. Financial assets measured at amortised cost. Financial instruments held within the framework of a business model the objective of which is to hold them in order to collect the cash flows are associated with the hold to collect business model. More specifically the following are recognised within this item: loans and advances to banks (e.g.: current account overdrafts, security deposits, debt securities); loans and advances to customers (e.g. mortgages, financial lease transactions, factoring transactions, debt securities) Recognition criteria Financial instruments measured at amortised cost are recognised initially when, and only when, the entity becomes a party to the contractual provisions of the instrument and that is at the time of settlement, at an amount equal to the fair value, understood as the cost of the instrument, inclusive of any costs and income directly attributable to it 25. Repurchase agreements with the obligation or right to repurchase or resell at term are recognised as funding or lending transactions. For transactions with a spot sale and forward repurchase, the spot cash received is recognised in the accounts as borrowings, while the spot purchase transactions with forward resale are recognised as lending for the spot amount paid Measurement criteria These financial instruments are measured at amortised cost 26 calculated using the effective interest method. The result of the application of this method is recognised in the income statement within item 10 Interest and similar income. 25 For loans and receivables which may not have been granted under market conditions, the initial fair value is calculated by applying special measurement techniques described subsequently. In these circumstances the difference between the fair value calculated in this way and the amount granted is recognise directly through profit or loss within the item interest. 26 The fair value is measured for all assets recognised within this item for information purposes only. For assets subject to effective hedging, the fair value is calculated in relation to the risk that is hedged for measurement purposes. The procedures employed to calculate the fair value of assets measured at amortised cost are described in Part A.4 Information on fair value of the Notes to the 2017 consolidated financial statements of the UBI Banca Group

188 The amortised cost of a financial asset is the amount at which it was measured on initial recognition net of principal repayments plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and less any decrease (as a result of impairment, or inability to recover the asset). The effective interest method is a method of calculating the amortised cost of a financial asset or liability (or group of assets and liabilities) and of allocating the interest income or expense over the relative life. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. To determine the effective interest rate, the cash flows must be estimated considering all the contractual terms of the financial instrument (e.g. prepayment, call and similar options), but future credit losses shall not be considered. The calculation includes all fees and basis points paid or received between parties to the contract that are an integral part of the effective interest rate, the transaction costs and all other premiums or discounts. An estimate is made at the end of each annual or interim reporting period of impairment losses on these assets, calculated in compliance with IFRS 9 impairment rules 27. Impairment losses are recognised immediately in the income statement within item 130. Net impairment losses for credit risk as are recoveries of a portion or the entirety of the impairment losses previously recognised. Reversals are recognised when the quality of the exposure improves sufficiently to reduce the overall impairment loss previously recognised. The amount which represents the progressive release of the discounting of the time value calculated at the time of recognition of an impairment loss is recognised in the income statement within item 10. Interest and similar income Derecognition criteria Financial assets measured at amortised cost are derecognised from the balance sheet when one of the following situations occurs: the contractual rights to the cash flows from the financial assets expire; or the financial assets are transferred with the substantial transfer of all the risks and rewards of ownership of them; or the financial asset is written off and that is when there is no reasonable expectation of recovering the financial assets, inclusive of cases of giving up the asset; or the entity retains the contractual right to receive the cash flows from them, but at the same time it assumes a contractual obligation to pay those cash flows to a third party; or contractual modifications are made that constitute substantial modifications. The profit or loss resulting from the derecognition of financial assets measured at amortised cost is recognised in the income statement within item 100. a) Income (loss) from disposal or repurchase of: financial assets measured at amortised cost in cases of transfer. Otherwise, in all other cases it is recognised within item 130. Net impairment losses for credit risk. 4. Hedging transactions The UBI Banca Group has taken advantage of the option allowed on first-time adoption of IFRS 9 to use the provisions of international accounting standard IAS 39 for hedge accounting Definition and classification Hedging transactions are designed to neutralise losses on determined assets or liabilities (or groups of assets and/or liabilities) attributable to a determined risk by means of the gains realised on another instrument (or group of instruments) if that particular risk should actually result in losses. The UBI Banca Group uses the following types of hedging transactions, presented consistently in the accounts and described below: a fair value hedge: the objective is to offset adverse changes in the fair value of the asset or liability hedged; a cash flow hedge: the objective is to hedge against exposure to variability in expected cash flows with respect to the initial expectations. 27 Details are given in section 16 Other information

189 Only derivative contracts with an external counterparty may be designated as hedging instruments Recognition criteria As with all derivatives, derivative financial instruments used for hedging are initially recognised and subsequently measured at fair value and are classified, depending on whether the value is positive or negative, in the balance sheet under assets within item 50. Hedging derivatives and under liabilities within item 40. Hedging derivatives respectively. A relationship qualifies as a hedge and is appropriately represented in the accounts if, and only if, all the following conditions are satisfied: at the start of the hedging transaction the relationship is formally designated and documented, including the company s risk management objective and strategy for undertaking the hedge. This documentation includes identification of the hedging instrument, the item or transaction hedged, the nature of the risk being hedged, and how the entity will assess the hedging instrument's effectiveness in offsetting the exposures to changes in the fair value of the item hedged or in the cash flows attributable to the risk hedged; the hedging is expected to be highly effective; the planned transaction hedged, for hedging cash flows, is highly probable and presents an exposure to changes in cash flows that could have effects on the income statement; the effectiveness of the hedging can be reliably measured; the hedging is measured on an ongoing basis and is considered highly effective for all the financial years in which it was designated Methods for testing effectiveness A hedge relationship is judged effective, and as such is appropriately presented in the accounts, if at its inception and during its life the changes in the fair value or cash flows of the hedged item attributable to the hedged risk are expected and have almost always been completely offset by the changes in the fair value or cash flows of the hedging instrument. This conclusion is reached when aforementioned changes in fair value or in cash flows fall within a range of between 80% and 125%. The effectiveness of a hedge is tested at inception and at each reporting date by means of a prospective test designed to demonstrate the expected effectiveness of the hedge during its life. Further retrospective tests are conducted monthly on a cumulative basis where the objective is to measure the degree of effectiveness of the hedge in the reporting period and therefore to verify whether the hedge has actually been effective in the period. Derivative financial instruments that are considered hedges from a profit and loss viewpoint, but which do not satisfy the requirements to be considered effective instruments for hedging are recognised within item 20. a) Financial assets measured at fair value through profit and loss: financial assets held for trading or within item 20. Financial liabilities held for trading and the profits and losses within the corresponding item 80. Trading income (loss). If the above tests do not confirm the effectiveness of the hedge, then if it is not derecognised, the derivative contract is reclassified within derivatives held for trading and the instrument hedged is again measured according to the criterion applied for its balance sheet classification Measurement criteria Fair value hedging Fair value hedging is treated as follows: the profit or loss resulting from measuring a hedging instrument at fair value is included in the income statement under item 90 Net hedging income (loss) ; the profit or loss on the item hedged attributable to the hedged risk adjusts the value in the accounts of the hedged item and is recognised immediately, regardless of the type of asset or liability hedged, in the income statement within the aforementioned item. Hedge accounting is discontinued prospectively in the following cases: 1. the hedging instrument expires or is sold, terminated, or exercised; 2. the hedge no longer meets the hedge accounting criteria described above; 3. the entity revokes the designation. If the asset or liability hedged is measured at amortised cost, the higher or lower value resulting from measuring them at fair value as a result of the hedge becoming ineffective is recognised through profit or loss, according to the effective interest rate method or at constant rates in the event of a hedge on a portfolio of assets and liabilities where that method is not feasible, or in a single amount if the hedge has been derecognised

190 The methods used for measurement of the fair value of the risk hedged in the assets or liabilities subject to hedging are described in Part A.4 Information on fair value of the Notes to the 2017 Consolidated financial statements Cash flow hedging When a derivative is designated as a hedge of exposure to changes in expected cash flows from an asset or liability in the balance sheet or a future transaction considered highly probable, the accounting treatment of the hedge is as follows: the profits or losses (from the valuation of the hedging derivative) attributable to the effective portion of the hedge are recognised in a special reserve in equity termed 120 Valuation reserves ; the profits or losses (from measurement of the hedging derivative) attributable to the ineffective portion of the hedge are recognised directly in the income statement under item 90 Net hedging income (loss) ; the asset or liability hedged is measured according to the class of asset or liability to which it belongs. If a future transaction occurs which involves recognising non-financial assets and liabilities, the corresponding profits or losses initially recognised under item 120 Valuation reserves are then transferred from that reserve and included as an initial cost of the asset or liability that is recognised. If the future hedged transaction subsequently involves recognition of a financial asset or liability, the associated profits or losses that were originally recognised within item 120. Valuation reserves are reclassified to the income statement in the same reporting period or periods during which the assets acquired or liabilities incurred have an effect on the income statement. If a portion of the profits or losses recognised in the aforementioned reserve are not considered recoverable, it is reclassified into the income statement within item 80 Net trading income (loss). In all cases other than those already described, the profits or losses initially recognised under the item 120 Valuation reserves are transferred to the income statement to reflect the time and manner in which the future transaction is recognised in the income statement. An entity must discontinue hedge accounting prospectively in each of the following circumstances: (a) the hedging instrument expires or is sold, terminated, or exercised (for this purpose the replacement or exchange of one hedging instrument with another hedging instrument is not a conclusion or termination if that replacement or exchange forms part of an entity s documented hedging strategy). In this case the total profit (or loss) on the hedging instrument continues to be recognised directly in equity until the reporting period in which the hedge became effective and it continues to be recognised separately until the programmed hedging transaction occurs; (b) the hedge no longer satisfies the criteria for hedge accounting. In this case the total profit or loss on the hedging instrument continues to be recognised directly in equity starting from the reporting period in which the hedge became effective and it continues to be recognised separately in equity until the programmed hedging transaction occurs; (c) it is no longer considered that the future transaction should occur, in which case any related total profit or loss on the hedging instrument recognised directly in equity starting from the reporting period in which the hedge became effective must be recognised through profit or loss; (d) the entity revokes the designation. For hedges of a programmed transaction, total profits or losses on the hedging instrument recognised directly in equity starting from the reporting period in which the hedge became effective continues to be recognised separately in equity until the programmed transaction occurs or it is expected that it will no longer occur. If it is expected that the transaction will no longer occur, the total profit (or loss) that had been recognised directly in equity is transferred to the income statement Hedging portfolios of assets and liabilities Hedging of portfolios of assets and liabilities ( macrohedging ) and appropriate accounting treatment is possible after first: - identifying the portfolio to be hedged and dividing it by maturity dates; - designating the risk to be hedged; - identifying the interest rate risk to be hedged; - designating the hedging instruments; - determining the effectiveness. The portfolio for which the interest rate risk is hedged may contain both assets and liabilities. This portfolio is divided on the basis of expected maturity or repricing dates of interest rates after first analysing the structure of the cash flows

191 Changes in the fair value of the hedged instrument are recognised in the income statement within item 90. Net hedging income (loss) and in the balance sheet within item 60. Fair value change in hedged financial assets or within item 50. Fair value change in hedged financial liabilities Changes occurring in the fair value of the hedging instrument are recognised in the income statement within item 90 Net hedging income (loss) and under assets in the balance sheet within item 50 Hedging derivatives or under liabilities side within item 40 Hedging derivatives. 5. Equity investments 5.1. Definition and classification Subsidiaries A subsidiary is defined as a company over which the Parent exercises control. Such a condition occurs when the latter is exposed to variable returns or holds rights on those returns resulting from its relationship with the subsidiary and at the same time it has the ability to influence those returns by exercising its power over that entity. The existence of control is also determined by considering the presence of potential voting rights and contractual rights which empower the owner to significantly influence the returns of the subsidiary Companies subject to joint control A company subject to joint control is defined as a company governed by a contractual arrangement whereby the parties to it that hold joint control enjoy rights over the net assets of the arrangement. Joint control assumes that control over the arrangement is shared contractually and that it only exists when the unanimous consent of all the parties that share the control is required for decisions that regard important activities Associates An associate is defined as a company in which the investor exercises significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the company invested in but not to control or have joint control of it Recognition criteria Equity investments in associates or joint ventures are recognised at cost of purchase plus any accessory costs Measurement criteria In the consolidated financial statements equity investments in subsidiaries are fully consolidated line-byline. Investments in associates and companies subject to joint control are measured by adopting the equity method. Any objective evidence that an equity investment has been subject to impairment is assessed as at each annual or interim reporting date. The recoverable amount is then calculated, considering the present value of the future cash flows which may be generated by the investment, including the final disposal value. If the recoverable amount calculated in this way is less than the carrying amount, the difference is recognised in the income statement within the item 250 Profits (losses) of equity investments (equityaccounted investees). Any future reversals of impairment are also included in the item where the reasons for the original impairment no longer apply Derecognition criteria Equity investments are derecognised in the balance sheet when the contractual rights to the cash flows from the financial assets expire or when the financial assets are disposed with the substantial transfer of all the risks and rewards deriving from ownership of them. The profit or loss on the disposal on investments valued using the equity method are recognised in the income statement within item 250. Profits (losses) of equity investments (equity-accounted investees); the profit or loss on the disposal of equity investments other than those valued using the equity method is recognised in the income statement within item 280. Profits (losses) on disposal of investments

192 6. Property, plant and equipment 6.1. Definition and classification Definition of assets for functional use Assets for functional use are defined as tangible assets possessed to be used for the purpose of carrying on a company s business and where the use is planned to last longer than one year. Assets for functional use also include properties rented to employees, ex employees and their heirs, as well as works of art Definition of investment property Investment property is defined as properties held in order to earn rentals or for capital appreciation. As a consequence, investment property is to be distinguished from assets held for the use of the owner because they generate cash flows that are very different from the other assets held by the banking group. Finance lease contracts are also included within tangible assets (for functional use and held for investment) even if the legal title to the assets remains with the leasing company Recognition criteria Tangible assets, functional and other, are initially recognised at cost (item 90 Property, plant and equipment ), inclusive of all costs directly connected with bringing it to working condition for the use of the assets and purchase taxes and duties that are not recoverable. This amount is subsequently increased to include expenses incurred from which it is expected future benefits will be obtained. The costs of ordinary maintenance are recognised in the income statement at the time at which they are incurred, while extraordinary maintenance costs (improvements) from which future benefits are expected are capitalised by increasing the value of the relative asset. Improvements and expenses incurred to increase the value of leased assets from which future benefits are expected are recognised: within the most appropriate category of item 90, Property, plant and equipment if they are independent and can be separately identified, whether they are assets held on the basis of an ordinary leasing contract or whether they are held under a finance lease contract; within item 90 Property, plant and equipment, if they are not independent and cannot be separately identified, as an increase to the type of assets concerned if held by means of a finance lease contract or within item 130 Other assets if they are held under an ordinary lease contract. The cost of property, plant and equipment is recognised as an asset if, and only if: it is probable that the future economic benefits associated with the asset will flow to the enterprise; the cost of the asset can be reliably determined Measurement criteria Subsequent to initial recognition, items of property, plant and equipment for use in operations are recognised at cost, as defined above, net of accumulated depreciation and any permanent cumulative impairment. The depreciable amount, equal to cost less the residual value (i.e. the amount that would be normally obtained from disposal, less disposal costs, if the asset was normally in the conditions, including age, expected at the end of its useful life), should be allocated on a systematic basis over the asset's useful life by adopting the straight line method of depreciation. The useful life of an asset, which is reviewed periodically to detect any significant change in estimates compared to previous figures, is defined as: the period of time over which it is expected that the asset can be used by a company or, the quantity of products or similar units that an entity expects to obtain from the use of the asset. Since property, plant and equipment may consist of items with different useful lives, land, whether by itself or as part of the value of a building is not depreciated since it constitutes a fixed asset with an indefinite life. The value attributable to the land is deducted from the total value of a property for all buildings in proportion to the percentage of ownership. Buildings, on the other hand, are depreciated according to the criteria described above. Works of art are not depreciated because they generally increase in value over time. Depreciation of an asset starts when it is available for use and ceases when the asset is written off the accounts, which is the most recent of when it is classified as for sale and the date of elimination from the accounts. As a consequence depreciation does not stop when an asset is left idle or is no longer in use, unless the asset has already been fully depreciated

193 Improvements and expenses which increase the value are depreciated as follows: if they are independent and can be separately identified, according to the presumed useful life as described above; if they are not independent and cannot be separately identified, then if they are held under an ordinary leasing contract, over the shorter of the period in which the improvements and expenses can be used and that of the remaining life of the contract taking account of any individual renewals, or if the assets are held under a finance lease contract, over the expected useful life of the assets concerned. The depreciation of improvements and expenses to increase the value of leased assets recognised within item 130 Other assets is recognised within the item 230 Other operating income (expense). At the end of each annual or interim reporting period the existence of indications that demonstrate the impairment of the value of an asset are assessed. The loss is determined by comparing the carrying amount of the tangible asset with the lower recoverable amount. The latter is the greater of the fair value 28, net of any sales costs, and the relative use value intended as the present value of future cash flows generated by the asset. The loss is immediately recognised in the income statement within item 210 Net impairment losses on property, plant and equipment ; the item also includes any future recovery in value if the causes of the original recognition of impairment no longer exist Property, plant and equipment acquired through finance leases A finance lease is a contract that substantially transfers all the risks and rewards incident to ownership of an asset. Legal title may or may not be transferred at the end of the lease term. The beginning of the lease term is the date on which the lessee is authorised to exercise his right to use the asset leased and therefore corresponds to the date on which the lease is initially recognised. When the contract commences, the lessee recognises the financial lease transactions as assets and liabilities in its balance sheet at the fair value of the asset leased or, if lower, at the present value of the minimum payments due. To determine the present value of the minimum payments due, the discount rate used is the contractual interest rate implicit in the lease, if practicable, or else the lessee s incremental borrowing rate is used. Any initial direct costs incurred by the lessee are added to the amount recognised for the asset. The minimum payments due are apportioned between the finance charges and the reduction of the residual liability. The former are allocated over the lease term so as to produce a constant rate of interest on the residual liability. The finance lease contract involves recognition of the depreciation charge for the asset leased and of the finance charges for each financial year. The depreciation policy used for assets acquired under finance leases is consistent with that adopted for owned assets. See the relative paragraph for a more detailed description Derecognition criteria Property, plant and equipment are derecognised in the balance sheet when they are disposed of or when they are permanently retired from use and no future economic benefits are expected from their disposal. Any gains or losses resulting from the retirement or disposal of the tangible asset, calculated as the difference between the net consideration on the sale and the carrying amount of the asset are recognised in the income statement within item 280 Profits (losses) on the disposal of investments. 28 The procedures employed to calculate the fair value of real estate assets are described in Part A.4 Information on fair value of the Notes to the 2017 consolidated financial statements

