FINANCIAL REPORT AS AT 31 DECEMBER 2017

Transcription

1 ANNUAL REPORT 2017

2 FINANCIAL REPORT AS AT 31 DECEMBER

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4 BANCA NAZIONALE DEL LAVORO SpA Registered at the Registry of Banks Parent Company of BNL Banking Group registered at the Registry of Banking Groups Member of the Fondo Interbancario di Tutela dei Depositi [Interbank Deposit Guarantee Fund] Registered Office and Head Office in Rome, Via Altiero Spinelli Shareholder equity euro 2,076,940,000 fully paid up Tax Code - VAT Number Registration Number at the Rome Company Registry Subject to the control and management of the sole shareholder BNP Paribas SA Paris Internet: On the cover: photo Beppe Raso 3

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6 Financial Report 2017 FINANCIAL REPORT AS AT 31 DECEMBER 2017 REPORT ON OPERATIONS... 6 CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER

7 Directors' report Introduction REPORT ON OPERATIONS 6

8 Report on Operations 2017 REPORT ON OPERATIONS BNL SpA Corporate and control roles... 9 Group structure Introduction The main indicators of the consolidated financial statements Reclassified consolidated financial statements: Reclassified consolidated balance sheet Reclassified consolidated income statement Summary of consolidated results The market context Consolidated profit evolution: Net banking income Operating expenses Cost of risk Consolidated equity components: Loans to customers Loan quality Financial asset portfolio Deposits Net interbank position Provisions for liability Equity Own funds, capital ratios and leverage ratio Liquidity coverage and net stable funding ratios Operations and profitability by business segment Parent company results Reclassified financial statements of BNL SpA Income items of BNL SpA Equity components of BNL SpA Own funds, capital ratios and leverage ratio of BNL SpA Significant events after the close of the year Business outlook for Main changes in the Group investment portfolio

9 Report on Operations 2017 Results of the main Group Companies Parent Company relations with subsidiaries, associated companies, the Holding Company and with Subsidiaries of the latter and resolutions as per art ter of the Italian Civil Code Corporate governance and organisational structures The main risks and uncertainties to which the Group is exposed and risk monitoring and management Distribution network Customer Satisfaction Human resources Research and development BNL Group social and environmental responsibility Other information Proposal for 2017 profit allocation Reconciliation table between the reclassified consolidated and the official income statements

10 Group Corporate roles and Group structure BNL SPA CORPORATE AND CONTROL ROLES Board of Directors (1) LUIGI ABETE ANDREA MUNARI ROGER ABRAVANEL (2) (4) JEAN CLAMON (3) BÉATRICE COSSA-DUMURGIER PAOLO ALBERTO DE ANGELIS MARIO GIROTTI (5) (7) THIERRY LABORDE BERNARD LEMÉE (3) PAOLO MAZZOTTO (6) ROBERTO HUGO TENTORI (5) (7) Chairman Managing Director and General Manager Director Director Director Director Director Director Director Director Director PAOLO D AMICO Secretary of the Board Board of Statutory Auditors (8) PIER PAOLO PICCINELLI GUGLIELMO MAISTO MARCO PARDI ROBERTO SERRENTINO GIOVANNI NACCARATO ANGELO NOVATI Chairman Acting Auditor Acting Auditor Alternate Auditor Alternate Auditor Acting Deputy General Manager Independent Auditors Deloitte & Touche (1) Expiry at approval of the financial statements as at 31 December 2017 (2) Chairman of the Remuneration Committee (3) Member of the Remuneration Committee (4) Chairman of the Appointments Committee (5) Member of the Appointments Committee (6) Chairman of the Internal Control and Risk Committee (7) Member of the Internal Control and Risk Committee (8) Expiry at approval of the financial statements as at 31 December

11 Group Corporate roles and Group structure GROUP STRUCTURE (1) Business Line BANCA COMMERCIALE ACTIVITY COMMERCIAL & PRIVATE BANKING CORPORATE BANKING CREDITI SPECIALI AND OTHER OTHER HUBS (2) Parent company (3) BNL SpA commercial & private banking BNL SpA corporate banking BNL SpA Crediti Speciali and other BNL SpA other Hubs Companies consolidated on lineby- line basis Artigiancassa SpA Business Partner Italia SCpA EMF-IT Srl (5) BNL Positivity Srl Sviluppo HQ Tiburtina Srl BNL Finance SpA Credit securitisation vehicles (4) (1) This figure shows the BNL SpA subsidiaries, whose financial statements are consolidated line-by-line with the Group's financial statements, as well as the organisational structure as at 31 December On 15 December 2016, with effect in January 2017, the BNL Board of Directors resolved a reorganisation of the Business Lines, specifically renaming the Retail and Private Division and the Corporate Division respectively the Commercial & Private Banking division and the Corporate Banking Division, and creating the Special Loans Division. (2) This includes Corporate & Institutional Banking, Wealth and Asset Management, Personal Finance and Corporate Center of the BNP Paribas Group. (3) Pursuant to art of the Italian Civil Code, Banca Nazionale del Lavoro is subject to the Control and Management of the sole shareholder BNP Paribas SA. (4) Vehicle companies established according to law no. 130/99 Provisions on credit securitisation. It includes the companies Vela Home, Vela ABS, Vela Mortgage, Vela OBG, Vela RMBS, Vela Consumer and Vela Consumer 2. (5) Credit securitisation vehicle of the Personal Finance hub. 10

12 Report on Operations The main indicators of the consolidated financial statements INTRODUCTION In consideration of the capital and economic impact of the Parent Company BNL SpA on Group results, the Bank has taken advantage of the right, granted by the regulation in force on financial statements (art. 42 of Legislative Decree 136/2015), to submit a single Directors Report along with the separate and consolidated financial statements, with more emphasis, where suitable, to issues that are significant for the set of consolidated companies. In order to guarantee the necessary clarity of the accounting data, condensed reclassified balance sheet and income statement are shown in the Directors' Report, with reconciliation with the mandatory data reported alongside the balance sheet tables on page 13 and at the end of this report with reference to the income table (page 99). The main indicators of the consolidated financial statements Economic data (*) (millions of euro) FY 2017 FY 2016 % Change Interest income ,5 Net banking income ,4 Operating expenses (1.671) (1.780) -6,1 C ost of risk (825) (807) 2,2 Risultato operativo netto ,3 Income taxes (81) (49) 65,3 Profit (Loss) for the year pertaining to the Parent Company ,2 (*) The table of reconciliation between the reclassified income statement and the official financial statements layout is shown at the end of this Directors' report. Balance sheet data (**) (millions of euro) 31/12/ /12/2016 % Change Loans to customers ,1 Financial assets held for trading and av ailable for sale ,9 Direct customer deposits (1) ,6 Asset administration and managed ,4 Net interbanking deposits ,1 of w hich: Parent Company BNPP ,0 Group shareholders equity (including minority interests) ,5 Shareholders equity pertaining to the Parent Company ,5 (*) see the Reclassified consolidated balance sheet on page 13 (1) Includes amounts due to customers, outstanding securities and financial liabilities carried at fair value. 11