194 7. Intangible assets 7.1. Definition and classification An intangible asset is defined as an identifiable non-monetary asset without physical substance that is used in carrying on a company s business. The asset is identifiable when: it is separable, which is to say capable of being separated and sold, transferred, licensed, rented, or exchanged; it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from other rights and obligations. An asset possesses the characteristic of being controlled by the enterprise as a result of past events and the assumption that its use will cause economic benefits to flow to the enterprise. An entity has control over an asset if it has the power to obtain future economic benefits arising from the resource in question and may also limit access by others to those benefits. Future economic benefits arising from an intangible asset might include receipts from the sale of products or services, savings on costs or other benefits resulting from the use of the asset by an enterprise. An intangible asset is recognised if, and only if: (a) it is probable that the expected future economic benefits attributable to the asset will flow to the entity; (b) the cost of the asset can be measured reliably. The probability of future economic benefits occurring is assessed on the basis of reasonable and supportable assumptions that represent the best estimate of the economic conditions that will exist over the useful life of the asset. The degree of probability attaching to the flow of economic benefits attributable to the use of the asset is assessed on the basis of the sources of information available at the time of initial recognition, giving greater weight to external sources of information. In addition to goodwill and software used mainly over several years, intangible assets related to assets under management, assets under custody and core deposits recognised following business combination operations are also considered as intangible assets Intangible assets with a finite useful life A finite useful life is defined for an asset where it is possible to estimate a limit to the period over which the related economic benefits are expected to be produced. Intangible assets recognised considered as having a finite useful life include software, intangible assets related to assets under management and assets under custody and core deposits Intangible assets with an indefinite useful life An indefinite useful life is defined for an asset where it is not possible to estimate a predictable limit to the period over which the asset is expected to generate economic benefits for a company. The attribution of an indefinite useful life to an asset does not arise from having already programmed future expenses which restore the standard level of performance of the asset over time and prolong its useful life. Intangible assets considered as having an indefinite useful life include goodwill Recognition criteria Assets recognised within balance sheet item 100 Intangible assets are stated at cost and any expenses subsequent to the initial recognition are only capitalised if they are able to generate future economic benefits and only if those expenses can be reliably determined and attributed to the Assets. The cost of an intangible asset includes: the purchase price including any non recoverable taxes and duties on purchases after commercial discounts and bonuses have been deducted; any direct costs incurred in bringing the asset into use Measurement criteria Subsequent to initial recognition intangible assets with a finite useful life are recognised at cost net of total amortisation and any losses in value that may have occurred. Amortisation is calculated on a systematic basis over the best estimate of the useful life of the asset (see definition in the section Property, plant and equipment) using the straight line method for all intangible assets except for

195 intangible assets relating to customer accounts recognised following the purchase price allocation resulting from business combination operations. In this case the amortisation is calculated on the basis of the estimated average life of the customer relationships. Amortisation begins when the asset is available for use and ceases on the date on which the asset is eliminated from the accounts. Intangible assets with an indefinite useful life (see, goodwill, as defined in the section below if positive) are recognised at cost net of any impairment loss resulting from periodic reviews when tests are performed to verify the appropriateness of the carrying amount of the assets (see section below). As a consequence amortisation of these assets is not calculated. No intangible assets arising from research (or from the research phase of an internal project) are recognised. Research expenses (or the research phase of an internal project) are recognised as expenses at the time at which they are incurred. An intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if the following can be demonstrated: (a) the technical feasibility of completing the intangible asset so that it becomes available for sale or use; (b) the intention of the company to complete the intangible asset to use it or sell it; (c) the capacity of the company to use or sell the intangible asset. At the end of each annual or interim reporting period the existence of potential impairment of the value of intangible assets is assessed. The impairment is given by the difference between the carrying amount of the assets and the recoverable amount and is recognised, as are any recoveries of value, within item 220 Net impairment losses on intangible assets, with the exception of impairment losses on goodwill which are recognised within item 270 Net impairment losses on goodwill Goodwill Goodwill is defined as the difference between the purchase cost and the fair value of assets and liabilities acquired as part of a business combination which consists of the union of separate enterprises or businesses in a single entity required to prepare financial statements. The result of almost all business combinations consists in the fact that a sole entity, an acquirer, obtains control over one or more separate businesses of the acquiree. When an entity acquires a group of activities or net assets that do not constitute a business it allocates the cost of the group to individual assets and liabilities identified on the basis of their relative fair value at the date of acquisition. A business combination may give rise to a holding relationship between a parent company and a subsidiary in which the acquirer is the parent company and the acquiree is the subsidiary. All business combinations are accounted for using the purchase method of accounting. The purchase method involves the following steps: (a) identification of the acquirer (the acquirer is the combining enterprise that obtains control of the other combining enterprises or businesses); (b) determination of the acquisition date; (c) determination of the cost of the business combination, intended as the consideration transferred by the purchaser to the shareholders of the acquiree; (d) the allocation, as at the acquisition date, of the cost of the business combination by means of the recognition, classification and measurement of the identifiable assets acquired and the identifiable liabilities assumed; (e) recognition of any existing goodwill. Business combinations performed with subsidiary undertakings or with companies belonging to the same group are recognised on the basis of the significant economic substance of the transactions. In application of that principle, the goodwill arising from those transactions in the separate financial statements is recognised: (a) within asset item 100 of the balance sheet if significant economic substance is found; (b) as a deduction from equity if it is not found. These transactions are eliminated from the consolidated financial statements and are therefore recognised solely as the relative costs incurred in relation to parties external to the Group

196 The goodwill recognised in the consolidated financial statements of the Group ( goodwill arising on consolidation resulting from the elimination of the equity investments in subsidiaries) is the result of all the goodwill and positive consolidation differences relating to some of the companies controlled by the Parent. Any changes in the share of ownership which do not result in the loss or acquisition of control are to be considered, in compliance with IFRS 10, as transactions between shareholders and as a consequence the relative effects must be recognised as either an increase or a decrease in equity Allocation of the cost of a business combination to assets and liabilities and contingent liabilities The acquirer: (a) recognises the goodwill acquired in a business combination as assets; (b) measures that goodwill at its cost to the extent that it is the excess of the cost of the business combination over the acquirer's share of interest in the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities. Goodwill acquired in a business combination represents a payment made by the acquirer in the expectation of receiving economic future benefits from the asset which cannot be identified individually and recognised separately. After initial recognition, the acquirer values the goodwill acquired in a business combination at the relative cost net of cumulative impairment. The goodwill acquired in a business combination must not be amortised. The acquirer tests the asset for impairment annually or more frequently if specific events or changed circumstances indicate that it may have suffered a reduction in value, according to the relative accounting standard. The standard states that an asset (including goodwill) has suffered an impairment loss when the amount recognised in the accounts exceeds the recoverable amount understood as the greater of the fair value, net of any sales expenses and its value in use, defined by section 6 of IAS 36. In order to test for impairment, goodwill must be allocated to cash generating units or to groups of cash generating units, in observance of the maximum aggregation limit which cannot exceed the operating segment identified in accordance with IFRS Negative goodwill If the acquirer s share of the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination the acquirer: (a) reviews the identification and measurement of the identifiable assets, liabilities and contingent liabilities of the acquiree and the determination of the cost of the business combination; (b) immediately recognises any excess existing after the new measurement in the income statement Derecognition criteria Intangible assets are derecognised in the balance sheet following disposal or when no economic future benefit is expected from its use or disposal. 8. Non-current assets and disposal groups held for sale The aggregate of non-current assets and liabilities and non-current groups of assets and liabilities is composed of assets held for sale that do not satisfy the requirements of IFRS 5 to qualify as discontinued operations ; and continued operations as defined in IFRS 5. The carrying amount of that aggregate will presumably be recovered through the sale rather than by continued use and the relative assets and liabilities are classified within the balance sheet items 120. Non-current assets and disposal groups held for sale and 70. Liabilities associated with disposal groups held for sale respectively. In order to be classified within these items the assets or liabilities (or disposal groups) must be immediately available for sale and there must be active, concrete programmes to sell the assets or liabilities in the short term. These assets or liabilities are measured at the lower of the carrying amount and their fair value net of disposal costs. Profits and losses attributable to groups of assets or liabilities held for sale are recognised in the income statement within item 320. Profit (loss) after tax on non-current assets and groups of assets held for disposal

197 Profits and losses attributable to individual assets held for disposal are recognised in the income statement under the most appropriate item. 9. Current and deferred taxation Tax assets and liabilities are stated in the balance sheet within items 110. Tax assets and 60. Tax liabilities Current tax assets and liabilities Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet been settled; any excess compared to the amount due is recognised as an asset. Current tax assets (liabilities) for the current and prior years, are measured at the amount expected to be paid to/recovered from taxation authorities, using the tax rates and tax laws in force. Current tax assets and liabilities are derecognised in the accounts in the year in which the assets are realised or the liabilities are extinguished Deferred tax assets and liabilities Deferred tax liabilities are recognised for all taxable temporary differences unless the deferred tax liability arises from: goodwill for which amortisation is not deductible for tax purposes; or the initial recognition of an asset or a liability in a transaction which: - is not a business combination; and - at the time of the transaction, affects neither the accounting nor the taxable profit. Deferred tax assets are not calculated for higher values of assets for which the tax regime has been suspended relating to equity investments and to reserves for which the tax regime has been suspended because it is considered there are no reasonable grounds to assume they will be taxed in future. Deferred tax liabilities are recognised in the balance sheet within item 60. Tax liabilities b) deferred. A deferred tax asset is recognised for all deductible temporary differences if it is probable that a taxable income will be used against which it will be possible to use the deductible temporary difference, unless the deferred tax asset arises from: negative goodwill which is treated as deferred income; the initial recognition of an asset or liability in a transaction which: - which is not a business combination; and - affects neither the accounting profit nor the taxable profit at the time of the transaction. Deferred tax assets are recognised within the balance sheet item 110 Tax assets b) deferred. Deferred tax assets and deferred tax liabilities are subject to constant monitoring and are measured using the tax rates that it is expected will apply in the period in which the tax asset will be realised or the tax liability will be extinguished on the basis of the tax regulations established by laws currently in force. Deferred tax assets and deferred tax liabilities are derecognised in the accounts in the year in which: the temporary difference which gave rise to them becomes payable with regard to deferred tax liabilities or deductible with regard to deferred tax assets; the temporary difference which gave rise to them is no longer valid for tax purposes. Deferred tax assets and deferred tax liabilities are not normally discounted to present values nor even, normally, offset one against the other. 10. Provisions for risks and charges Definition A provision is defined as a liability of uncertain timing or amount. A contingent liability, however, is defined as: a possible obligation, the result of past events, the existence of which will only be confirmed by the occurrence or (non-occurrence) of future events that are not totally under the control of the enterprise;

198 a present obligation that is the result of past events, but which is not recognised in the accounts because: - it is improbable that financial resources will be needed to settle the obligation; - the amount of the obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognised in the accounts, but are only reported, unless they are considered a remote possibility Recognition and measurement criteria A provision is recognised if and only if: there is a present obligation (legal or implicit) that is the result of a past event; and it is probable that the use of resources suitable for producing economic benefits will be required to fulfil the obligation; and a reliable estimate can be made of the amount arising from fulfilment of the obligation. The amount recognised as a provision represents the best estimate of the expenditure required to settle the present obligation at the reporting date and reflects the risks and uncertainties that inevitably characterise a number of facts and circumstances. The amount of a provision is measured by the present value of the expenditure that it is assumed will be necessary to settle the obligation where the effect of the present value is a substantial aspect. Future events that might affect the amount required to settle the obligation are only taken into consideration if there is sufficient objective evidence that they will occur. Provisions made for risks and charges include those for the risk attaching to any existing tax litigation. Provisions for risks and charges also include: provisions relating to financial commitments and guarantees issued subject to IFRS 9 impairment rules 29 ; expenses relating to pension funds and defined benefits pursuant to the provisions of IAS Derecognition criteria The provision is reversed when it becomes improbable that the use of resources designed to produce economic benefits will be required to settle the obligation. 11. Financial liabilities measured at amortised cost Definition and classification The various forms of interbank and customer funding are recognised within the following balance sheet items: 10 a) Financial liabilities measured at amortised cost: due to banks 10 b) Financial liabilities measured at amortised cost: due to customers ; and 10 c) Financial liabilities measured at amortised cost: debt securities issued These items also include liabilities recognised by a lessee in financial leasing operations Recognition criteria The liabilities in question are recognised in the balance sheet at the time when the funding is received or when the debt securities are issued. The amount initially recognised is the fair value, which is normally the same as either the consideration received or the issue price, inclusive of any additional expenses or income that are directly attributable to the transaction and determinable from the outset, regardless of when they are paid. The amount of the initial recognition does not include all those costs that are reimbursed by the creditor counterparty or that are attributable to internal costs of an administrative character Measurement criteria After initial recognition medium to long-term financial liabilities are measured at amortised cost using the effective interest method as defined in previous paragraphs. 29 Details are given in section 16 Other information

199 Short-term liabilities, for which the time factor is insignificant, are measured at cost Derecognition criteria Financial liabilities are derecognised in the balance sheet when they mature or are extinguished. The repurchase of own securities issued results in derecognition of the securities with the consequent redefinition of the liability for debt instruments issued. Any difference between the repurchase value of the own securities and the corresponding carrying amount of the liabilities is recognised in the income statement within the item 100 c) Profit (loss) on the disposal or repurchase of financial liabilities. Any subsequent re-issue of the securities previously subject to derecognition in the accounts constitutes a new issue for accounting purposes with the consequent recognition at the new issue price without any effect in the income statement. 12. Financial liabilities held for trading Definition and classification A financial liability is defined as held for trading and is therefore recognised within item 20. Financial assets held for trading, if it is: acquired or incurred principally for the purpose of selling or repurchasing it in the short-term; part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument 31 ) Recognition criteria Financial liabilities held for trading are recognised on the subscription date or the issue date. Measurement on initial recognition is at cost considered to be the fair value of the instrument without considering any transaction costs or income directly attributable to them. The negative value of derivative contracts held for trading, the negative value of any implicit derivatives implicit in complex contracts, but not strictly related to them and therefore subject to separation and liabilities that originate from uncovered short positions generated by securities trading activity are included in this category of liabilities Measurement criteria Subsequent to initial recognition, the financial instruments in question are measured at fair value with changes recognised within item 80. Net trading income Derecognition criteria Financial liabilities held for trading are derecognised from the balance sheet when the contractual rights to the cash flows resulting from them expire or when they are transferred with the substantial transfer of all the risks and rewards of their ownership. The profit or loss from the transfer of financial assets held for trading is recognised in the income statement within item 80. Trading income (loss). 13. Financial liabilities designated as at fair value Definition and classification A financial liability may be classified on initial recognition within Financial liabilities designated as at fair value, on the basis of the fair value option recognised by IFRS 9, or only when: 30 The procedures employed to calculate the fair value of liabilities and debt securities issued, performed for information purposes only, are described in Part A.4 Information on fair value of the Notes to the 2017 consolidated financial statements. 31 Reference is made to point 4 Hedging transactions for further details. 32 Reference is made for details concerning the calculation of the fair value to Part A.4 Information on fair value of the Notes to the 2017 consolidated financial statements

200 a) it is a hybrid contract containing one or more embedded derivatives and the embedded derivative significantly alters the cash flows that would otherwise be generated by the contract; b) the designation as at fair value through profit or loss allows better information to be provided because: it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or a group of financial liabilities, or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity s key management personnel Recognition criteria Financial liabilities designated as at fair value, classified on the basis of the fair value option, are recognised as at the issue date. Measurement on initial recognition is at cost considered to be the fair value of the instrument without considering any transaction costs or income directly attributable to them Measurement criteria Subsequent to initial recognition, the financial instruments in question are measured at fair value 33 with changes recognised in the income statement within item 110. a) Net income from other financial assets and liabilities measured at fair value through profit or loss: financial assets designated as at fair value. With specific reference to changes in fair value relating to the credit rating, these are recognised within item 120. Valuation reserves in equity unless the accounting treatment would create or enlarge an accounting mismatch in profit or loss. In the latter case the changes in question should be recognised in the aforementioned item in the income statement Derecognition criteria Financial liabilities designated as at fair value are derecognised from the balance sheet when the contractual rights to the cash flows resulting from them expire or when they are transferred with the substantial transfer of all the risks and rewards of their ownership. The profit or loss from the transfer of financial liabilities held for trading is recognised in the income statement within item 110. a) Net income from other financial assets and liabilities measured at fair value through profit or loss: financial assets and liabilities designated as at fair value. 14. Foreign currency transactions Definition The foreign currency is a currency that is not the functional currency of the entity, which is in turn the currency of the primary economic environment in which an entity operates Recognition criteria A foreign currency transaction is recorded at the time of initial recognition in the functional currency applying the spot exchange rate between the functional currency and the foreign currency ruling on the date of the transaction Measurement criteria At each reporting date: (a) foreign currency monetary amounts 34 are translated using the closing rate; (b) non-monetary items 35 measured at historical cost in foreign currency are translated using the exchange rate ruling at the date of the transaction; 33 Reference is made for details concerning the calculation of the fair value to Part A.4 Information on fair value of the Notes to the 2017 consolidated financial statements. 34 Monetary items are defined as relating to determined sums in foreign currency, which is to say to assets and liabilities which must be received or paid for a determined amount in foreign currency. The defining characteristic of a monetary item is therefore the right to receive or an obligation to pay a set or calculable number of foreign currency units. 35 See the note on monetary items for the contrary

201 (c) non-monetary items measured at fair value in a foreign currency are translated using the exchange rates that existed on the dates when the fair values were determined. Exchange rate differences arising from the settlement of monetary items, or from the translation of monetary items at rates different from those at which they were translated when initially recognised during the year or in previous financial statements, are recognised in the income statement for the period except for exchange rate differences arising on monetary items that form part of a net investment in a foreign operation. Exchange rate differences arising from a monetary item that forms part of a net investment in a foreign operation of an entity that prepares financial statements are recognised in the income statement of the individual company financial statements of the entity that prepares the financial statements or the individual company financial statements of the foreign operation. These exchange rate differences in the financial statements that include the foreign operation (e.g. in the consolidated accounts when the foreign operation is a subsidiary) are initially recognised as a separate component in equity and are recognised in the income statement at the time of the disposal of the net investment. When a profit or loss on a non-monetary item is recognised directly in equity, each change in that profit or loss is also recognised directly in equity. However, when a profit or loss on a non-monetary item is recognised in the income statement each change in that profit or loss is recognised in the income statement. The financial statements of foreign subsidiaries and associates which employ an accounting currency that is different from that of the Parent are translated using the exchange rates ruling at the reporting date 15. Insurance assets and liabilities The UBI Banca Group recognises assets and liabilities and also the profits and losses for the period relating to its subsidiary insurance companies on the basis of the provisions of IFRS 9. It does this because: since it is not a financial conglomerate 36 it does not apply the deferral approach 37 ; it has opted not to apply the overlay approach 38. Technical reserves These relate solely to contracts falling within the scope of IFRS 4. An accounting practice known as Shadow Accounting has been adopted, where the fair value component of the assets in separate management portfolios, originally recognised in equity, is posted to the reserves. In fact, paragraph 30 of IFRS 4 states: In some accounting models, realised gains or losses on an insurer s assets have a direct effect on the measurement of some or all of (a) its insurance liabilities, (b) related deferred acquisition costs and (c) related intangible assets. An insurer is permitted, but not required, to change its accounting policies so that a recognised but unrealised gain or loss on an asset affects those measurements in the same way that a realised gain or loss does. The related adjustment to the insurance liability shall be recognised in other comprehensive income if, and only if, the unrealised gains or losses are recognised in other comprehensive income. On the basis of those provisions it is permitted to attribute income and 36 In accordance with Art. 2 of Directive 2002/87/EC, a group or sub-group of a group constitutes a financial conglomerate when it satisfies the following conditions: a) a regulated entity is at the head of the group or at least one of the subsidiaries in the group is a regulated entity; b) where there is a regulated entity at the head of the group, this is either a parent undertaking of another entity in the financial sector, an entity which holds a participation in another entity in the financial sector, or an entity linked with an entity in the financial sector by a relationship which involves management on a unified basis pursuant to a contract concluded with that undertaking or provisions in the articles of association or in which the administrative, management or supervisory bodies consist for the major part of the same persons; c) where there is no regulated entity at the head of the group, the group's activities mainly occur in the financial sector; d) at least one of the entities in the group is within the insurance sector and at least one is within the banking or investment services sector; e) the consolidated and/or aggregated activities of the entities in the group within the insurance sector and the consolidated and/or aggregated activities of the entities within the banking and investment services sector are both significant. 37 This approach is reserved to financial groups which constitute financial conglomerates on the basis of which entities belonging to them, within the insurance sector, may opt not to apply the provisions of IFRS 9 for the preparation of consolidated financial statements until the financial year ending 31 st December This approach is also applicable for groups whose activities are predominantly connected with insurance activities. 38 An option which may taken by companies that issue insurance contracts, which are required to apply IFRS 9 because they do not belong to financial conglomerates. This option, which may be exercised on first-time adoption of IFRS 9, allows the amount needed for the income statement result at the end of the year to be the same as it would have been had the company applied the provisions of IAS 39 in place of IFRS 9 to be reclassified from the income statement to the statement of OCI. Only those financial assets can be designated for the aforementioned approach which: - are measured at fair value and recognised through profit or loss, but would not have been measured in that manner in accordance with IAS 39; - are not held in relation to activities with no connection (e.g. banking activities) with contracts that fall within the scope of application of IFRS