13 Report on Operations The main indicators of the consolidated financial statements Credit risk indices (%) Average Average 31/12/2017 banking banking 31/12/2016 system data system data 31/12/2017 (*) 31/12/2016 (**) Gross doubtful loans / Gross loans to customers 11,5 10,6 13,0 10,9 Net doubtful loans / Net loans to customers 5,1 3,8 5,1 4,4 Gross unlikely to pay /Gross loans to customers 5,0 5,7 5,8 6,4 Net unlikely to pay /Net loans to customers 3,5 4,1 4,1 4,7 Gross past due impaired loans / Gross loans to customers 0,2 0,3 0,3 0,3 Net past due impaired loans / Net loans to customers 0,2 0,2 0,2 0,3 Gross impaired loans / Gross loans to customers 16,8 16,6 19,0 17,6 Net impaired loans / Net loans to customers 8,8 8,2 9,5 9,4 Impaired loans covered ratio (1) 52,0 55,3 55,3 51,7 Doubtful loans covered ratio (1) 59,7 67,2 64,6 63,1 Unlikely to pay covered ratio 35,7 35,0 36,2 33,7 Past due impaired loans cov ered ratio 19,0 25,0 19,9 24,7 Net doubtful loans / Shareholders' equity 53,8 n.d. 56,2 n.d. Net v alue adjustment for impairment of loans / Net loans to customers 1,2 n.d. 1,3 n.d. Large ex posures (2) / Net loans (3) 5,9 n.d. 5,1 n.d. Large ex posures - Number of customers 8,0 n.d. 9,0 n.d. [*] Source: Bank of Italy - Financial Stability Report no. 2, November TAV 2.1 Significant banks (directly supervised by the ECB). [**] Source: Bank of Italy - Financial Stability Report no. 1, April TAV 2.1 Significant banks (directly supervised by the ECB). [1] The reduction in the coverage ratio compared to 2016 is mainly due to the sale of non-performing loans and the cancellation of interest on late payments made in the 2017 financial year. [2] Amount weighted according to the current supervisory regulations. [3] Net loans consist of the sum of the amounts as at 31 December of item 60. Loans to banks and 70. Loans to customers. Prudential indicators 31/12/ /12/2016 Changes % (% and millions of euro) Capital ratios (phased in) minimum (fully loaded) threshold (phased in) (fully loaded) minimum thresholds s (phased in) (fully loaded) CET 1 capital ratio 11,2% 11,0% 7,00% 12,2% 12,0% 7,00% - 8,2-7,8 Tier 1 capital ratio 11,2% 11,0% 8,50% 12,2% 12,0% 8,50% - 8,2-7,8 Total capital ratio 12,5% 12,4% 10,50% 13,2% 13,0% 10,50% - 5,4-4,9 Risk weighted assets (RWA) ,4 + 4,4 Common equity tier 1 capital (CET ,1-3,7 Tier 1 capital (Tier1) ,1-3,7 Own funds ,1-0,6 Risk w eighted assets (RWA) / Total assets 55,3 55, ,6 + 4,6 Leverage ratio 5,6% 5,5% 5,9% 5,8% - 5,6-5,3 Liquidity 31/12/2017 minimum threshold 31/12/2016 minimum thresholds Changes % Loan to deposit ratio (*) 137% n.a. 139% n.a. Liquidity coverage ratio (**) 80% 91,4% per il ,8% 70% per il ,4 Net stable funding ratio (**) 95,6% (***) 98,4% (***) - 2,8 (*) Loan to Deposit Ratio indicator, drawn up on a consolidated basis over the two years, is the ratio between customer loans (item 70 of the Balance Sheet - Assets) and payables to customers (item 20 of the Balance Sheet - Liabilities) (**) Liquidity indicators 2016 have been processed at individual level, as per instructions received from the Bank of Italy (***) The stable funding indicator or Net Stable Funding Ratio (NSFR) remains subject to an observation period and will become mandatory at the end of the current legislative process for the implementation of the global reform package on CRR and CRD IV (Regulation 575/2013 and Directive 2013/36 / EU). 12

14 Report on Operations Reclassified consolidated financial statements Reclassified consolidated financial statements Reclassified consolidated balance sheet (millions of euro) Financial statement item code ASSETS 31/12/ /12/2016 % Change 10 Cash and cash equiv alents ,6 60 Loans to third banks ,4 60 Loans to BNP Paribas ,9 70 Loans to customers ,1 20, 40 Financial assets held for trading and av ailable for sale ,9 80 Hedging deriv ativ es ,5 90 Value adjustments to financial assets subject to macrohedging ,4 100 Equity inv estments ,0 120, 130 Tangible and intangible assets ,9 140, 150, 160 Tax receiv ables and other assets ,8 Total assets ,1 (millions of euro) Financial statement item code LIABILITIES AND SHAREHOLDERS EQUITY 31/12/ /12/2016 % Change 10 Deposits from third banks ,6 10 Deposits from BCE/TLTROII ,7 10 Deposits from BNP Paribas ,1 1. subordinated deposits ,0 2. other deposits ,8 20, 30, 50 Direct customer deposits ,6 40 Financial liabilities held for trading ,6 60 Hedging deriv ativ es ,6 70 Value adjustments to financial liabilities subject to macrohedging ,8 110, 120 Allow ances for risks and contingencies and liabilities for retirement indemnities ,2 80, 100 Tax pay ables and other liabilities ,4 da 130 a 200 Shareholders equity ,5 Total liabilities and shareholders equity ,1 13

15 Report on Operations Reclassified consolidated financial statements Reclassified consolidated income statement (*) (millions of euro) FY 2017 FY 2016 % Change 1 Net interest income 1,576 1, Net commissions 1, Net result of financial instruments measured at fair v alue Net result of financial assets av ailable for sale Income / charges from other banking activ ities Net banking income 2,721 2, Operating ex penses (1,671) (1,780) a - personnel costs (961) (1,025) transformation costs - (42) n/s - other ordinary costs (961) (983) b - other administrative expenses (595) (645) transformation costs (9) (13) other ordinary expenses (586) (632) c - depreciation and amortisation of tangible and intangible assets (115) (110) Gross operating result 1, Cost of risk (825) (807) Net operating result Net income from equity inv estments and other non-current assets 5 - n/s 12 Profit (loss) before tax Income tax es (81) (49) Profit (loss) for the year Profit (loss) for the y ear pertaining to minority interests Profit (loss) for the year pertaining to the Parent Company (*) The table of reconciliation between the reclassified income statement and the official financial statements layout is shown at the end of this Directors' report. 14

16 Report on Operations Summary of consolidated results Summary of consolidated results In 2017 global economic activity continued to expand, with a favourable outlook for sound, widespread growth. Even more positive performance was confirmed in the Eurozone, with a gradual expansion of the GDP, driven by the monetary policy of the ECB - though with a view to recalibration - which retained highly expansive monetary conditions. This favourable trend was confirmed in Italy, though lower than the European average, with moderate growth in the economy, particularly in the service sector and industry, stimulated by the start up of investments and driven by the most recent economic signs, such as the trend of industrial production and improved confidence from businesses, returning to pre-recession levels. As the economic recovery continued, the risks for the banking sector decreased and the quality of bank credit continued to improve, with a reduction in new impaired loans, also in terms of amounts. Banks capital ratios grew stronger. In this context, the BNL Group continued its commercial action, developing and adjusting its organisational structure to best meet commercial needs and its operating priorities. It also extended the measures aimed at increasing efficiency and curbing operating costs and it closed the year 2017 with a net profit of 149 million euro compared to 125 million euro recorded in the previous year. Moreover, a key factor was the Group s ability to maintain the decrease in revenues compared to 2016 within the amount planned. The weakness of revenues triggered by the very low or even negative level of interest rates and pricing competition on products and services was partially offset by a structured, as well as effective, commercial commitment. This commitment took shape in a positive trend in volumes and in the development of fee-based operations, pursued through distribution policies based on a multichannel strategy, attention to customer needs and cooperation with other entities/hubs of the BNPP Group. The reduction of the cost structure positively reflected the effectiveness of the initiatives implemented to rationalise activities and the improvement in efficiency levels (human resources, real estate, operations), and make it possible to guarantee actions and investments to support strategies and commercial development (digital offering, marketing, adjustment of the distribution network). At the same time, the cost of risk decreased compared to the previous year, due to a scenario of conditions favourable to reducing risk: improvement in the rating mix of loans and concentration on top customers, pro-active management of at-risk exposures and a further slowdown in new non-performing loans. Examining the results in detail: Net banking income reached 2,721 million euro, down compared to 2,761 million euro of last year. The net interest income and the net commissions came to 2,614 million euro, substantially stable on the 2016 figure (-0.7%). In more detail: Net interest income (from 1,650 to 1,576 million euro in 2017, -4.5%): the moderate development of loans to customers, supported by medium-term loans to households and businesses, did not offset the impact of the decrease in commercial spreads, which were eroded by harsh competitive pressure. For loans to households, the decrease in spreads was the result of reduced margins on new business and requests for transfer or renegotiation of outstanding mortgages, specifically in the first half, attenuating in the second part of the year. For loans to businesses, the commercial margins were impacted by the significant concentration of competitors commercial actions on top customers, also accentuated by the widespread availability of TLTRO2 funding. Liquidity received from customers also grew: deposits recorded an increase of 3.6 billion in average volumes, 15