202 expenses resulting from the fair value measurement of financial instruments assigned to separate management portfolios. The value adjustment must be calculated by applying the minimum withheld to the balance of the unrealised capital gains and losses on the securities in each separate management portfolio, recognised in the fair value reserve. A liability adequacy test (LAT) conducted in accordance with IFRS 4 shows that the requirements are met. Any additional reserves in case of death relating to Business Sector III policies are reported in equity. Net insurance premiums Comprises premiums relating to Business Sector I and V contracts Other net profit (loss) on insurance operations This includes the following items: commissions and other acquisition costs from insurance policy contracts relate to Business Sectors I and V only; management fees on investments related to securities management charges; acquisition and liquidation expenses relating to Business Sector III investment contracts; expenses relating to claims. This includes amounts disbursed for claims settlements, net of reinsurance and inclusive of liquidation expenses relating to contracts subject to IFRS 4. Amounts disbursed and liquidation expenses in insurance Business Sectors III and VI are not included, as they are classified as administrative expenses, nor are changes in mathematical reserves for Business Sector III and VI policies, while according to IAS they are defined as financial liabilities. 16. Other information Impairment of financial instruments The following items are subject to impairment rules in accordance with IFRS 9: Financial assets measured at amortised cost ; Financial assets measured at fair value through other comprehensive income that are not equity securities; loan commitments and guarantees granted that are not measured at fair value through profit or loss; and contract assets resulting from transactions that fall within the scope of IFRS 15. General approach The calculation of expected credit losses (ECL), which is to say expected losses to be recognised through profit and loss as impairment losses, was carried out on the basis of whether there has been a significant increase in the credit risk of a financial instrument compared with that calculated on the date of its initial recognition. To achieve this, the instruments subject to impairment rules are associated in accordance with those rules with different stages characterised by different approaches to the calculation of impairment losses 39. In detail: in the absence of a significant increase in credit risk since its initial recognition, the financial instrument is maintained in stage 1 and an impairment loss is recognised in the financial statements equal to the 12-month expected credit losses (i.e. the expected credit losses that result from default events on a financial asset that are possible within 12 months of the reporting date); in the presence of a significant increase in credit risk since initial recognition, the financial instrument is assigned to stage 2 or stage 3 if the financial instrument is impaired 40 and an impairment loss is recognised in the balance sheet equal to the lifetime expected credit losses (i.e. the expected credit losses that result from all possible default events over the expected life of a financial asset). Purchase or originated credit impaired (POCI) financial assets constitute an exception to the above, details of which are given under a special part in this section. 39 The stages differ not only in the procedures employed to calculate impairment losses on loans but also in those used to calculate interest, details of which are given under the relative point of this section In this respect, the UBI Banca Group has adopted the definition given in the 5 th update of Bank of Italy Circular No. 262/2005, which states that non-performing exposures are the sum of all exposures considered non-performing past due, unlikely to pay or bad, as defined under supervisory regulations in force

203 The identification of the presence of a significant increase in credit risk is carried out following a single case-by-case transaction approach and it is based on the use of both qualitative and quantitative criteria. More specifically, moving a financial instrument from stage 1 to stage 2 is caused by one of the following circumstances: - the counterparty becomes past due by more than 30 days, with a significance threshold; - a forbearance measure has been agreed; - lifetime probability of default (PD) changes with respect to a threshold value, specific for each transaction, calculated on the basis of the significant risk characteristics. As concerns the above, it is underlined that the IFRS 9 assumption according to which a position past due by at least 30 days is to be associated with stage 2, is only untrue for loans relating to specific and circumscribed areas of business which in the absence of other indicators involve maintaining the exposure in stage 1. With regard to the significant increase in credit risk, the UBI Banca Group applies the following, limited to debt securities only: - the "Low Credit Risk Exemption" option, with regard to first-time adoption of the standard and subsequently, and only limited to the sovereign debt portfolio. This is an option to assume that credit risk has not increased significantly since initial recognition if the financial instrument has a low credit risk at the measurement date, by identifying the risk with an "investment grade" rating. If subsequently those securities were to lose their investment grade rating, they would be transferred to another stage only in the event of a significant increase in credit risk since the initial recognition date. - the first in, first out (FIFO) method to compare the instrument s original credit risk to that assigned on the reporting date, for each tranche of debt securities acquired. An improvement in credit risk sufficient to eliminate the conditions that had led to a significant increase in it or in other words the loss of non-performing status leads to the return of the financial instrument to its previous stage. In this case the entity recalculates the impairment loss previously recognised, and recognises it through profit and loss as a reversal. In cases of exposure subject to forbearance, any return to the calculation of 12-month expected credit losses takes place in accordance with the timing set by EBA guidelines contained in Regulatory Implementing Technical standards (ITS), which is to say in compliance with the "probation period". Estimate of expected credit losses on performing positions (stages 1 and 2) Expected credit losses are a probability-weighted estimate of credit losses (i.e. the present value of all possible cash shortfalls) over the expected life of the financial instrument. The general approach used to estimate expected credit losses involves the application of regulatory risk parameters adjusted for compliance with the IFRS 9 accounting standard (according to the procedures described later). More specifically, the estimate is made by applying an estimate of the expected loss given default (LGD) and the marginal probability of default (Marginal PD) to the remaining debt on each repayment date. Expected credit losses over the following 12 months are a fraction of the expected losses over the entire lifetime of a loan and they represent losses that will occur if a default were to occur in the 12 months following the reporting date, weighted on the basis of the probabilities that a default will occur. Expected credit losses are discounted back to the reporting date using the effective interest rate of the financial instrument determined on initial recognition and updated for instruments with variable interest rates. In its absence the contracted rate or an average portfolio interest-rate for residual types of loan is used (mainly relating to off-balance sheet exposures). The risk indicators (PD, LGD and CCF Credit Conversion Factor) are assigned to the instruments on the basis of a hierarchy of rules by which priority is given to models calibrated on internal Group data and then to models calibrated on "external credit assessment institution" ("ECAI agencies") data for portfolios for which no internal observations are available. More specifically, a probability of default curve is associated with each instrument on the basis of the segment to which the counterparty belongs and of the rating according to a rating assignment process, which takes account of the availability of an internal rating at Group level or an ECAI rating. In the absence of these ratings, the benchmark AIRB lifetime PD curve which best approximates the risk of the exposure is assigned for non-marginal exposures and the rating for the country to which the instrument belongs is used for marginal exposures, downgraded by one notch. The point-in-time and forward-looking components are incorporated in the lifetime PD curves with the help of internal satellite models developed for stress test purposes. Calculation of the expected loss given default IFRS 9 compliant LGD is carried out by applying specific corrective factors to regulatory internal LGDs in line with IAS 39 approaches. The LGD values were also discounted using the effective interest rate, or in its absence, the contracted rate. The LGD parameter incorporates relationships between the macroeconomic variables and forwardlooking information by using the satellite models developed for stress tests

204 The forecasts of the macroeconomic indicators considered for estimates of PD and LGD are calculated in three possible future scenarios (baseline, best and worst) to which a percentage of occurrence is associated to each one. These estimates are calculated internally in the Group and they are updated quarterly, for the purpose of calculating expected credit losses. The timeframe considered for the estimate of expected credit losses is based on the contractual maturity date for financial instruments with fixed maturities. For those instruments with no predetermined contractual maturity, the period over which expected losses are estimated is set at one year from the reporting date. Estimate of expected credit losses on non-performing positions (stage 3) The evaluation of non-performing positions normally takes place on a case-by-case basis. The method for estimating impairment losses recognised on non-performing loans is based on discounting expected future cash flows, taking account of any guarantees to back the positions and of any advances received. The fundamental elements for determining the present value of cash flows are the identification of the estimated receipts, the relative maturity dates and the discount rate to apply. The amount of the impairment losses is equal to the difference between the carrying amount of the asset and the present value of the expected future cash flows, discounted at the effective interest rate and appropriately updated for instruments with variable interest rates, or, for cases of exposures classified as bad, with the effective interest rate existing as at the date of classification as bad. Depending on the size of the impairment loss and of the exposure, estimates of the amount recoverable are based either on a going concern approach, which assumes that the counterparty's business will continue to generate operational cash flows or alternatively on a gone concern basis. The latter is based on the assumption that the company's operations will be discontinued and as a consequence the only cash flows available to recover the exposure will be generated by the enforcement of the underlying guarantees. Estimates of the credit recovery amount, consistent with the condition (performing or nonperforming) of the exposures shall include the available forward-looking factors. These factors relate in particular to the macroeconomic scenario forecasts and the geosectoral trends of the environment in which the counterparty operates. The case-by-case measurement rules for "bad" positions include forward-looking aspects: for estimating the percentage impairment of real estate pledged as collateral (as estimated via up-todate appraisals or based on the report of a court-appointed expert); by means of the introduction of specific exposure recovery scenarios, considering that the Group intends to sell them within a reasonable timeframe, to a third party, both in order to maximise cash flows and to pursue a specific non-performing loan management strategy. Consequently, the expected credit loss estimates for those positions reflect not only the expected recovery amount through ordinary management of the loan, but also the presence of an appropriately calibrated sale scenario that would lead to cash flows from the transaction. Calculation of interest income on impaired financial assets As already stated in previous sub-sections, the calculation of interest income is carried out by applying the effective interest rate except for purchase or originated credit impaired (POCI) financial assets which are discussed separately. The calculation of interest income differs according to the stage with which the financial instrument is associated with for the purposes of determining impairment losses. In detail: for assets associated with stages 1 and 2, which is to say performing positions, the effective interest rate is applied to the gross carrying amount of the financial asset consisting of the amortised cost of the financial instrument without the overall impairment losses recognised; for assets associated with stages 3, which is to say non-performing positions, the effective interest rate is applied to the amortised cost of the financial instrument, consisting of the gross carrying amount less the cumulative impairment losses recognised. Purchased or originated credit impaired assets (POCI) Purchase or originated credit impaired assets (POCI) are defined as exposures that are non-performing at the purchase or origination date. POCI assets also include credit exposures acquired in the course of disposal transactions (individual portfolio) and business combinations. The assets in question are not identified by any specific balance sheet item, but are classified on the basis of the business model with which the assets are managed, within the following items: 30. Financial assets measured at fair value through other comprehensive income ; and 40. Financial assets measured at amortised cost

205 On this basis reference is made to the information given on the items in question for the initial recognition, measurement and derecognition criteria. With specific reference to: 1. the application of the effective interest rate; and 2. the calculation of impairment losses; the specifications given below are made. 1. The effective interest rate method The interest recognised should be calculated by applying the credit adjusted effective interest rate, which is the interest rate which at the time of initial recognition exactly discounts all the estimated future cash flows at amortised cost of the asset, incorporating also the expected credit losses in the estimate (unlike the method used to calculate the effective interest rate). This interest rate is applied to the amortised cost of the instrument, which is the gross carrying amount of the asset minus the cumulative impairment losses. 2. Calculation of net impairment losses The assets in question are subject to the calculation of the lifetime expected credit losses of the financial instrument with no possibility of transfer to 12-month expected credit losses should there be a significant improvement in the credit risk of the exposure. More specifically, it is underlined that the expected credit losses are not recognised on the first measurement date of the financial instrument because they are already included in the calculation of the credit adjusted effective interest rate, but only if there have been changes in the expected credit losses compared with those initially estimated. In this circumstance the impact of that change is recognised within item 130 Net impairment losses for credit risk. Contractual modifications of financial assets Contractual modifications made to financial assets can be classified in the following two categories: 1. contractual modifications which, on the basis of their significance, lead to the derecognition of the financial asset and are therefore treated according to derecognition accounting rules; 2. contractual modifications which do not lead to the derecognition of the financial asset and are therefore treated according to modification accounting rules. 1. Derecognition Accounting If the contractual modifications lead to derecognition of the financial asset the modified financial instrument is recognised as a new financial asset. The new modified asset must be subject to an SPPI test in order to decide how to classify it and it must be recognised at fair value. The difference between the carrying amount of the derecognised asset and that which is recognised is stated within item 130. Net impairment losses for credit risk. For the purposes of impairment measurement requirements the initial recognition date is considered to be that on which the modification of the asset took place. 2. Modification Accounting In cases of modification accounting the gross carrying amount of the financial instrument is recalculated, by discounting the new cash flows determined by the modified contract at the original effective interest rate of the financial asset. All the differences between the amount recalculated in this way and the gross carrying amount are recognised in the income statement within item 140. Profits (losses) from contractual modifications without derecognition. For the purposes of impairment measurement requirements the initial recognition date is considered to be that on which the instrument was originated. The UBI Banca Group defines significance in this respect on the basis of the nature of the modification requested by the counterparty. In this regard the following two cases are identified, 1. modifications made due to financial difficulties of the counterparty (i.e. forbearance measures); 2. modifications made for commercial reasons Modifications made due to financial difficulties of the counterparty In cases of modifications for counterparties that present financial difficulties (both performing and nonperforming), the definition given to the term substantial is essentially qualitative because the purpose of the modifications is to maximise the recovery of the original exposure. The quantitative impact that the contractual modifications may have on the value of the financial instrument the contractual provisions of which are subject to modification is therefore considered irrelevant. On that basis, contractual modifications to the financial instrument are considered substantial where its owner is exposed to new types of risk or to modifications to the instrument which alter its nature such as for example the introduction of clauses on the basis of which the cash flows from the modified 41 This is defined as all those contractual modifications made for reasons that are not determined by financial difficulties of the counterparty

206 instrument do not represent solely payments of principal and interest on the principal amount outstanding. 2. Modifications made for commercial reasons. In cases of contractual modifications made solely for commercial reasons, such as changes to the interest rate, whether the modification is substantial or not is assessed not only on the basis of the qualitative reasoning mentioned in the previous point, but also on the basis of percentage changes in the cash flows from the financial instrument before and after the modification. In this situation the Group considers significance according a quantitative factor, which is the percentage interest rate resulting from the renegotiation with respect to current market interest rates. More specifically, in view of the consideration that the substantial nature of a commercial renegotiation is strictly linked to the level of market interest rates (i.e. the risk free interest rate), which has a determining factor on the bank s profits in terms of net interest income, the UBI Banca Group sets a number of different significance thresholds based on the current level of market interest rates. Derivatives embedded in hybrid contracts An "embedded derivative" is defined as a component of a hybrid (combined) instrument that also includes a host non-derivative contract, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. Derivatives embedded in financial liabilities are separated from the host contracts and treated in the accounts as stand-alone derivatives if and only if 42 : the economic risks and characteristics of the embedded derivative are not closely related to the economic risks and characteristics of the host contract; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; the hybrid (combined) contract is not measured at fair value with changes in fair value recognised through profit or loss. Treasury shares The treasury shares present in the UBI Banca Group portfolio are deducted from equity. No profit or loss arising from the purchase, sale, issue or cancellation of treasury shares is recognised in the income statement. The differences between the purchase and sale price arising from these transactions are recorded in equity reserves. Employee benefits Definition Employee benefits are defined as all forms of consideration given by an enterprise in exchange for services rendered by employees. Employee benefits can be classified as follows: short-term benefits (not including benefits due to employees for end of contract) which it is planned to pay entirely within twelve months from the end of the year in which the employees provided their services; post-employment benefits at the end of an unemployment contract due after the contract of employment has terminated; benefits due to employees for the ending of an employment contract; other long-term benefits, other than the previous, which it is not planned to pay entirely within the twelve months from end of the financial year in which employee rendered the relative employment service. Post-employment benefits and defined service provisions Recognition criteria Following the reform of supplementary pensions pursuant to Legislative Decree No. 252/2005, portions of post-employment benefit funds maturing from 1 st January 2007 constitute a defined benefit plan. The liability relating to those portions is measured on the basis of the contributions due without the application of any actuarial methods. However, post-employment benefits maturing up until 31 st December 2006 continue to constitute a post-employment benefit belonging to the defined benefit plan series and as such require the amount of the obligation to be determined on an actuarial basis and to be discounted to present values because the debt may be extinguished a long time after the employees have rendered the relative service. The amount is accounted for as a liability amounting to: 42 In compliance with the provisions of IFRS 9, derivatives embedded in financial assets are not subject to separation. On the other hand, derivatives embedded in non-financial assets are subject to separation if the above-mentioned conditions are met

207 (a) the present value of the defined benefit obligation as at the reporting date; (b) plus any actuarial gains (less any actuarial losses) recognised in a separate reserve in equity; (c) less the fair value at the reporting date of any assets at the service of the plan. Measurement criteria Actuarial gains/losses, recognised in a special valuation reserve in equity, comprise the effects of adjustments arising from the reformulation of previous actuarial assumptions as a result of actual experience or from changes in the actuarial assumptions themselves. The Projected Unit Credit Method is used to calculate the present value. This considers each single period of service as giving rise to an additional unit of severance payment and therefore measures each unit separately to arrive at the final obligation. This additional unit is obtained by dividing the total expected service by the number of years that have passed from the time service commenced until the expected payment date. Application of the method involves making projections of future payments based on historical analysis of statistics and of the demographic curve and discounting these flows on the basis of market interest rates. The rate used for present value discounting purposes is determined by making reference to market yields observed as at the reporting date for high quality corporate bonds or to yields on securities with a low credit risk. Stock Options/Stock Grants Stock option and stock grant plans are defined as personnel remuneration schemes where the service rendered by an employee (or a third party) is remunerated by using equity instruments (including options on shares). The cost of these transactions is measured at the fair value of equity instruments granted and is recognised in the income statement under item 190. a) Administrative expenses: staff costs on a straight line basis over the vesting period of the plan. The fair value determined relates to the equity instruments granted at the time of grant and takes account of market prices, if available, and the terms and conditions upon which the instruments were granted. Segment Reporting Segment reporting is defined as the manner in which financial information on an enterprise is reported by operating segment. An operating segment is intended as a component of an entity: that engages in business activities that generate revenues and expenses; whose operating results are reviewed regularly by the entity s chief operating decision maker, to make decisions about the resources to be allocated to the segment and assess its performance; and for which separate financial information is available. Segment reporting is based on elements that senior management uses to make operating decisions (a management approach ) and consequently the identification of operating segments is performed on the basis of the current system of reporting to management which is based primarily on operational analysis of legally recognised entities. Segment reporting is completed by information on the geographical areas in which revenues are produced and assets are held. Revenue Definition Revenue is the gross inflow of economic benefits resulting from business arising from the ordinary operating activities of an enterprise when these inflows create an increase in equity other than an increase resulting from payments made by shareholders. Recognition criteria Revenue resulting from contractual obligations towards customers is recognised only if the following criteria are met: a. the parties to the contract have approved the contract and are committed to perform their respective obligations; b. the entity can identify each party s rights regarding the goods or services to be transferred; c. the entity can identify the payment terms for the goods or services to be transferred; d. the contract has commercial substance (i.e. the risk, timing or amount of the entity s future cash flows is expected to change as a result of the contract); and e. it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer s ability and intention to pay that amount of consideration when it is due

208 Recognition of variable consideration Revenue that consists of variable consideration is recognised through profit or loss if it can be reliably estimated and only if it is highly probable that the consideration will not be reversed through profit or loss either in its entirety or for a significant part in subsequent periods. In cases of great uncertainty over the nature of the consideration it will only be recognised when that uncertainty has been resolved. Procedures and timing for the recognition of consideration The consideration in a contract, the collection of which must be probable, is allocated to the single performance obligations resulting from the contract. The time at which recognition of revenue takes place is based on the time of the performance of the obligations either in one single solution or alternatively over the period of time set for performing the various obligations. Revenue from financial assets Interest is recognised on an accruals basis that takes into account the effective yield of the asset. Negative components of income accruing on financial assets are recognised within the item Interest and similar expense, while positive components accruing on financial liabilities are recognised within the item Interest and similar income ; Arrears of interest are recognised within item 10. Interest and similar income, at the time at which they are actually collected. Dividends are recognised when shareholders acquire the right to receive payment. Expenses or revenues resulting from the sale or purchase of financial instruments, determined by the difference between the amount paid or received for the transaction and the fair value of the instrument are recognised through profit or loss on initial recognition of the financial instrument when the fair value is determined: by making reference to current and observable market transactions in the same instrument; by using measurement techniques which use, as variables, only data from observable markets. Expenses Expenses are recognised in the accounts at the time at which they are incurred while following the criteria of matching expenses to revenues that result directly and jointly from the same transactions or events. Expenses that cannot be associated with revenues are recognised immediately in the income statement. Expenses directly attributable to financial instruments measured at amortised cost and determinable from the outset, regardless of the time at which they are settled, are recognised through profit and loss by applying the effective interest rate. Impairment losses are recognised through profit and loss in the year in which they are measured. Impairment tests on goodwill The provisions of IAS 36 require goodwill and therefore the cash generating units (CGUs) or groups of CGUs to which it was allocated, to be tested for impairment at least annually and also certain qualitative and quantitative indicators of presumed impairment to be monitored continuously to see whether the necessary conditions of presumed impairment exist for repeating goodwill impairment tests more frequently. Since the stock market capitalisation as at 30 th June 2018 was lower than the book equity, all the main elements were analysed from internal and external inputs which might lead to a fundamental presumption of impairment (i.e. the presumption that the recoverable amounts are less than the carrying amounts of the CGUs to which impairment is allocated). It must first be stated that in the first half in question both the stock market capitalisation and the equity value implicit in the consensus target price had both fallen substantially. Compared with 31 st December 2017, the stock market capitalisation had fallen 9.71%, while the book equity implicit in the consensus target price had fallen 6.98%. On the other hand, the book equity implicit in the maximum target price had fallen 7.41%. A rise in the BTP-Bund spread was also recorded during the six-month period when a new government was formed, which caused the CDSs recognised on UBI Banca s debt securities to rise again. The following fundamental factors were analysed: i. the cost of equity (cost of own funds) for UBI Banca (and its determinants); ii. the interest rate scenario;

209 iii. trends in consensus net profit forecasts (and other income statement items) made by equity analysts both for 2018 and subsequent years (after the announcement of the results for the first quarter of 2018). As concerns the cost of equity (and its determinants), this had recorded a slight increase as at 30 th June 2018 due to an increase in the betas as shown in the table below. (a) (b) (c) Delta = (a) - (b) A) Risk Free (average daily 1 year BTP 10-y) 2.05% 2.07% -0.02% B) Beta (5-y monthly vs FTSE Italia All Share) 1.68x 1.60x C) Equity risk premium 5.00% 5.00% 0.00% D) Cost of equity = A + B x C 10.44% 10.09% +0.35% The estimate of the cost of equity (CoE) in June 2018 stood at 10.44%, up 35 basis points compared with the estimate made as at 31 st December 2017 (10.09%). With regard to the interest rate scenario (for forecasting the cash flows of the result), a survey was carried out on external input based forecasts used as a basis for the projections. More specifically, a deterioration was found in the medium-term part of the yield curve: the future rate for the 3-month Euribor for 2020 and 2021 was lower than the same estimates formulated by Management at the end of 2017 and used as the basis for projections developed for impairment test purposes in December In this respect it is underlined that a reduction in market interest rates reduces the Group s expected results. Finally, net profit forecasts by equity analysts as at 30 th June 2018 had worsened compared with the same forecasts formulated at the beginning of the year. The analysis conducted allowed the deterioration in cash flows to be attributed to the worsening of the interest rate scenario. In order to check the resilience of the values tested as at 31 st December 2017, a sensitivity analysis was carried out to verify the impact on consolidated Group figures, considering an increase of 0.35% in the opportunity cost of capital, together with a worsening of business plan cash flows in the amount adopted by equity analysts. We report that the sensitivity analysis carried out here would lead to an overall reduction in the recoverable amount compared to that estimated as at 31 st December 2017 comprised within a range of change in prices/target prices recorded by UBI Banca s share during the first half (-9.71%/-6.98%). We report that the recoverable amount estimated for the last annual impairment test at the end of December 2017 would have been able to tolerate that reduction with no impairment loss arising at Group level. As concerns the internal inputs we report that a comparison of the consolidated results for the period ended June 2018 with budget forecasts for the same period showed no negative changes in net profit. On the basis of the results reported above, none of which indicate assumptions of impairment, no need was found to repeat the impairment test for the purposes of preparing this interim financial report. BRRD Directive (Bank Recovery and Resolution Directive 2014/59/EU) - Accounting treatment of the contribution to the Single Resolution Fund In May, the Bank of Italy, in its capacity as the Resolution Authority, addressed a communication as usual to all Italian banks subject to the BRRD Directive (Bank Recovery and Resolution Directive 2014/59/EU) 43, specifying the ordinary contribution due for the financial year 2017, calculated according to European Commission Delegated Regulations 2015/63 and 2015/81. This contribution was decided by the Single Resolution Board in partnership with the Bank of Italy, and under normal circumstances, pursuant to the aforementioned Regulation 2015/81, at least 15% of the amount may be paid by stipulating irrevocable commitments to pay. In this respect, in line with the provisions for years prior to 2016, the aforementioned communication allows banks the option to pay 85% of the contribution in cash and the remaining 15% by means of an irrevocable commitment backed by cash collateral. Along the same lines as in prior years, UBI Banca opted to pay the contribution 85% in cash and 15% by making a commitment and on 31 st May 2018, it paid the full contribution due. 43 This directive set new resolution rules applicable since 1 st January 2015 for all banks in the European Union. Its measures are funded by the National Resolution Fund, which was merged into the Single Resolution Fund on 1 st January

210 In view of the above, the Group recognised the overall contribution amounting to 34.4 million 44 in the income statement, of which 29.2 million within the item Other administrative expenses 45 and 5.2 million below the line within irrevocable commitments to pay 46, fully backed by cash collateral. - Accounting for contributions to the National Resolution Fund The Italian Government s 2016 Legge di stabilità ( stability law annual finance law) 47 states, in the event that the National Resolution Fund (hereinafter NRF ) does not have sufficient funds to sustain resolution efforts over time, that Italian banks must pay: a) additional contributions to the NRF itself, within the overall limit, inclusive of the ordinary and extraordinary contributions paid to the NRF, pursuant to articles 70 and 71 of EU Regulation 2014/ ; b) for 2016 only, two additional quotas on top of the regular contribution to the Single Resolution Fund (SRF). Article 25 of Decree Law No. 237 of 23 rd December 2016 specifies that such additional contributions are to be paid to cover any and all of NRF s obligations, losses, costs and liabilities arising from or in any event related to the execution of provisions to start resolutions and with the requirement to ensure that they can be effectively executed, even if as a consequence of amendments made to them. In this respect, on 27 th December 2016 the Bank of Italy, in its capacity as the national resolution institution, had called in the two annual instalments to the contribution mentioned in point b) above 49. With account taken of the fund s financial requirements in the near future, last May the Bank of Italy called in a portion of the additional contributions mentioned in letter b) of which a total of 12.9 million to be paid by the UBI Banca Group 50. The cost in question, relating to the second quarter, was recognised in accordance with IFRIC 21 51, within the item Other administrative expenses. 44 The best estimate of the contribution had already been recognised, in accordance with IFRIC 21 Levies, in the interim financial report for the period ended 31 st March In compliance with the provisions of Art. 8 of the above mentioned Commission Delegated Regulation of the European Commission No. 2015/ In compliance with the provisions of the Bank of Italy communication cited and pending further announcements by the supervisory authorities. 47 Cf. Art. 1, paragraph 848, Law No. 208/2015 of 28 th December Amounting to at most three times the regular contribution. 49 This totalled 74.7 million for the UBI Banca Group. 50 A contribution which was paid by the Group on 22 nd June This was along the same lines as that which was done with regard to the additional contributions recognised in 2016 in compliance, moreover, with the Bank of Italy notification entitled Addition-al contributions to the national resolution fund: accounting treatment and treatment for supervisory reporting dated 25 th January

211 List of the main IFRS standards endorsed by the European Commission IAS/IFRS ACCOUNTING STANDARDS EU Regulations IAS 1 Presentation of financial statements 1274/08, 53/09, 70/09, 494/09, 243/10, 149/11, 475/12, 1254/12, 1255/12, 301/13, 2113/15, 2173/15, 2406/15, 1905/16, 2067/16, 1986/17 IAS 2 Inventories 1126/08, 1255/12, 1905/16, 2067/16, 1986/17 IAS 7 Statement of cash flows 1126/08, 1274/08, 70/09, 494/09, 243/10, 1254/12, 1174/13, 1986/17, 1990/17 IAS 8 Accounting policies, changes in accounting estimates and 1126/08, 1274/08, 70/09, 1255/12, errors 2067/16 IAS 10 Events after the reporting date 1126/08, 1274/08, 70/09, 1142/09, 1255/12, 2067/16 IAS 12 Income taxes 1126/08, 1274/08, 495/09, 475/12, 1254/12, 1255/12, 1174/13, 1905/16, 2067/16, 1986/17, 1989/17 IAS 16 Property, plant and equipment 1126/08, 1274/08, 70/09, 495/09, 1255/12, 301/13, 28/15, 2113/15, 2231/15, 1905/16, 1986/17 IAS 17 Leases 1126/08, 243/10, 1255/12, 2113/15 IAS 19 Employee benefits 1126/08, 1274/08, 70/09, 475/12, 1255/12, 29/15, 2343/15 IAS 20 Accounting for government grants and disclosure of 1126/08, 1274/08, 70/09, 475/12, government assistance 1255/12, 2067/16 IAS 21 The effects of changes in foreign exchange rates 1126/08, 1274/08, 69/09, 494/09, 149/11, 475/12, 1254/12, 1255/12, 2067/16, 1986/17 IAS 23 Borrowing costs 1260/08, 70/09, 2113/15, 2067/16, 1986/17 IAS 24 Related party disclosures 632/10, 475/12, 1254/12, 1174/13, 28/15 IAS 26 Retirement benefit plans 1126/08 IAS 27 Consolidated and separate financial statements 1254/12, 1174/13, 2441/15 IAS 28 Investments in associates and joint ventures 1254/12, 2441/15, 1703/16, 2067/16, 182/18 IAS 29 Financial reporting in hyperinflationary economies 1126/08, 1274/08, 70/09 IAS 32 Financial instruments: presentation 1126/08, 1274/08, 53/09, 70/2009, 495/09, 1293/09, 149/11, 475/12, 1254/12, 1255/12, 1256/12, 301/13, 1174/13, 1905/16,2067/16, 1986/17 IAS 33 Earnings per share 1126/08, 1274/08, 495/09, 475/12, 1254/12, 1255/12, 2067/16 IAS 34 Interim financial reporting 1126/08, 1274/08, 70/09, 495/09, 149/11, 475/12, 1255/12, 301/13, 1174/13, 2343/15, 2406/15, 1905/16 IAS 36 Impairment of assets 1126/08, 1274/08, 69/09, 70/09, 495/09, 243/10, 1254/12, 1255/12, 1374/13, 2113/15, 1905/16,2067/16 IAS 37 Provisions, contingent liabilities and contingent assets 1126/08, 1274/08, 495/09, 28/15, 1905/16, 2067/16, 1986/17 IAS 38 Intangible assets 1126/08, 1274/08, 70/09, 495/09, 243/10, 1254/12, 1255/12, 28/15, 2231/15, 1905/16, 1986/17 IAS 39 Financial instruments: recognition and measurement 1126/08, 1274/08, 53/2009, 70/09, 494/09, 495/09, 824/09, 839/09, 1171/09, 243/10, 149/11, 1254/12, 1255/12, 1174/13, 1375/13, 28/15, 1905/16, 2067/16, 1986/17 IAS 40 Investment property 1126/08, 1274/08, 70/09, 1255/12, 1361/14, 2113/15, 1905/16, 1986/17, 400/18 IAS 41 Agriculture 1126/08, 1274/08, 70/09, 1255/12, 2113/15, 1986/17 IFRS 1 First-time adoption of international financial reporting standards 1126/09, 1164/09, 550/10, 574/10, 662/10, 149/11, 475/12, 1254/12, 1255/12, 183/2013, 301/13, 313/13, 1174/13, 2343/15, 2441/15,1905/16, 2067/16, 1986/17, 182/18, 519/18 IFRS 2 Share-based payment 1126/08, 1261/08, 495/09, 243/10, 244/10, 1254/12, 1255/12, 28/15, 2067/16, 289/18 IFRS 3 Business combinations 495/09, 149/11, 1254/12, 1255/12, 1174/13, 1361/14, 28/15, 1905/16, 2067/16, 1986/17 IFRS 4 Insurance contracts 1126/08, 1274/08, 1165/09, 1255/12, 1905/16, 2067/16, 1986/17, 1988/17 IFRS 5 Non-current assets held for sale and discontinued operations 1126/08, 1274/08, 70/09, 494/09, 1142/09, 243/10, 475/12, 1254/12, 1255/12, 2343/15, 2067/

212 IFRS 6 Exploration for and evaluation of mineral resources 1126/08 IFRS 7 Financial instruments: disclosures 1126/08, 1274/08, 53/09, 70/2009, 495/09, 824/09, 1165/09, 574/10, 149/11, 1205/11, 475/12, 1254/12, 1255/12, 1256/12, 1174/13, 2343/15, 2406/15, 2067/16, 1986/17 IFRS 8 Operating segments 1126/08, 1274/08, 243/10, 632/10, 475/12, 28/15 IFRS 9 Financial instruments 2067/16, 1986/17, 498/18 IFRS 10 Consolidated financial statements 1254/12, 313/13, 1174/13, 1703/16 IFRS 11 Joint arrangements 1254/12, 313/13, 2173/15 IFRS 12 Disclosure of interests in other entities 1254/12, 313/13, 1174/13, 1703/16, 182/18 IFRS 13 Fair value measurement 1255/12, 1361/14,2067/16, 1986/17 IFRS 15 Revenue from contracts with customers 1905/16, 1986/17, 1987/17 IFRS 16 Leases (*) 1986/17 (*) From 1 st January 2019, the date on which application of the standard becomes compulsory, the provisions of the following standards and interpretations will no longer be applicable: IAS 17, IFRIC 4, SIC 15 and 27. SIC/IFRIC INTERPRETATION DOCUMENTS EU Regulations IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities 1126/08, 1274/08, 1986/17 IFRIC 2 Members' shares in co-operative entities and similar 1126/08, 53/09, 1255/12, 301/13, instruments 2067/16 IFRIC 4 Determining whether an arrangement contains a lease 1126/08, 70/09, 1255/12 IFRIC 5 Rights to interests arising from decommissioning, 1126/08, 1254/12, 2067/16 restoration and environmental rehabilitation funds IFRIC 6 Liabilities arising from participating in a specific market - waste electrical and electronic equipment 1126/08 IFRIC 7 Applying the restatement approach under IAS /08, 1274/08 Financial reporting in hyperinflationary economies IFRIC 10 Interim financial reporting and impairment 1126/08, 1274/08, 2067/16 IFRIC 12 Service concession arrangements 254/09, 1905/16, 2067/16, 1986/17 IFRIC 14 Prepayments of a minimum funding requirement 1263/08, 1274/08, 633/10, 475/12 IFRIC 16 Hedges of a net investment in a foreign operation 460/09, 243/10, 1254/12, 2067/16 IFRIC 17 Distributions of non-cash assets to owners 1142/09, 1254/12, 1255/12 IFRIC 19 Extinguishing financial liabilities with equity instruments 662/10, 1255/12, 2067/16 IFRIC 20 Stripping costs in the production phase of a surface mine 1255/12 IFRIC 21 Levies 634/14 IFRIC 22 Foreign currency transactions and advance consideration 519/18 SIC 7 Introduction of the euro 1126/08, 1274/08, 494/09 SIC 10 Government assistance no specific relation to operating 1126/08, 1274/08 activities SIC 15 Operating leases Incentives 1126/08, 1274/08 SIC 25 Income taxes Changes in the tax status of an enterprise 1126/08, 1274/08 or its shareholders SIC 27 Evaluating the substance of transactions in the legal form 1126/08, 1905/16, 2067/16 of a lease SIC 29 Service concession arrangements: disclosures 1126/08, 1274/08, 70/09, 1986/17 SIC 32 Intangible assets Website costs 1126/08, 1274/08, 1905/16, 1986/

213 Information on transfers between portfolios of financial assets The UBI Banca Group did not modify its business models governing the management of its financial assets during the period and therefore it did not carry out any reclassifications on them. Information on fair value Qualitative information Reference is made to section A.4 Information on fair value in the Notes to the Consolidated Financial Statements contained in the 2017 Annual Report for full details of methods employed to measure fair value. Quantitative information A Assets and liabilities measured at fair value on a recurring basis: distribution by fair value level Financial assets/liabilities measured at fair value restated Figures in thousands of euro L1 L2 L3 L1 L2 L3 1. Financial assets measured at fair value through profit or loss 258, , , , , ,070 a) financial assets held for trading 11, ,238 71, , ,211 75,526 b) financial assets designated as at fair value 10, , c) other financial assets mandatorily measured at fair value 236, , , , , , Financial assets measured at fair value through other comprehensive income 11,393,607 84,131 50,236 12,246,393 64,696 58, Hedging derivatives - 57,953 1, ,028 2, Property, plant and equipment Intangible assets Total 11,652, , ,083 12,982, , , Financial liabilities held for trading , , Financial liabilities designated as at Fair value - 75, , Hedging derivatives - 102, ,590 - Total , ,

214 A Changes in the first half in assets measured at fair value on a recurring basis (level 3) Figures in thousands of euro Financial assets measured at fair value through profit or loss Total a) + b) + c) of which: a) financial assets held for trading of which: b) financial assets designated as at fair value of which: c) other financial assets mandatorily measured at fair value Financial assets measured at fair value through other comprehensive income Hedging derivatives Property, plant and equipment Intangible assets 1. Opening balances (*) 536,739 75, ,213 58,818 2, Increases 39,042 2,335-36,707 5, Purchases 15, , Profits recognised in: 13, , Income statement 13, , of which gains 7, , Equity X X X Transfers from other levels 1,964 1, Other increases 8, ,090 4, Decreases (47,785) (6,289) - (41,496) (13,906) (1,028) Sales (28,012) (45) - (27,967) (4,856) Redemptions (861) (1) - (860) Losses recognised in: (16,254) (3,585) - (12,669) (320) (1,028) Income statement (16,254) (3,585) - (12,669) - (737) of which losses (12,426) (641) - (11,785) - (736) Equity X X X (320) (291) Transfers to other levels (2,657) (2,657) Other decreases (1) (1) - - (8,730) Closing balances 527,996 71, ,424 50,236 1, (*) The opening balances incorporate the accounting impacts of first-time application of financial reporting standard IFRS 9. They are therefore not fully comparable with the figures restated as at 31 st December A Changes in the first half in liabilities measured at fair value on a recurring basis (level 3) Figures in thousands of euro Financial liabilities held for trading financial liabilities designated as at fair value Hedging derivatives 1. Opening balances Increases Issuances Losses recognised in: Income statement of which losses Equity X Transfers from other levels Other increases Decreases (48) Redemptions Repurchases Profits recognised in: (29) Income statement (29) of which gains (29) Equity X Transfers to other levels (19) Other decreases Closing balances Financial assets held for trading The increases in Financial assets held for trading are due primarily to transfers to fair value level three amounting to approximately 2 million in relation to derivatives for which the credit value adjustment risk was greater than the limits set by Group Policy (10% of the gross book fair value). The main losses recognised through profit and loss related to losses on derivatives of 2.9 million and other losses amounting to 0.6 million. Decreases due to Transfers to other levels, amounting to 2.7 million, related to derivatives on the basis of valuations carried out according to the Group Policy indicated above

215 Other financial assets mandatorily measured at fair value Increases included the payment of 15.2 million (recognised within the item Purchases ) as consideration for the investment in the Italian Recovery Fund (formerly the Atlante II Fund). Profits totalling 12.7 million were also recognised through profit or loss and included gains of 4.5 million on equity investments, gains of 2.6 million on other financial assets and profits on the sale amounting to 5.6 million. Financial assets measured at fair value through other comprehensive income Decreases were mainly due to sales carried out by UBI Banca consisting mostly of the disposal of the investment in CSE - Consorzio Servizi Bancari Scarl. ( 4.3 million). Derivatives Losses recognised through profit and loss, amounting to 0.7 million, were incurred primarily on CCS derivatives entered into to hedge against currency risk. A Assets and liabilities not measured at fair value or measured at fair value on a non-recurring basis: distribution by fair value level Assets/liabilities not measured at fair value or measured at fair value on a non-recurring basis restated Figures in thousands of euro BV L1 L2 L3 BV L1 L2 L3 1. Financial assets measured at amortised cost 103,886,299 2,723,493 30,976,482 73,775, ,648,875 2,871,547 30,658,240 70,576, Tangible assets held for investment 265, , , , Non-current assets and disposal groups held for sale 1, Total 104,153,343 2,723,493 30,976,482 74,088, ,910,536 2,871,547 30,658,240 70,901, Financial liabilities measured at amortised cost 111,617,355 15,785,118 9,750,096 85,889, ,182,776 15,287,729 11,188,099 85,281, Liabilities associated with assets held for sale Total 111,617,355 15,785,118 9,750,096 85,889, ,182,776 15,287,729 11,188,099 85,281,773 Information on Day One Profit/Loss The information relates to differences between transaction prices and the value obtained by using measurement techniques that emerge on initial recognition and that are not immediately recognised through profit or loss on the basis of paragraph B5.1.2 A of IFRS 9. Given the above, we report that in the period in question the UBI Banca Group has not performed any transactions for which a difference between the purchase price and the value of the instrument obtained using internal measurement techniques has arisen on initial recognition

216 The scope of consolidation The companies that formed part of the consolidation as at 30 th June 2018 are listed below, divided into subsidiaries (fully consolidated) and associates (consolidated using the equity method). The percentage of control or ownership attributable to the Group (direct or indirect), their headquarters (registered address or operating headquarters) and the share capital are also given for each of them. Fully consolidated companies (control is by the Parent of the Group where no other indication is given): 1. Unione di Banche Italiane Spa - UBI Banca (Parent) registered address: Bergamo, Piazza Vittorio Veneto, 8 share capital: 2,843,177, UBI Trustee Sa (100% controlled) registered address: 37/A, Avenue J.F. Kennedy, L Luxembourg share capital: 250, Prestitalia Spa (100% controlled) registered address: Bergamo, Via A. Stoppani, 15 share capital: 205,722, IW Bank Spa (100% controlled) registered address: Milan, Piazzale F.lli Zavattari, 12 share capital: 67,950, Centrobanca Sviluppo Impresa SGR Spa 2 (100% controlled by Centrobanca) registered address: Milano, Corso Europa, 16 share capital: 2,000, UBI Pramerica SGR Spa (65% controlled) operating headquarters: Milano, Via Monte di Pietà, 5 share capital: 19,955, UBI Management Company Sa (100% controlled by UBI Pramerica SGR) registered address: 37/A, Avenue J.F. Kennedy, L Luxembourg share capital: 125, UBI Leasing Spa (controlled 100%) registered address: Brescia, Via Cefalonia, 74 share capital: 644,952, Unione di Banche Italiane per il Factoring Spa - UBI Factor Spa (100% controlled) registered address: Milan, Via f.lli Gabba, 1 share capital: 36,115, BPB Immobiliare Srl (100% controlled) registered address: Bergamo, Piazza Vittorio Veneto, 8 share capital: 185,680, BancAssurance Popolari Spa ( % controlled) registered address: Arezzo, Via P. Calamandrei, 255 share capital: 61,080, BancAssurance Popolari Danni Spa ( % controlled and % held by BancAssurance Popolari) registered address: Arezzo, Via P. Calamandrei, 255 share capital: 5,500, Assieme Srl (89.79% controlled by BancAssurance Popolari) registered address: Arezzo, Via T. Edison, 45 share capital: 30, Oro Italia Trading Spa - in liquidation (100% controlled) registered address: Arezzo, Via P. Calamandrei, 255 share capital: 500, Kedomus Srl (100% controlled) registered address: Brescia, Via Cefalonia, 74 share capital: 300,000 1 On 20 th February 2018 a deed was signed for the merger of Banca Teatina into the Parent: because Banca Teatina was 100% controlled by UBI Banca, the merger had no effect on the number of shares and the share capital of the latter. 2 With a note dated 12 th January 2018, the Bank of Italy notified the removal of this company from the register of asset management companies. As already reported, this asset management company managed the Sviluppo Imprese Fund, which was liquidated on 16 th August

217 16. UBI Sistemi e Servizi Scpa 3 Consortium Stock Company ( % controlled and % interest held by IW Bank; % held by UBI Pramerica SGR % held by UBI Factor; % held by Prestitalia and by BancAssurance Popolari; and % held by UBI Academy) registered address: Brescia, Via Cefalonia, 62 share capital: 36,149, UBI Academy SCRL - Limited Consortium Company (88% controlled and 3% held by: IW Bank and UBI.S; 1.5% held by: UBI Pramerica SGR, UBI Leasing, UBI Factor and Prestitalia) registered address: Bergamo, Via f.lli Calvi, 9 share capital: 100, UBI Finance Srl 4 (60% controlled) registered address: Milano, Foro Bonaparte, 70 share capital: 10, UBI Finance CB 2 Srl 5 (60% controlled) registered address: Milano, Foro Bonaparte, 70 share capital: 10, Finance Srl UBI Finance 2 Srl - in liquidation UBI SPV BBS 2012 Srl- in liquidation UBI SPV BPCI 2012 Srl- in liquidation UBI SPV BPA 2012 Srl- in liquidation UBI SPV Group 2016 Srl UBI SPV Lease 2016 Srl Mecenate Srl 11 (95% controlled) registered address: Arezzo, Via P. Calamandrei, 255 share capital: 10, Marche Mutui 2 Società per la Cartolarizzazione a r.l Marche M6 Srl Focus Impresa 13 3 The Group holds a controlling % interest in the share capital of UBI.S; the remaining % is held by Cargeas Assicurazioni Spa (the former UBI Assicurazioni Spa). 4 A special purpose entity in accordance with Law No. 130/1999, this company, enrolled on the general list of intermediaries pursuant to Art. 106 of the Consolidated Banking Act, was formed on 18 th March 2008 to allow UBI Banca to implement the first programme to issue covered bonds backed by residential mortgages. 5 A special purpose entity in accordance with Law No. 130/1999, this company, enrolled on the general list of intermediaries pursuant to Art. 106 of the consolidated banking act, was formed on 20th December 2011 to allow the UBI Banca to implement a second programme to issue covered bonds backed mainly by commercial non-residential mortgages. 6 A special purpose entity used in compliance with Law No. 130/1999 for the securitisations of the former B@nca 24-7 performed in It was consolidated because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 7 A special purpose entity used in accordance with Law No. 130/1999 for the securitisation of a portfolio of Banco di Brescia performing loans at the beginning of It was consolidated because this company is in reality controlled, since its assets and cties were originated by a Group member company. UBI Banca holds a 10% stake. The securitisation was closed down in May A Shareholders Meeting held on 26th February 2015 resolved to put the entity into early voluntary liquidation (with the relative records filed with the Company Registrar on 16th March 2015). 8 A special purpose entity formed in accordance with Law No. 130/1999 for the securitisation of the performing loans to SMEs of some former network banks (Banco di Brescia, Banca Popolare Commercio e Industria and Banca Popolare di Ancona) carried out in the last part of The three companies are currently in voluntary liquidation in accordance with company records filed with the Company Registrar on 15 th May 2018 after the respective boards of directors had resolved to voluntarily wind the companies up on 9 th May. They were consolidated because they are in reality controlled, since their assets and liabilities were originated by Group member companies. UBI Banca holds a 10% stake in each of them. 9 A special purpose entity formed in accordance with Law No. 130/1999 for the securitisation of residential mortgages recognised on the books of the former network banks (BPB, BBS, BPCI, BRE, BPA, Carime) carried out in August It was consolidated because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 10 A special purpose entity formed in accordance with Law No. 130/1999 for the securitisation of performing loans by UBI Leasing in July It was consolidated because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 11 A special purpose entity used in accordance with Law No. 130/1999 for the former Banca dell Etruria e del Lazio securitisations performed in 2007, 2009 and 2011, relating to performing residential mortgages. The securitisations structured in 2009 and 2011 were closed down. 12 A special purpose entity formed in accordance with Law No. 130/1999 for securitisations by the former Banca delle Marche. At the end of the first half two securitisations existed carried out in 2006 (Marche Mutui 2, an RMBS securitisation of a portfolio of performing regulated mortgages backed by first mortgage guarantees) and in 2013 (Marche M6, an RMBS securitisation of a portfolio of performing residential mortgages) respectively. They were consolidated because they are in reality controlled, since their assets and liabilities were originated by a Group member company. The Group holds no equity interests in the companies. 13 This is a closed-end fund, reserved for qualified investors recognised within financial assets measured at FVTPL (balance sheet item 20 c), consolidated in relation to an investment that had been made by the former Banca delle Marche and to the predominant position exercised in shareholders meetings by subscribers of the fund ( % of the shares held). 217

218 Companies consolidated using the equity method (the investment is by the Parent where no other indication is given): 1. Aviva Vita Spa (20% interest held) registered address: Milan, Via A. Scarsellini, 14 share capital: 155,000, Lombarda Vita Spa (40% interest held) registered address: Brescia, Corso Martiri della Libertà, 13 share capital: 185,300, Polis Fondi SGRpA (19.6% interest held) registered address: Milano, Via Solferino, 7 share capital: 5,200, Zhong Ou Asset Management Co. Ltd (25% interest held) registered address: 8f Bank of East ASIA Finance Tower, 66 Hua Yuan Shi Qiao Road, Pudong New Area, Shanghai (China) share capital: 188,000,000 yuan/renminbi 5. SF Consulting Srl (35% interest held) operating headquarters: Mantova, Via P.F. Calvi, 40 share capital: 93, UFI Servizi Srl ( % interest held by Prestitalia) registered address: Roma, Via G. Severano, 24 share capital: 150, Montefeltro Sviluppo SCRL ( % interest held) registered address: Urbania (PU), Via A. Manzoni, 25 share capital: 73,000 Changes in the scope of consolidation The scope of consolidation underwent the changes reported below compared with 31 st December 2017 Banca Teatina Spa: on 20 th February 2018 a deed for the merger of Banca Teatina into the Parent was signed and filed on the following 22 nd February with the competent Company Registrar of Bergamo. It took effect with regard to third parties from 26 th February and for accounting and tax purposes from 1 st January Because the surviving bank held 100% control, the merger had no effect on the number of shares and the share capital of UBI Banca; Etruria Informatica Srl was merged into UBI Sistemi e Servizi Scpa with effect from 1 st June 2018 and took effect for accounting and tax purposes from 1 st January All relationships of an operating and financial nature were fully taken over by the surviving company. 218

219 Information on the accounts This section contains the principal information relating to the balance sheet, financial position and income statement. The changes in the balance sheet and financial position that occurred in the reporting period (first six months of 2018), and the operating performance for the period January-June 2018 are commented on in the Interim Management Report on consolidated operations as at and for the period ended 30 th June Explanatory tables for the consolidated income statement 1.1 Interest income and similar: composition (item 10) Items/Type Debt securities Financing Other transactions 1H H 2017 restated Figures in thousands of euro 1. Financial assets measured at fair value through profit or loss 577 3,750-4,327 1, Financial assets held for trading , Financial assets designated as at fair value Other financial assets mandatorily measured at fair value 528 3,750-4, Financial assets measured at fair value through other comprehensive income 83,496 - X 83,496 76, Financial assets measured at amortised cost 34, ,414-1,027, , Loans and advances to banks 7 3,210 X 3,217 5, Loans and advances to customers 34, ,204 X 1,024, , Hedging derivatives X X (26,961) (26,961) 55, Other assets X X Financial liabilities X X X 29,908 - Total 118, ,164 (26,873) 1,118,476 1,056,171 of which: interest income on impaired financial assets - 149, ,576 73,952 The balances for the period ended the 30 th June 2017 published in the interim financial report for that period in compliance with IAS 39 and prepared according to the 4 th update of Bank of Italy Circular No. 262/2005 have been restated in accordance with the 5 th update of that circular and following IFRS 9 rules. More specifically, (i) interest on available-for-sale financial assets (former AFS) has been recognised within item "2. Financial assets measured at fair value through other comprehensive income" in the above table and (ii) interest on loans and advances to customers, loans and advances to banks and held-to-maturity investments (former L&R and HTM) has been recognised within item "3. Financial assets measured at amortised cost". Because no item existed previously for interest income on financial liabilities, that amount has been recognised within interest expense for the first half of Interest and similar expense: composition (item 20) Figures in thousands of euro Items/Type Borrowings Securities Other transactions 1H H 2017 restated 1. Financial liabilities measured at amortised cost (45,597) (213,247) - (258,844) (302,175) 1.1 Due to central banks - X X - (4,866) 1.2 Due to banks (15,341) X X (15,341) (9,816) 1.3 Due to customers (30,256) X X (30,256) (41,093) 1.4 Debt securities issued X (213,247) X (213,247) (246,400) 2. Financial liabilities held for trading (486) 3. Financial liabilities designated as at fair value Other liabilities and provisions X X (13) (13) (46) 5. Hedging derivatives X X 96,660 96, Financial assets X X X (18,145) - Total (45,597) (213,247) 96,647 (180,342) (302,707) The balances for the period ended the 30 th June 2017 published in the interim financial report for that period in compliance with IAS 39 and prepared according to the 4 th update of Bank of Italy Circular No. 262/2005 have been restated in accordance with the 5 th update of that circular and following IFRS 9 rules. More specifically, because no item existed previously for interest expense on financial liabilities, that amount has been recognised within interest income for the first half of

220 2.1 Commission income: composition (item 40) 2.2 Fee and commission expense: composition (item 50) Type of service/amounts 1H H 2017 restated Type of service/amounts 1H H 2017 restated Figures in thousands of euro Figures in thousands of euro a) guarantees granted 25,561 24,027 c) management, trading and advisory services 506, , trading in financial instruments 4,833 7, foreign exchange trading 4,171 4, portfolio management 197, , individual 36,171 39, collective 161, , custody and administration of securities 3,888 4, depository banking placement of securities 148, , receipt and transmission of orders 19,323 18, advisory activities 4,485 3, on investments 4,485 3, on financial structure distribution of third party services 123, , portfolio management individual collective insurance products 109, , other products 13,443 10,498 d) collection and payment services 85,924 84,816 e) servicer activities for securitisation transactions f) services for factoring transactions 5,918 6,104 i) current account administration 113, ,246 j) other services 172, ,838 Total 909, ,461 a) guarantees received (8,409) (271) c) management and trading services: (43,677) (52,713) 1. trading in financial instruments (4,991) (5,497) 2. foreign exchange trading (2) (1) 3. portfolio management (3,991) (4,782) 3.1. own - (20) 3.2. delegated to third parties (3,991) (4,762) 4. custody and administration of securities (3,416) (3,930) 5. placement of financial instruments (3,015) (5,441) 6. financial instruments, products and services distributed through indirect networks (28,262) (33,062) d) collection and payment services (27,630) (24,777) e) other services (21,366) (22,138) Total (101,082) (99,899) 4.1 Net trading income (item 80) Transactions/Components of income Gains Profits from trading Losses Losses from trading Net income 1H 2018 Figures in thousands of euro (A) (B) (C) (D) [(A+B)-(C+D)] 1. Financial assets held for trading 70 22,809 (918) (4,101) 17, Debt securities (75) (598) (618) 1.2 Equity securities 48 1,941 (746) (2,613) (1,370) 1.3 Shares in UCITS Financing Other - 20,831 (97) (890) 19, Financial liabilities held for trading Debt securities Payables Other Financial assets and liabilities : Exchange rate differences X X X X 5, Derivative instruments 111,437 57,843 (83,961) (70,340) 11, Financial derivatives 111,437 57,843 (83,961) (70,340) 11,206 - on debt securities and interest rates 107,658 49,368 (79,900) (64,251) 12,875 - on equity securities and share indices 145 4,977 (516) (2,574) 2,032 - on currencies and gold X X X X (3,773) - other 3,634 3,498 (3,545) (3,515) Credit derivatives of which: natural hedges related to the fair value option X X X X - Total 111,507 80,652 (84,879) (74,441) 34,

221 5.1 Net hedging loss: composition (item 90) Figures in thousands of euro Income components/amounts 1H H 2017 restated A. Income relating to: A.1 Fair value hedge derivatives 156, ,032 A.2 Hedged financial assets (fair value) 163,612 33,293 A.3 Hedged financial liabilities (fair value) 41, ,603 A.4 Cash flow hedge financial derivatives - - A.5 Assets and liabilities in foreign currency - - Total income from hedging activity (A) 361, ,928 B. Expense relating to: B.1 Fair value hedge derivatives (207,624) (158,312) B.2 Hedged financial assets (fair value) (38,284) (184,947) B.3 Hedged financial liabilities (fair value) (120,122) (37) B.4 Cash flow hedge financial derivatives - - B.5 Assets and liabilities in foreign currency - - Total expense from hedging activity (B) (366,030) (343,296) C. Net hedging loss (A - B) (4,227) (1,368) 6.1 Profit from disposal or repurchase (item 100) Figures in thousands of euro Items/Income components Profits Losses Net profit 1H 2018 Net profit 1H 2017 restated Financial assets 1. Financial assets measured at amortised cost 6,689 (21,556) (14,867) 28, Loans to banks (978) 1.2 Loans to customers 6,689 (21,556) (14,867) 29, Financial assets measured at fair value through other comprehensive income 75,175 (15,996) 59,179 81, Debt securities 75,175 (15,996) 59,179 81, Financing Total assets (A) 81,864 (37,552) 44, ,237 Financial liabilities measured at amortised cost 1. Due to banks Due to customers Debt securities issued 421 (4,659) (4,238) (5,830) Total liabilities (B) 533 (4,659) (4,126) (5,830) Total 82,397 (42,211) 40, ,407 The balances for the period ended 30 th June 2017 published in the interim financial report for that period in compliance with IAS 39 and prepared according to the 4 th update of Bank of Italy Circular No. 262/2005 have been restated in accordance with the 5 th update of that circular and following IFRS 9 rules. More specifically: (i) profits/losses from the disposal/repurchase of loans and advances to customers, loans and advances to banks and held-to-maturity investments (former L&R and HTM) have been recognised within item "1. Financial assets measured at amortised cost"; (ii) profits/losses from the disposal/repurchase of available-for-sale financial assets (former AFS) have been recognised within item "2. Financial assets measured at fair value through other comprehensive income" of this table. Because no item existed previously for equity securities and shares of UCITS, those amounts have been classified within item "2.1 Debt securities". 221

222 7.2 Net change in fair value of other financial assets and liabilities measured at fair value through profit or loss: composition of other financial assets mandatorily measured at fair value [item 110 B)] Transactions/Components of income Figures in thousands of euro Gains (A) Profits on sale (B) Losses (C) Losses on sale (D) Net income [(A+B) - (C+D)] 1. Financial assets 212,134 6,902 (230,806) (3,007) (14,777) 1.1 Debt securities 1, (4,872) (1,206) (4,998) 1.2 Equity securities 5,801 4,034 (1,200) (2) 8, Shares in UCITS 1,258 2,690 (6,942) (966) (3,960) 1.4 Financing 204, (217,792) (833) (14,452) 2. Financial assets: currency translation differences X X X X - Total 212,134 6,902 (230,806) (3,007) (14,777) Because this is the change in the net value of an accounting portfolio that did not exist according the 4 th update of Bank of Italy Circular No. 262/2005, but was introduced with the 5 th update of the Circular, no figures have been restated for the first half of Net impairment losses for credit risk relating to financial assets measured at amortised cost [item 130 a)] Impairment losses Reversals Transactions/Components of income 1H 2017 Stages one Stage three Stages one Stage 1H 2018 restated and two and two three Figures in thousands of euro Write-offs Other A. Loans and advances to banks (1,460) (1,458) (16) - Financing (1,460) (1,460) (16) - Debt securities of which: purchased or originated credit-impaired loans B. Loans and advances to customers (106) (55,420) (475,614) 56, ,708 (258,272) (282,612) - Financing - (55,420) (475,614) 56, ,708 (258,166) (282,612) - Debt securities (106) (106) - of which: purchased or originated credit-impaired loans Total (1,566) (55,420) (475,614) 56, ,708 (259,730) (282,628) The balances for the period ended on 30 th June 2017 published in the interim financial report for that period in compliance with IAS 39 and prepared according to the 4 th update of Bank of Italy Circular No. 262/2005 have been restated in accordance with the 5 th update of that circular and following IFRS 9 rules. More specifically, net impairment losses on loans have been have been reported in this table which shows net impairment losses on financial assets measured at amortised cost. Furthermore, in compliance with IAS 39 the figures for the first half of 2017 include both (i) the adjustment recognised on that part of interest considered not recoverable, based on recognising interest on a net basis, relating to non-performing positions, and (ii) the reversal of the time value connected with the measurement of non-performing positions. According to IFRS 9 these components are not classified within this item but as part of net interest income. 8.2 Net impairment losses for credit risk relating to financial assets measured at fair value through other comprehensive income: composition [item 130 b)] Impairment losses Transactions/Components of income Stages one Stage three and two Figures in thousands of euro Write-offs Other Stages one and two Reversals Stage three 1H H 2017 restated A. Debt securities (7,283) (6,610) (119,319) B. Financing to customers to banks financing Total (7,283) (6,610) (119,319) The balances for the period ended on 30 th June 2017 published in the interim financial report for that period in compliance with IAS 39 and prepared according to the 4 th update of Bank of Italy Circular No. 262/2005 have been restated in accordance with the 5 th update of that circular and following IFRS 9 rules. More specifically, net impairment losses on available for sale financial assets (former AFS) have been reported in this table which shows impairment losses on financial assets measured through other comprehensive income. Because the categories for equity securities and shares of UCITS longer exist, the amounts for these have been recognised within item "A. Debt securities". 222

223 9.1 Profits (losses) from contractual modifications without derecognition This item which amounted to a loss of 22.1 million in the first half of 2018, incorporates the impacts of contractual modifications to financial assets which (in compliance with IFRS 9 and also Group accounting practices) not being of a substantial amount, do not involve derecognition of the assets in question but recognition through profit or loss of the modifications to the contractual cash flows Net insurance premiums: composition (item 160) Premiums from insurance business Figures in thousands of euro Direct work Indirect work 1H H 2017 restated A. Life A.1 Gross premiums recognised (+) 256, ,516 57,354 A.2 Premiums reinsured (-) (44) X (44) (20) A.3 Total 256, ,472 57,334 B. Non-life B.1 Gross premiums recognised (+) B.2 Premiums reinsured (-) (173) X (173) (146) B.3 Change in gross premiums reserve (+/-) B.4 Change in reinsurer premium reserves (+/-) (6) - (6) 21 B.5 Total 1,189-1, C. Total net premiums 257, ,661 57, Balance on other income and expenses from insurance operations: composition (item 170) Figures in thousands of euro 1H H 2017 restated 1. Net change in technical reserves (135,162) (40,754) 2. Claims relating to the period paid in the period (124,482) (26,686) 3. Other income and expense on insurance operations (1,889) (719) Total (261,533) (68,159) 12.5 Other administrative expenses: composition [item 190 b)] Figures in thousands of euro 1H H 2017 restated A. Other administrative expenses (378,859) (369,389) Rent payable (37,319) (31,402) Professional and advisory services (59,142) (70,281) Rentals hardware, software and other assets (19,162) (20,848) Maintenance of hardware, software and other assets (26,483) (23,755) Tenancy of premises (24,545) (24,067) Property maintenance (12,263) (12,112) Counting, transport and management of valuables (6,478) (6,831) Membership fees (48,737) (34,802) Information services and land registry searches (6,074) (6,190) Books and periodicals (617) (592) Postal (7,687) (9,458) Insurance premiums (16,044) (16,021) Advertising (11,072) (13,044) Entertainment expenses (534) (798) Telephone and data transmission expenses (25,704) (25,351) Outsourced services (30,342) (29,260) Travel expenses (10,048) (7,394) Credit recovery expenses (22,877) (20,354) Forms, stationery and consumables (3,360) (4,263) Transport and removals (4,129) (4,413) Security (3,497) (2,936) Other expenses (2,745) (5,217) B. Indirect taxes (139,807) (138,218) Indirect taxes and duties (6,069) (7,806) Stamp duty (108,680) (105,406) Municipal property tax (11,636) (11,866) Other taxes (13,422) (13,140) Total (518,666) (507,607) 223

224 Explanatory tables for the consolidated balance sheet The balances as at 31 st December 2017 published in the consolidated financial statements for the year then ended in accordance with IAS 39 and the 4 th update of Bank of Italy Circular No. 262/2005 have been restated in accordance with the 5 th update of that circular and following IFRS 9 rules. The amounts for the assets and liabilities in the balance sheet, calculated by applying the measurement rules of IAS 39 are then restated in the new items in accordance with the business model defined by the UBI Group in compliance with the financial reporting standard IFRS 9. The results of the SPPI test, which constitutes an integral part of the classification process, are considered in that restatement. ASSETS 2.1 Financial assets held for trading: composition by type [asset item 20. a)] Items/Amounts restated Figures in thousands of euro L1 L2 L3 L1 L2 L3 A. On-balance sheet assets 1. Debt securities , Structured securities Other debt securities , Equity securities 9, , Shares of UCITS Financing Repurchase agreements Other Total (A) 9, , B. Derivative instruments 1. Financial derivatives 1, ,949 71,446 1, ,868 75, For trading 1, ,949 8,884 1, ,868 12, Connected with fair value options Other , , Credit derivatives For trading Connected with fair value options Other Total (B) 1, ,949 71,446 1, ,868 75,372 Total (A+B) 11, ,238 71, , ,211 75, Financial assets designated as at fair value: composition by type [asset item 20. b)] Items/Amounts restated Figures in thousands of euro L1 L2 L3 L1 L2 L3 1. Debt securities 10, , Structured securities Other debt securities 10, , Financing Structured Other Total 10, ,

225 2.5 Other financial assets mandatorily measured at fair value: composition by type [asset item 20. c)] Items/Amounts restated Figures in thousands of euro L1 L2 L3 L1 L2 L3 1. Debt securities 91,998 36,044 17,012 67,814 41,756 18, Structured securities 1,874 36,044 17,012 1,874 36,032 16, Other debt securities 90, ,940 5,724 1, Equity securities 22,482 2, ,563 21,913 2, , Shares of UCITS 122, ,537 37, , ,547 32, Financing - 144, , , , Repurchase agreements Other - 144, , , ,774 Total 236, , , , , , Financial assets measured at fair value through other comprehensive income: composition by type (asset item 30) Items/Amounts restated Figures in thousands of euro L1 L2 L3 L1 L2 L3 1. Debt securities 11,393,607 84, ,246,393 64, Structured securities 701,710 16, ,376 13, Other debt securities 10,691,897 67, ,816,017 51, Equity securities , , Financing Total 11,393,607 84,131 50,236 12,246,393 64,696 58, Financial assets measured at amortised cost: composition of loans and advances to banks by type [asset item 40. a) ] Type of transaction/amounts Figures in thousands of euro restated Carrying amount Fair value Carrying amount Fair value of which: purchased of which: purchased Stages one or Stages one or Stage three L1 L2 L3 Stage three and two originated and two originated L1 L2 creditimpaired creditimpaired L3 A. Loans to central banks 7,660, ,660,634 5,799, ,799, Term deposits X X X X X X 2. Compulsory reserve requirement 7,660, X X X 5,799, X X X 3. Reverse repurchase agreements X X X X X X 4. Other X X X X X X B. Loans to banks 1,853, ,730 1,737,660 2,022, ,641 1,599, Financing 1,853, ,521 1,737,660 2,021, ,433 1,599, Current accounts and sight 700, X X X 823, X X X 1.2. Term deposits 12, X X X 19, X X X 1.3. Other financing: 1,139, X X X 1,178, X X X - Reverse repurchase agreements X X X 10, X X X - Finance leases X X X X X X - Other 1,138, X X X 1,167, X X X 2. Debt securities Structured securities Other debt securities Total 9,513, ,730 9,398,294 7,821, ,641 7,398,

226 4.2 Financial assets measured at amortised cost: composition of loans and advances to customers by type [asset item 40. b)] Type of transaction/amounts Figures in thousands of euro Stages one and two restated Carrying amount Fair value Carrying amount Fair value Stage three of which: purchased or originated creditimpaired L1 L2 L3 of which: purchased Stages one or Stage three and two originated creditimpaired L1 L2 L3 1. Financing 84,199,995 7,142, ,055-30,873,752 64,372,174 83,947,080 8,029, ,598-30,235,599 63,178, Current account overdrafts 7,005, , ,201 X X X 7,715,551 1,087, ,185 X X X 1.2. Reverse repurchase X X X X X X 1.3. Mortgages 56,704,797 4,429, ,542 X X X 56,906,627 4,792, ,434 X X X 1.4. Credit cards, personal loans and salary-backed loans 3,285,515 98,639 3,178 X X X 3,041, , X X X 1.5. Finance leases 5,368, ,339 55,401 X X X 5,541,888 1,004,204 53,788 X X X 1.6. Factoring 2,062, ,510 - X X X 2,184, ,180 - X X X 1.7. Other financing 9,771, ,647 53,733 X X X 8,556, ,679 19,248 X X X 2. Debt securities 3,029, ,723,493-4,536 2,850, ,871, Structured securities Other debt securities 3,029, ,723,493-4,536 2,850, ,871, Total 87,229,730 7,142, ,055 2,723,493 30,873,752 64,376,710 86,798,075 8,029, ,598 2,871,547 30,235,599 63,178,087 We report that in application of the provisions of the 5 th update of Bank of Italy Circular No. 262/2005, the non-performing loans resulting from the acquisition of the New Banks had already been reclassified in the restated financial statements as at 31 December 2017 as Purchased or originated credit impaired ( POCI ) and therefore recognised within the appropriate column of which: purchased or originated credit impaired. 5.1 Hedging derivatives: composition by type of hedge and by level (asset item 50) FV NA FV NA L1 L2 L3 L1 L2 L3 Figures in thousands of euro restated A. Financial derivatives - 57,953 1,851 23,626, ,028 2,879 19,888,992 1) Fair value - 57,940-23,601, ,028-19,864,542 2) Cash flow ,851 25, ,879 24,450 3) Foreign investments B. Credit derivatives ) Fair value ) Cash flow Total - 57,953 1,851 23,626, ,028 2,879 19,888, Technical reserves of reinsurers: composition (asset item 80) Figures in thousands of euro restated A. Non-life A.1 premium reserves A.2 claims reserves A3. other reserves - - B. Life - - B.1 mathematical reserves - - B.2 reserves for sums to be paid - - B3. other reserves - - C. Technical reserves where the investment risk is borne by the insurers - - C1. reserves relating to contracts on which performance is linked to investment funds and market indexes - - C2. reserves resulting from the management of pension funds - - D. Total technical reserves of reinsurers

227 Property, plant and equipment 9.1 Property, plant and equipment for functional use: composition of assets measured at cost (asset item 90) Assets/amounts Figures in thousands of euro restated 1. Owned assets 1,505,670 1,521,362 a) land 815, ,387 b) buildings 555, ,438 c) furnishings 38,162 35,840 d) electronic equipment 56,386 62,567 e) other 40,924 43, Assets acquired through finance leases 27,965 29,682 a) land 15,946 16,546 b) buildings 12,019 13,136 c) furnishings - - d) electronic equipment - - e) other - - Total 1,533,635 1,551,044 At the end of the first half of 2018 property, plant and equipment used in operations amounted to 1.53 billion, down by 17 million. That decrease was attributable entirely to depreciation in the first half. 9.2 Tangible assets held for investment: composition of assets measured at cost (asset item 90) Assets/amounts restated Carrying Fair value Carrying Fair value Figures in thousands of euro amount L1 L2 L3 amount L1 L2 L3 1. Owned assets 265, , , ,509 a) land 155, , , ,635 b) buildings 109, , , , Assets acquired through finance leases a) land b) buildings Total 265, , , ,696 Intangible assets Composition of the item "Goodwill" Figures in thousands of euro restated UBI Banca Spa 1,195,840 1,195,840 UBI Pramerica SGR Spa 170, ,284 IW Bank Spa 88,754 88,754 UBI Factor Spa 8,260 8,260 UBI Sistemi e Servizi SCpA 2,122 2,122 TOTAL 1,465,260 1,465,

228 Commitments to purchase property, plant and equipment and intangible assets Commitments to purchase property, plant and equipment Figures in thousands of euro restated A. Assets for functional use 1.1 owned: 27,135 4,618 - land buildings 5, furnishings 2, electronic equipment 11, other 6,767 4, through finance leases: land buildings furnishings electronic equipment other - - Total A 27,135 4,618 As shown in the table, the largest commitments undertaken by the Group in the first half relate to the purchase of electronic equipment for operational use amounting to 11.9 million (relating to UBI Banca and UBI.S), to the purchase of other assets for operational use amounting to 6.8 million (mainly relating to UBI Banca), to the purchase of buildings for operational use amounting to 5.7 million (relating to UBI Banca) and to furnishings amounting to 2.7 million (relating to UBI Banca). B. Investment property 2.1 owned: land buildings through finance leases: land buildings - - Total B - - Total (A+B) 27,135 4,618 LIABILITIES 1.1 Financial liabilities measured at amortised cost: composition of amounts due to banks by type [liability item 10. a)] Type of transaction/amounts for the Group restated Fair value Fair value BV BV Figures in thousands of euro L1 L2 L3 L1 L2 L3 1. Due to Central Banks 12,474,154 X X X 12,428,723 X X X 2. Due to banks 4,133,146 X X X 4,304,283 X X X 2.1 Current accounts and sight deposits 992,033 X X X 1,023,954 X X X 2.2 Term deposits 75,086 X X X 62,532 X X X 2.3 Financing 3,033,379 X X X 3,156,438 X X X Repurchase agreements 1,618,692 X X X 1,665,484 X X X Other 1,414,687 X X X 1,490,954 X X X 2.4 Amounts due for commitments to repurchase own equity instruments - X X X - X X X 2.5 Other payables 32,648 X X X 61,359 X X X Totale Total 16,607, ,128,917 15,279,255 16,733, ,808,

229 1.2 Financial liabilities measured at amortised cost: composition of amounts due to customers by type [liability item 10. b)] Type of transaction/amounts for the Group restated Fair value Fair value BV BV Figures in thousands of euro L1 L2 L3 L1 L2 L3 1. Current accounts and sight deposits 66,725,481 X X X 64,258,153 X X X 2. Term deposits 1,292,162 X X X 2,364,594 X X X 3. Financing 1,741,634 X X X 513,627 X X X 3.1 Repurchase agreements 1,404,660 X X X 167,157 X X X 3.2 Other 336,974 X X X 346,470 X X X 4. Amounts due for commitments to repurchase own equity instruments - X X X - X X X 5. Other payables 823,476 X X X 1,298,453 X X X Total 70,582, ,587,027 68,434, ,449, Financial liabilities measured at amortised cost: composition of debt securities issued by type [liability item 10. c)] Type of securities / Amounts restated Fair value Fair value BV BV Figures in thousands of euro L1 L2 L3 L1 L2 L3 A. Securities 1. Bonds 23,793,930 15,785,118 7,987,807 22,948 24,865,262 15,287,729 10,042,696 18, structured 4,133,157 2,221,311 1,882,362 20,096 3,923,231 2,394,436 1,566,979 17, other 19,660,773 13,563,807 6,105,445 2,852 20,942,031 12,893,293 8,475,717 1, Other securities 633, ,372-1,149,681-1,145,403 5, structured other 633, ,372-1,149,681-1,145,403 5,065 Total 24,427,302 15,785,118 8,621,179 22,948 26,014,943 15,287,729 11,188,099 23, Financial liabilities held for trading: composition by type (liability item 20) Type of transaction/amounts restated Fair value Fair value NA Fair value * NA Figures in thousands of euro L1 L2 L3 L1 L2 L3 Fair value * A. On-balance sheet liabilities 1. Due to banks Due to customers Debt securities Bonds Structured X X Other bonds X X 3.2 Other securities Structured X X Other X X Total A B. Derivative instruments 1. Financial derivatives , , , , For trading X , X X , X 1.2 Connected with fair value options X X X X 1.3 Other X X X X 2. Credit derivatives For trading X X X X 2.2 Connected with fair value options X X X X 2.3 Other X X X X Total B X , X X , X Total (A+B) X , X X , X * Fair value calculated excluding changes in value resulting from a change in the credit rating of the issuer since the date of issue. 229

230 3.1 Financial liabilities designated as at fair value: composition by type (liability item 30) Type of transaction/amounts restated Fair value Fair value NA Fair value * NA Figures in thousands of euro L1 L2 L3 L1 L2 L3 Fair value * 1. Due to banks Structured X X 1.2 Other X X of which: - loan commitments - X X X X - X X X X - financial guarantees granted - X X X X - X X X X 2. Due to customers 75,488-75,488-75,488 43,021-43,021-43, Structured X X 2.2 Other 75,488-75,488 - X 43,021-43,021 - X of which: loan commitments - X X X X - X X X X - financial guarantees granted - X X X X - X X X X 3. Debt securities Structured X X 3.2 Other X X Total 75,488-75,488-75,488 43,021-43,021-43,021 * Fair value calculated excluding changes in value resulting from a change in the credit rating of the issuer since the date of issue. 4.1 Hedging derivatives: composition by type of hedge and by level (liability item 40) Fair value NA NA Fair value Figures in thousands of euro L1 L2 L3 restated L1 L2 L3 A) Financial derivatives 18,488, ,961-11,053, ,590-1) Fair value 18,486, ,923-11,036,554-99,464-2) Cash flow 1, ,959-1,126-3) Foreign investments B. Credit derivatives ) Fair value ) Cash flow Total 18,488, ,961-11,053, , Technical reserves: composition (liability item 110) Figures in thousands of euro Direct work Indirect work restated A. Non-life 1,787-1,787 1,999 A.1 premium reserves 1,258-1,258 1,525 A.2 claims reserves A3. other reserves B. Life 1,877,285-1,877,285 1,778,702 B.1 mathematical reserves 1,864,454-1,864,454 1,766,645 B.2 reserves for sums to be paid 11,636-11,636 11,499 B3. other reserves 1,195-1, C. Technical reserves where the investment risk is borne by the insurers C1. reserves relating to contracts on which performance is linked to investment funds and market indexes C2. reserves resulting from the management of pension funds D. Total technical reserves 1,879,072-1,879,072 1,780,

231 Provisions for risks and charges 10.1 Provisions for risks and charges: composition (liability item 100) Items/Components Figures in thousands of euro restated 1. Provisions for credit risk relating to commitments and guarantees granted 73,964 47, Provisions on other commitments and guarantees granted Company pension funds 130, , Other provisions for risks and charges 360, , litigation and tax 122, , staff costs 47,957 80, other 190, ,379 Total 565, , Provisions for credit risk relating to commitments and guarantees granted (liability item 100) Figures in thousands of euro Items/Components Provisions for credit risk relating to commitments and guarantees granted Stage one Stage two Stage three Total Loan commitments 4,259 4, ,380 Financial guarantees granted 17,912 11,323 36,349 65,584 Total 22,171 15,399 36,394 73, Provisions for risks and charges: other provisions [liability item 100. c)] Items/Components Figures in thousands of euro restated 1. Provision for revocation (clawback) risks 11,286 12, Provision for defaulted bonds 2,430 5, Other provisions for risks and charges 176, ,004 Total 190, ,379 Contingent liabilities 10.7 Contingent liabilities Figures in thousands of euro restated for personnel litigation for revocation (clawback) risks 8,566 8,566 for compounding of interest - - for claim risks - - for tax litigation 140, ,372 for other litigation - former New Banks 178, former Stand-Alone UBI Banca Group 545, ,489 Total 872, ,907 A detailed report on both ordinary litigation and tax litigation, for which provisions were made or for which contingent liabilities were identified, is given in the following sub-sections which may be consulted. 231

232 Litigation Ordinary litigation Significant litigation (claims of greater than or equal to 5 million) for which the risk is deemed probable, compared to the situation reported in the consolidated financial statements for the year ended 31 st December 2017, which may be consulted, is the following: a claim filed by a client for compensation for damages concerning UBI Leasing following loss of ownership of the asset and improper reporting to Centrale Rischi; an arbitration award relating to arbitration proceedings initiated by a company operating in the naval sector involving a dispute over a derivatives transaction concluded with the UBI Banca (former Banco di Brescia), with a claim for the return on the one hand of the negative differentials paid by the customer and on the other hand the implicit costs. The partially favourable ruling issued on 21 st May 2018 ordered UBI Banca to pay roughly 50% of the claim for failure to fulfil the disclosure obligation defined under Article 21 of the Consolidated Finance Act or the obligations of integrity and good faith in executing the contract. As allowed by law, the Bank will be appealing the ruling before the Brescia appeals court. Compared with the situation reported as at 31st December 2017, during the first half of the year the following new litigation arose for which a possible risk (or a contingent liability) has been estimated: UBI Banca a demand for compensation for damages filed as part of bankruptcy proceedings and concerning the role the Bank allegedly played in the financing of a public tender offer. The operation contested in the summons is the same that had been contested in two previous compensation actions started in 2011 by official receivers on behalf of another two companies belonging to the same group as the current claimant and which had been abandoned in 2016 by the official receivers of the claimants; a suit filed by a beneficiary of public funding (Contratto di Programma Regione Campania), in relation to which UBI Banca (which took the place of the former Centrobanca in arrangements said company had entered into with authorities that subsidised loans to manage formalities connected with processing applications) has been summoned, jointly and severally with those authorities in its capacity as the concessionary bank appointed by those same authorities, before the civil court of Rome for the annulment of a ministerial measure revoking the subsidies (ordered in response to our proposal because the Bank had leased to the company in violation of explicit provisions in applicable legislation) and the full restoration of the subsidies themselves; a dispute concerning a contract-liability suit not resulting from failure by UBI Banca to disburse to a now-defunct company a number of tranches of a mortgage loan subject to progress reports. During the proceedings, the claim value increased in response to the voluntary actions of three shareholders claiming failure to repay certain loans made by the company following its bankruptcy. On 26 th June 2018, the hearing for the examination of witnesses was held. Following this hearing, in line with the Bank s request and disregarding the counterparty s request for a court-appointed expert, the judge set the hearing for final pleadings for 22 nd October 2019; a dispute related to the revocation of overdraft lines of credit, backed by equivalent mandates to sell trading securities, following intensive trading in equity (and foreign securities in particular) over the period ; a summons, reclassified as a possible risk from a previous remote risk, served (originally against the former Banco di Brescia) by a company with a bankruptcy case which began in 1999 and is still in progress, which in the person of the receiver has requested the return of amounts drawn/used in the period September 1997-June 1998 by the sole director who ceased to be a director in September 1997 without the Bank being informed. In December 2012 the Judge accepted the objections raised by the bank and dismissed the case. The counterparty resumed the case within the relative time limits. In November 2017 a ruling 232

233 was made by the Court of Trani rejecting the claims of the claimant and ordering the counterparty to pay costs. The ruling was notified to the counterparty in order to impose short time limits for an appeal. The case was appealed on 9 th January The case has been adjourned to a hearing set for 13 th March 2020 for final pleadings; finally, following a ruling by the Constitutional court, we provide an update on the summons served on UBI Banca by a fund 1, a shareholder of the Bank, containing claims for compensation in relation to the amount of the redemption paid on shares subject to withdrawal following the transformation of UBI Banca into an ordinary joint-stock company which occurred in the context of the reform of popular co-operative banks [pursuant to Art. 28, paragraph 2 ter of the Consolidated Banking Act introduced with Decree Law No. 3/2015, converted into law with Law No. 33/2015 which establishes that the right in popular banks ( ) to the redemption of shares in the event of withdrawal, even following transformation ( ) is limited according to the provisions made by the Bank of Italy, even as an exception to the provisions of the law, where that is necessary to ensure the inclusion of the shares in the Common Equity Tier 1 regulatory capital of the bank ]. The bank considers that the position taken on the subject of the redemption of the shares of shareholders that have withdrawn is sound in view, amongst other things, of legal opinions received from advisers and it has filed a defence asking for the claims made to be rejected. The case is currently at the preliminary stage. On 15 th December 2016, when hearing the appeal against the ruling by the TAR (administrative Court) which had rejected claims submitted by some consumer associations and the shareholders of some popular co-operative banks, the Council of State considered certain doubts over the constitutionality of the aforementioned legislation to be clearly groundless for the following reasons: (1) assumptions concerning the necessity and urgency which legitimise the issue of a decree law; (2) the possibility that the redemption paid to the withdrawing shareholders may be limited/excluded and not merely deferred in time, with payment of interest; (3) assignment to the Bank of Italy of regulatory powers even as an exception to the law. UBI Banca filed a defence in both actions before the Council of State in order to be able to also file a defence before the Constitutional Court, which in fact occurred in April The President of the Court set 20 th March 2018 as the date for the hearing to debate the case, on the conclusion of which the court threw out the question of legitimacy raised by the Council of State on its merits. The court first confirmed that the conditions of necessity and urgency in accordance with the decree law existed. Furthermore, the legislation appealed against, which in implementation of European legislation on capital requirements allows banks to set limits on redemptions in the event of a shareholder s withdrawal, did not harm the right of ownership. The regulatory powers conferred on the Bank of Italy fall within the limits permitted by the constitution. UBI Leasing a request to repay grants paid by a public authority to UBI Leasing against the disposal of receivables by the lessee and by UBI Leasing, which were shared with the customer after verification of proper payment of the lease instalments. The following significant cases of litigation have been concluded: a summons served on UBI Banca (former Banca Carime) to claim back payments made for compounding of interest, interest, charges, remunerations and costs not agreed. A ruling was issued on 29 th July 2017, notified on the following 30 th September, throwing out the claims ordering the claimant to pay costs. The final ruling was issued on 23 rd October 2017; a revocation bankruptcy clawback action against UBI Banca (the former Banca Popolare Commercio e Industria), brought by FDG Spa, was closed following a favourable ruling by the Supreme Court of Cassation; a case brought against UBI Banca involving a claim for damages for contractual liability, resulting from withdrawal from a contract concerning the development of software. A ruling was issued against the Bank as jointly liable with another bank summoned for an amount less than the existing provision made. The position was closed when the final verdict was given. * * * 1 Originally there were three claimants, but two of them, including the largest, withdrew from the proceedings. 233

234 With regard to the activities related to the merger of the New Banks (i.e. Banca Adriatica, Banca Tirrenica, Banca Teatina, and related subsidiaries), and for the sake of full disclosure, we report the following significant litigation (with a claim value of greater than or equal to 5 million) for which an agreement was signed by UBI Banca and the National Resolution Fund on 18 th January , given that they are situations related to the operations of the New Banks prior to their acquisition: a demand for back payments for UBI Banca (the former Nuova Banca Adriatica) purportedly surpassing the usury rate and compensation for damages from a pool of banks (including the former Nuova Banca Adriatica) for purportedly violating agreements in the interbank convention connected with the recovery plan presented by the claimant pursuant to Article 67 of the bankruptcy law; a demand for compensation for damages by UBI Banca (the former Banca Adriatica) and consequent demand for termination due to failure to meet the Bank s obligations defined in the contract of 6 lease agreements for properties under construction; a demand for compensation for material and non-material damages by UBI Banca (the former Banca Adriatica) resulting from the purchase of shares in the former Banca delle Marche SpA; a demand for compensation for material and non-material damages by UBI Banca (the former Banca Adriatica) resulting from the loss in value of the foundation s equity investment in Cassa di Risparmio di Loreto SpA; a demand for compensation for material and non-material damages by UBI Banca (the former Banca Adriatica) resulting from the purchase of shares in the former Banca delle Marche SpA; a writ of summons filed by a guarantor against UBI Banca (the former Banca Adriatica) by which the guarantor made a preliminary request, by way of decree pursuant to Article 700 of the Italian code for civil proceedings, the immediate cancellation of the report to CRIF and placement of the loan in default, while also mainly demanding cancellation of the guarantee for the Bank s violation of the principles of integrity and good faith; a writ of summons filed by a guarantor against UBI Banca (the former Banca Adriatica) demanding cancellation of the guarantees issued by the Bank due to the lack of a provision concerning the maximum amount guaranteed in accordance with Article 1938 of the Italian civil code; a demand for compensation for damages by UBI Banca (the former Banca Adriatica) for inducing to subscribe shares in order to increase the share capital of the former Banca delle Marche SpA; a demand for compensation for damages by UBI Banca (the former Banca Adriatica) for damages incurred as a result of purported unlawful conduct and failure to act by the Bank over time regarding issues connected with the provision of a mortgage loan subject to progress reports; a demand for compensation for damages by UBI Banca (the former Banca Adriatica) for purported usury in regard to current account interest rates; a demand for compensation for damages by UBI Banca (the former Banca Adriatica) for the alleged unlawfulness and invalidity of the clauses concerning usury and for the Bank s purported unlawful and improper conduct in managing the relationship. * * * To complete the information, we report the following: The Bank has not complied with the unfavourable arbitration decision for the financial disputes related to appeals by the former shareholders of Banca delle Marche given that the interpretation of the arbiter diverges from Italian Legislative Decree no. 180/2015 and the subsequent measures of the Bank of Italy 2 It should be noted that the agreement for the acquisition of the New Banks called for certain guarantees and releases from liability provided by the seller (National Resolution Fund) in favour of UBI Banca [these guarantees and releases also refer to the period prior to the creation of the Bridge Banks (23 rd November 2015) and therefore also cover any liabilities originating from the activities conducted by the Old Banks prior to undergoing the resolution process] and also in relation to relations with REV Gestioni Crediti SpA and with the Atlante Fund II [as the transferors of the loans and receivables of those banks classified as bad and unlikely-to-pay (these disposals of receivables were without recourse, so the transferor assumes all the risks and benefits of the disposed receivables in accordance with IAS 39 Derecognition)], regarding risks of a legal nature or risks in general relating to existing or threatened legal action, which is to say regarding violations of the law and any contingent liabilities. 234

235 of 22 nd November 2015, according to which the Bank has the capacity to be a party to legal proceedings instituted by the injured party and there are no alternative remedies allowed by legislation governing arbitration. This refusal to comply is the only solution consistent with the defence submitted by the Bank, including in legal proceedings. The reasons for this refusal to comply have been presented to the arbiter and to CONSOB, and in the same communication we also underscore the utmost consideration we have for the efforts of the arbiter with regard to the financial disputes. At the same time, the administrative costs of the proceedings that the arbiter ruled are to be borne by the Bank have been paid; Italy s anti-trust authority has recently begun proceedings against UBI Banca, and others, aimed at determining whether there have been any violations of the provisions of the Italian Consumer Code concerning improper commercial practices in diamond sales conducted by third parties via the banking system. Within the scope of discussions underway with the anti-trust authority aimed at demonstrating that the Bank has acted properly in this regard, and in the spirit of broad-based, effective collaboration, the authority has been provided with a proposal of commitments aimed at further reinforcing (existing) control processes related to this type of transaction. Anti money-laundering notifications In the first half of 2018 the UBI Banca Group was served with Written notifications of findings for failure to report suspect transactions in accordance with Anti-Money Laundering law. Since the end of 2017 the UBI Banca Group has received four charges that it violated Art. 51, paragraph 1 3 of Legislative Decree No. 231/2007, for a report made after the legal time limit to the competent State Territorial Accounting Office concerning a financial transaction carried out in violation of Art. 49, paragraph 5 4 of the aforementioned decree, the total fines for which amount to a maximum of 95 thousand. Three of the aforementioned charges were withdrawn following the voluntary payment of an agreed amount, while defence documents have been lodged in relation to the fourth. Details of positions already under management for which updates have taken place during the year are given below: Charges of failure to report suspect transactions pursuant to Art. 35 of Legislative Decree No. 231/2007 1) Resolved positions - a fine of 57,000 imposed in 2016 (contested in 2011), notified to a manager of a branch of the former Banco di Brescia, regarding total transactions of 566 thousand. The hearing for the debate and a ruling before the court of first instance was held on 23 rd February 2018; the judge ruled against the proposed objection and reduced the total amount of the fine from 56.6 thousand to 11.3 thousand. No order was made for costs. The fine was paid on 27 th March 2018; - a fine of 314 thousand imposed in 2012 (and contested in 2007), notified to a branch manager of the former Banca Popolare di Ancona, regarding transactions totalling 3 million, for which a ruling against the Ministry of the Economy and Finance was made in the court of first instance. Following the ruling against it in the Macerata court of first instance, the Ministry of the Economy and Finance lodged an appeal. The Appeal Court dismissed the appeal. Following the ruling against it in the appeal court, the Ministry of the Economy and Finance appealed to the Court of Cassation. The Court of Cassation, with judgment No /18, rejected the application filed by the Ministry of the Economy and Finance, ordering the respondent Ministry to pay the claimant legal costs amounting to 8 thousand, as well as for expenses and additional sums required by law. 2) Ongoing positions - a fine of 100 thousand imposed in 2014 (contested in 2010) notified to a former branch manager of the former Banca Popolare di Ancona, regarding transactions totalling 1 million, for which an adverse ruling was made in the court of first instance in October It was possible to lodge an appeal until April An application to suspend the fine in appeal was declared inadmissible because the court considered that the harmful effect was attributable to the decision for which suspension had not been ruled possible in the court of first instance and not to the ruling appealed 3 Art Obligation to report the infringements referred to therein to the Ministry of the Economy and Finance. 4 Art Limitations on the use of cash and bearer instruments. Paragraph 5 - Bank and postal cheques written for amounts equal to or greater than 1, must bear the name and legal status of the beneficiary and must not be transferable. 235

236 against. The first hearing in this respect is set for 16 th January Payment of the fine was made in August In January 2018, with judgment No. 313/2018, the Rome Court of Appeal dismissed the appeal awarding costs against the Manager with the bank jointly and severally, to be paid to the Ministry of the Economy and Finance; - a fine of 110 thousand imposed in 2012 (contested in 2007), notified to a branch manager of the former Banca Popolare di Ancona, regarding transactions totalling 1 million, for which a ruling against the Ministry of the Economy and Finance was made in the court of first instance. An appeal was lodged in June 2015, following which the application filed by the Ministry of the Economy and Finance requesting the cancellation of the fine imposed by the Macerata court of first instance was rejected. In January 2016 the Ministry of the Economy and Finance appealed to the Court of Cassation. In June 2016 the Ministry of the Economy and Finance repaid the legal costs for the judgments made in favour of UBI Banca and the courts of first and second instance. The Court of Cassation, with judgment No. 9520/18 of 18 th April 2018, quashed the ruling of the Ancona Court of Appeal and referred the case, including the costs of these proceedings, back to the Ancona Court of Appeal with a different composition. Lastly, we note that in view of the five years that have passed since the charges were made the following proceedings, for which defence documents were drawn up and lodged with the Ministry of the Economy and Finance, are to be considered as time barred: - Guardia di Finanza (finance police) tax assessment report, of which the Branch Manager was notified on 9 th April 2013 and UBI Banca on the following 12 th April, for failure to report a suspect transaction amounting to approximately 3 million [minimum/maximum fine: 34,563.97/ 1,382,558.86]; - Guardia di Finanza tax assessment report, of which the Branch Manager was notified on 10 th April 2013 and UBI Banca on the following 13 th April, for failure to report a suspect transaction amounting to approximately 240 million [minimum/maximum fine: 2,442.32/ 97,692.80]. Finally as concerns notifications regarding the former New Banks we report that there have been no updates during the year for those arising prior to these banks joining the UBI Banca Group and that no notifications of failure to report suspect transactions, significant compliance infringements and/or violations regarding the applicable regulations were received in Tax litigation Tax inspections and other investigative activities On 29 th May 2017 the Central Assessment Department of the tax authorities commenced a general tax inspection into UBI Banca regarding the tax year The inspection is still in progress. On 6 th December 2017 the Arezzo Police Tax Unit of the Guardia di Finanza commenced a general tax inspection into Oro Italia Trading Spa in liquidation for the tax years 2013, 2014 and The inspection was concluded on 5 th July 2018 with the notification of a tax assessment report that had already been sent to the Tuscany Regional Department of the tax authorities, which have been assigned the task of carrying out the necessary verifications in preparation for the notice of assessment that may be issued. The appropriate assessments are in progress, it remaining the case that the observations in question relate to financial years before they were put into extraordinary administration and the later resolution procedures involving the then Banca Popolare dell Etruria e del Lazio co-operative company and that such cases are regulated as part of the contractual agreements for purchasing the New Banks. Assessment notices UBI BANCA FORMER BANCA POPOLARE COMMERCIO E INDUSTRIA 2014 REFUSE TAX On 6 th July 2016 the City of Milan notified the former Banca Popolare Commercio e Industria of a demand for the payment of refuse tax for the year 2014 totalling 234 thousand. As a consequence, the merged Banca Popolare Commercio e Industria lodged a partial appeal on 16 th September 2016 with the Provincial Tax Commission of Milan. The hearing has been adjourned several times in order to allow the parties to arrive at an out-of-court settlement agreement at amounts less than those assessed. 236

237 UBI Banca and the City reached an out-of-court settlement on 27 th February 2018, which quantified the refuse tax due as amounting to a total of 154 thousand. As a consequence, the Tax Commission of the Province of Milan declared the matter closed with a ruling filed on 16 th March UBI BANCA 2014 REFUSE TAX On 23 rd November 2017 the City of Milan notified UBI Banca of a demand for the payment of refuse tax for the year 2014 totalling 92 thousand. UBI Banca lodged an appeal with the Tax Commission of the Province of Milan on 29 th January The hearing, originally scheduled for 19 th June 2018, was adjourned until 17 th December 2018 in order to allow the parties to arrive at an out-of-court settlement. UBI BANCA FORMER BANCA CARIME: IRPEG (FORMER CORPORATE INCOME TAX) AND ILOR (FORMER LOCAL INCOME TAX) FOR 1996 AND 1997 The cases relate to two notices of tax assessment relating to the claimed long-term usefulness of some expenses incurred in 1996 and 1997, all of which were recognised through profit or loss in that year. Banca Carime appealed against the notices of tax assessment and in 2011 it won its case in the court of second instance. The tax authorities appealed to the Court of Cassation and the Banca applied to appear in its defence within the legal time limits. The hearing before the Court of Cassation was held in chambers on 10 th July 2018; the judgment has not yet been issued. Given that Banca Carime was acquired by IntesaBCI (now IntesaSanPaolo Spa) and the years under dispute are backed by full contractual guarantees in favour of UBI Banca Spa, no provision has ever been made for this litigation. UBI BANCA FORMER BANCA POPOLARE DI ANCONA: 2016 REGISTRATION TAX The Pesaro office of the tax authorities notified UBI Banca of the following payment demands: - in March 2017, for registration tax claimed on a debt restructuring agreement with a corporate client, with the additional tax calculated at 34 thousand; - in April 2017, for registration tax claimed on a debt restructuring agreement with another corporate client, with the additional tax calculated at 90 thousand. These same demands were also served in the same period on the merged Banca Adriatica and other banks participating in a debt restructuring agreement as jointly and severally liable with UBI Banca with regard to the tax authorities. In both cases the tax authorities applied registration tax at a rate of 1% on the acknowledgement of the debt as an action listed in the restructuring agreements covered by Art. 182 bis of the bankruptcy law. UBI Banca and the other banks, including Banca Adriatica jointly with the other corporate clients, appealed against the two tax demands before the Tax Commission of the Province of Pesaro within the legal time limits. The relative hearings were held on 6 th October The Tax Commission of the Province of Pesaro rejected the appeals and confirmed the tax claims ordering the appellants to pay costs. An appeal against these rulings was lodged with the Regional Tax Commission of the Marches on 19 th June UBI BANCA: REGISTRATION TAX On 2 nd August 2017 the Bari office of the tax authorities served a demand for payment of registration tax for the tax year 2016 on UBI Banca, allegedly due in relation to Centrobanca s (merged into UBI Banca in 2013) acceptance as an official creditor in the bankruptcy case of a customer. The additional taxation was calculated at 84 thousand. UBI Banca promptly lodged an appeal before the Tax Commission of the Province of Bari, objecting that the legislation underlying the issue of that demand was declared unconstitutional with ruling No. 177 of 13 th July 2017 of the Constitutional Court. The Provincial Tax Commission fully upheld the appeal against the ruling with a decision filed on 11 th April The deadline for a possible appeal by the tax authorities has not yet expired. Also on the subject of registration tax, during the last quarter UBI Banca has lodged appeals against undue recoveries of registration tax on documents relating to the transfer of receivables and judicial documents, for a total amount of approximately 50 thousand. UBI BANCA (FORMER BANCA TIRRENICA IN ITS CAPACITY AS THE SURVIVOR OF THE ETRURIA LEASING MERGER): 2010 MORTGAGE TAXES On 23 rd April 2012 the tax authorities (Department I of the Province of Rome) served an adjustment and payment notice on the former Etruria Leasing regarding the sales value of a real estate property purchased in 2010 by the leasing company (it assessed a value of 15.6 million compared with a declared value of 3.5 million) and as a result demanded additional mortgage tax of 181 thousand and additional land registry tax of 60 thousand, plus interest and fines. 237

238 In view of the adverse result of an application for tax assessment by consent submitted by the seller of the property (jointly liable) in November 2012 the former Etruria Leasing lodged an appeal before the Tax Commission of the Province of Rome, which was upheld in full. The tax authorities appealed that ruling before the Tax Commission of the Region of Latium in 2016 and the then Nuova Banca Popolare dell Etruria e del Lazio applied to appear at the hearing within the legal time limits. On conclusion of that hearing held on 10 th April 2017, with the ruling filed on 14 th February 2018, the Regional Tax Commission partially upheld the tax authorities appeal and recalculated the sales value of the property at 9 million. Appropriate assessments are currently in progress to decide whether to lodge an appeal with the Supreme Court of Cassation against the rulings of the Regional Tax Commission. An appeal to the Court of Cassation against the rulings of the Regional Tax Commission is currently being prepared. 238

239 Segment Reporting Distribution by operating segment: income statement for the period ended 30th June 2018 Figures in thousands of euro item/operating segment Banking (Aggregate + PPA) Non-banking financial (Aggregate + PPA) Insurance (Aggregate + PPA) Corporate Centre (Aggregate + Intercompany + Consolidation entries except PPA) TOTAL Net interest income 567, ,462 19, , ,134 Net fee and commission income 790,872 75,231 (417) (56,876) 808,810 Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities measured at fair value through profit or loss 19,086-2,595 33,150 54,831 Dividends ,442 8,282 9,811 Gross income 1,377, ,773 23, ,943 1,811,586 Net impairment losses for credit risk (187,417) (50,640) (246) (28,037) (266,340) Losses from contractual modifications without derecognition (178) (4) - (21,890) (22,072) Net financial income 1,189, ,129 23, ,016 1,523,174 Net income from insurance operations - - (11,910) 8,038 (3,872) Net income from banking and insurance operations 1,189, ,129 11, ,054 1,519,302 Administrative expenses (1,172,603) (68,048) (3,757) (24,117) (1,268,525) Net provisions for risks and charges (891) (1,682) - - (2,573) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (90,554) (1,567) (353) 12,536 (79,938) Other net operating income/expense 145,508 9, , ,044 Operating expenses (1,118,540) (62,039) (4,049) (7,364) (1,191,992) Profits (losses) of equity investments - - (90) 9,103 9,013 Profits on disposal of investments Pre-tax profit from continuing operations 71,310 85,090 7, , ,286 Taxes on income for the period from continuing operations (20,916) (24,985) (2,914) (65,866) (114,681) Profit for the period attributable to minority interests - (13,312) (461) 35 (13,738) Profit for the period 50,394 46,793 3, , ,867 Distribution by operating segment: balance sheet as at 30th June 2018 Figures in thousands of euro item/operating segment Banking (Aggregate + PPA) Non-banking financial (Aggregate + PPA) Insurance (Aggregate + PPA) Corporate Centre (Aggregate + Intercompany + Consolidation entries except PPA) TOTAL Financial assets measured at amortised cost - loans to banks ,917 2,996,971 3,010,888 Financial liabilities measured at amortised cost - due to banks - 10,104, ,104,267 Other net financial assets 328,376 48,821 1,936,431 10,177,005 12,490,633 Financial assets measured at amortised cost - loans to customers 80,843,984 10,500,319 1,025 3,027,050 94,372,378 Financial liabilities measured at amortised cost - due to customers 70,417, , ,582,753 Financial liabilities measured at amortised cost - debt securities issued 21,468,674 50,022 10,339 2,898,267 24,427,302 Technical reserves - - 1,879,072-1,879,072 Equity-accounted investees ,466 27, ,509 Minority interests (+/-) 23 43,005 9,739 14,570 67,337 The merger of the New Banks was concluded in the first half with the incorporation of Banca Teatina into UBI Banca, with effect for accounting and tax purposes from 1 st January The UBI Banca Group did not modify its operating segments (pursuant to IFRS 8) for the purposes of the first half financial statements: banking, non-banking financial (consisting of the Group s product companies), corporate centre and insurance. The banking segment comprises the banking line of business consisting primarily of UBI Banca Spa, inclusive of the former Banca Teatina Spa, in addition to IW Bank Spa. The non-banking financial segment mainly comprises UBI Leasing Spa, UBI Factor Spa, UBI Pramerica SGR Spa and Prestitalia Spa. The corporate centre segment comprises UBI Banca Spa (net of its banking business, as specified above), UBI Sistemi e Servizi Scpa, BPB Immobiliare Srl, Kedomus Srl, UBI Academy Scrl, Oro Italia Trading Spa in liquidation, Focus Impresa and Assieme Srl. It also includes all the consolidation entries with the exception of those relating to the purchase price allocations made to the relative individual segments. 239

240 The insurance segment is comprised of BancAssurance Popolari Spa and BancAssurance Popolari Danni Spa. The algebraic sum of the four segments identified in this manner represents the income statement and balance sheet of the UBI Banca Group as at and for the period ended 30 th June The items "Financial assets measured at amortised cost - Loans and advances to banks" and "Financial liabilities measured at amortised cost - Due to banks" have been stated in the four segments on the basis of the prevailing balance and show an overall net interbank balance of - 7,093 million. The items "Financial assets measured at amortised cost Loans and advances to banks and Financial liabilities measured at amortised cost Loans and advances to banks relating to the banking segment have been included, together with the relative consolidation entries, in the corporate centre segment. The item "Financial assets measured at amortised cost Loans and advances to customers includes securities measured at amortised cost attributed to the corporate centre segment, along the same lines as other financial assets. The item Net financial assets includes loans and receivables mandatorily measured at fair value (i.e. loans and receivables that have failed the SPPI test set by IFRS 9) and have been attributed to the banking segment along the same lines as other loans and receivables. The item "minority interests" in the "banking" and "non-banking financial" segments is the only portion of equity and of the profit for the period of the companies not wholly owned. It does not include minority interests and the part of consolidated items attributable to minority interests which have been attributed to the "corporate centre". Absolute amounts are reported for liability items. 240

241 Transactions with related parties pursuant to IAS 24 In compliance with IAS 24, information is provided below on balance sheet and income statement transactions between related parties of UBI Banca and Group member companies, as well as those items as a percentage of the total for each item in the consolidated financial statements. According to IAS 24, a related party is a person or entity that is related to the entity that is preparing its financial statements (the reporting entity ). (a) A person or close family member of that person is related to the reporting entity if that person: (i) has control or joint control over the reporting entity: (ii) has significant influence over the reporting entity; or (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity. (b) An entity is related to a reporting entity if any of the following conditions apply: (i) the entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others); (ii) one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member); (iii) both entities are joint ventures of the same third party; (iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity; (v) the entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity; (vi) the entity is controlled or jointly controlled by a person identified in (a); (vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). (viii) the entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity. In compliance with the regulations in force, we report that all transactions carried out by Group member companies with related parties were conducted in observance of correct principles both in substance and form, under conditions analogous to those applied for transactions with independent parties. More specifically, the Parent and its subsidiary UBI Sistemi e Servizi ScpA provide Group member companies with a series of services, governed by intragroup contracts drawn up in accordance with the principles of consistency, transparency and uniformity in line with the organisational model of the Group. Under this model, strategic, and management activities are centralised at UBI Banca and technical and operational activities in UBI Sistemi e Servizi ScpA. The prices agreed for the services provided under the contracts, subject to revision in the first half, were determined on the basis of market prices or, where appropriate reference parameters could not be found in the marketplace, in accordance with the particular nature of the services provided and also in relation to the service contracts signed by UBI.S with its consortium shareholders, on the basis of the costs incurred for the services provided. The main intragroup contracts existing at the end of the first half included those to implement the policy to centralise activities in the governance and business areas of the Parent, which involved the Parent and all the banks and companies in the Group, and also contracts to implement the national tax consolidation (in accordance with articles 117 to 129 of Presidential Decree No. 917/1986, the consolidated law on income tax) concluded by the Parent. There were also all the intercompany contracts which implement the centralisation in UBI Sistemi e Servizi of support activities for the principal companies in the Group. We report with regard to transactions between companies in the Group and all of its related parties, that no atypical and/or unusual transactions were performed; furthermore, no transactions of that type were even performed with counterparties that were not related parties. Atypical and/or unusual transactions, in compliance with Consob Communications No of 27 th February 1998 and No of 6 th April 2001, are intended to mean all those transactions which, because of their significance/importance, the nature of the counterparties, the content of the transaction (even in relation to ordinary operations), the way 241

242 in which the transfer price is decided and the timing of the event (close to the end of the financial year) might give rise to doubts concerning: the correctness/completeness of the information in the accounts, a conflict of interests, the security of the company s assets and the rights of non-controlling shareholders. The information pursuant to article 5, paragraph 8 of Consob Resolution 17221/2010 on transactions of greater importance concluded with related parties in the first half of 2018, is reported in the Consolidated Management Report on Operations, which may be consulted. Principal transactions with related parties in the balance sheet Figures in thousands of euro Financial assets held for trading Financial assets designated as at fair value Other financial assets mandatorily measured at fair value Other financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost a) loans to banks Financial assets measured at amortised cost b) loans to customers Financial liabilities measured at amortised cost a) due to banks Financial liabilities measured at amortised cost b) due to customers Debt securities issued Financial liabilities held for trading Guarantees granted Associates , , , ,800 Senior managers (1) ,006-11, Other related parties , ,810 1, ,283 Total , , ,471 2, ,849 (1) A Senior manager is defined as a manager with strategic responsibilities of the entity or of its parent, where a manager with strategic responsibility is defined as those who have power and responsibility for the planning, management and control of the activities of the entity including its directors ; Percentage of related-party transactions in the consolidated balance sheet Figures in thousands of euro Financial assets held for trading Financial assets designated as at fair value Other financial assets mandatorily measured at fair value Other financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost a) loans to banks Financial assets measured at amortised cost b) loans to customers Financial liabilities measured at amortised cost a) due to banks Financial liabilities measured at amortised cost b) due to customers Debt securities issued Financial liabilities held for trading Guarantees granted With related-parties (a) , , ,471 2, ,849 Total (b) 453,209 10,085 1,025,151 11,527,974 9,513,921 94,372,378 16,607,300 70,582,753 24,427, ,959 5,672,800 Percentage (a/b*100) % % % 0.01% % 242

243 Principal transactions with related parties in the income statement Figures in thousands of euro Net interest income Dividends and similar income Net fee and commission income Staff costs Operating income/expenses Other administrative expenses Associates 88-96, ,185 Senior managers (1) , Other related parties 379-1, ,351 Total ,051-5, ,582 (1) A Senior manager is defined as a manager with strategic responsibilities of the entity or of its parent, where a manager with strategic responsibility is defined as those who have power and responsibility for the planning, management and control of the activities of the entity including its directors ; Percentage of related-party transactions in the consolidated income statement Figures in thousands of euro Net interest income Dividends and similar income Net fee and commission income Staff costs Operating income/expenses Other administrative expenses With related-parties (a) ,051-5, ,582 Total (b) 938,134 9, , , , ,666 Percentage (a/b*100) 0.05% % 0.76% 0.03% 1.65% Principal balance sheet items with associate companies subject to significant influence Figures in thousands of euro Financial assets held for trading Financial assets designated as at fair value Other financial assets mandatorily measured at fair value Other financial assets measured at fair value through other comprehensive income Financial assets measured at amortised cost b) loans to customers Financial liabilities measured at amortised cost a) due to banks Financial liabilities measured at amortised cost b) due to customers Debt securities issued Financial Guarantees liabilities held granted for trading Aviva Vita Spa , , Lombarda Vita Spa ,673-42, ,000 Polis Fondi SGRpA , SF Consulting Srl , UFI Servizi Srl Montefeltro Sviluppo Total , , , ,800 Principal income statement items with associate companies subject to significant influence Figures in thousands of euro Net interest income Dividends and similar income Net fee and commission income Staff costs Operating income/expenses Other administrative expenses Aviva Vita Spa 87-62, Lombarda Vita Spa , ,180 Polis Fondi SGRpA SF Consulting Srl UFI Servizi Srl Total 88-96, ,

244 Events occurring after the end of the first half No important events that might affect the operating and financial position presented occurred after 30 th June 2018, the balance sheet date of this half year financial report, and until 3 rd August 2018, the date of its approval by the Management Board of UBI Banca Spa. The following is nevertheless reported for your information: 1 st August 2018: the securitisation of a portfolio of bad loans with a gross book value as at the reference date (1 st January 2018) of 2,748.8 million (a gross exposure of 1,615 million) and the preparation of a second portfolio for disposal without recourse to securitisation was announced. Reference is made to the section Significant events in the first half of 2018 of this document for further details. 244

245 STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND OF THE SENIOR OFFICER RESPONSIBLE FOR PREPARING THE COMPANY ACCOUNTING DOCUMENTS

246

247 Statement on the condensed interim financial report pursuant to article 81-ter of Consob Regulation No of 14 th May 1999 and subsequent amendments and additions 1. The undersigned Victor Massiah, Chief Executive Officer, and Elisabetta Stegher, Senior Officer Responsible for preparing the company accounting documents of UBI Banca Spa, having taken account of the provisions of paragraphs 3 and 4 of article 154 bis of Legislative Decree No. 58 of 24 th February 1998, hereby certify to: the adequacy in relation to the characteristics of the company and the effective application of the administrative and accounting procedures for the preparation of the half year condensed financial statements, during the first half of The model employed The assessment of the adequacy of the administrative and accounting procedures for the preparation of the condensed interim financial report as at and for the half year ended 30 th June 2018 was based on an internal model defined by UBI Banca SpA, developed in accordance with the framework drawn up by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) and with the framework Control Objectives for IT and related technology (COBIT) which represent the generally accepted international standards for internal control systems. 3. They also certify that: 3.1 the condensed interim financial report: a) was prepared in compliance with the applicable international accounting standards recognised by the European Community in accordance with the Regulation No. 1606/2002 (EC) issued by the European Parliament on 19 th July 2002; b) corresponds to the records contained in the accounting books of the company; c) provides a true and fair view of the capital, operating and cash flow position of the issuer and the companies included in the scope of the consolidation. 3.2 The half year management report comprises a reliable analysis of the important events that occurred in the first six months of the year and of their impact on the half year condensed financial statements, together with a description of the main risks and uncertainties relating to the remaining six months of the year. The half year management report also comprises a reliable analysis of information on significant related party transactions. Bergamo, 3 rd August 2018 Victor Massiah Chief Executive Officer (signed on the original) Elisabetta Stegher Senior Officer Responsible for preparing the company accounting documents (signed on the original) 247