17 Report on Operations Summary of consolidated results deriving from businesses and households in equal amounts, without an increase in the cost of deposits. Net commissions (from 983 to 1,038 million euro in 2017, +5.6%): the commercial performance for the period showed a positive trend in the aggregate, specifically due to the higher volumes of assets under management and pension/protection products. Positive developments were also seen in monetics and other banking commissions in the Retail sector and the revenue deriving from trade finance and credit commissions of the Corporate Division. The net result of financial instruments measured at fair value recorded a 35 million euro profit (39 million euro in the previous year). This result is primarily attributable to income from brokerage with customers in securities, exchange rates and derivatives of 26.2 million euro, the assessment of risk on securities issued, including issuer (own) risk of 7.4 million euro and gains (losses) on risk components of derivatives, both trading and hedging derivatives (CVA, DVA and FVA) of 1.8 million euro. The net result of financial assets available for sale showed a profit of approximately 26 million euro, compared to the positive result of 61 million euro recorded at the end of December 2016, and refers to the following components: dividends and similar income of 27.3 million euro, which mainly included Bank of Italy dividends of 9.6 million euro, coupon income received on AT1 bank bonds of 4.2 million euro, as well as the distribution of reserves of the investee company Sud Factoring in liquidation of 12.3 million euro; profits on the sale of equity investments of 9.2 million euro, mainly due to the capital gain realised on the sale of GGP Greenfield (8.2 million euro); profit on sales of bonds: BTP of 8.2 million euro, AT1 Santander of 2.3 million euro; losses on financial assets available for sale (AFS) totalling 21.9 million euro due to an additional intervention requested by the Voluntary Scheme at the Interbank Deposit Guarantee Fund for the recapitalisation of the Casse di Risparmio di Rimini e San Miniato (around 18 million euro) and the loss on the sale of the equity investment held by the Voluntary Scheme of Cassa di Risparmio di Cesena of 3.1 million euro. The net income from other banking activities reached 46 million euro (28 million euro in 2016) and mainly refers to the capital gains realised in the second quarter of the year on the sale of properties for 32.5 million euro. Operating expenses equalled 1,671 million euro. Last year the aggregate included the contribution of two additional portions to the National Resolution Fund of 46.8 million euro and transformation costs for personnel redundancy of 42.2 million euro. Net of those components, operating expenses decreased by 1.2% compared to the previous year s figure. The cost for amortisation of intangible assets and depreciation of tangible assets, +4.5%, from 110 to 115 million euro: product innovation, support to the distribution network and the new branch lay-out continue to be the main investments of the Bank. Confirming the trends described, the cost to income ratio for 2017 defined as operating expenses to net banking income came to 61.4% (64.5% in 2016). The cost of risk continues to show a declining trend. Excluding extraordinary phenomena that impact the results, primarily the write-down of financial assets of 94 million euro and the capital gain on the sale of a portfolio of doubtful loans of 12 million euro, the cost of risk decreased to

18 Report on Operations Summary of consolidated results million euro, a significant reduction (-67 million euro, -8.3%) on The Profits on equity investments and other non-current assets, equal to 6 million euro, refer to the portion of profits on the sale of real estate realised in the portions used in operations. Based on the profit results described above, the net operating result came to 225 million euro compared to 174 million euro in the previous year (+29.3%). After the direct taxes, totalling 81 million, the BNL Group ended 2017 with a net profit pertaining to the Parent Company of 149 million euro (125 million euro as at 31 December 2016). * * * At balance sheet level, total assets came to 78,934 million euro (-0.1% on December 2016). The growth in customer loans, already seen at the end of last year, continued and gained strength, amounting to 61,225 million euro. In detail, impaired loans came to 11,266 million euro in gross values and 5,409 million euro in net values. The aforementioned sale of doubtful loans and the cancellation of prior overdue interest during 2017, to ensure more streamlined representation of asset quality influenced qualitative figures: the impact on customer loans decreased to 16.8% (19.0% at the end of 2016) in gross values and to 8.8% (9.5% at the end of 2016) net of value adjustments, while the level of hedging came to 52.0% (55.3% at the end of 2016). The portfolio of financial assets amounted to 4,795 million euro, against 7,477 million euro as at 31 December In detail, both components of the aggregate are decreasing: financial assets held for trading, from 2,457 to 370 million euro, due to different management methods on derivatives on borrowing and lending interest rates with the parent company BNPP; financial assets available for sale, from 5,020 to 4,425 million euro (-11.9%), mainly due to the sales of BTP by the Parent company during the fourth quarter of 2017 for 485 million in nominal value. Total customer financial assets, which include direct customer deposits, assets under administration and managed assets, amounted to 66,504 million euro as at 31 December 2017, increasing compared to 62,391 million euro at the end of 2016 (+6.6%). Direct customer deposits decreased slightly, amounting to 46,027 million euro (-295 million euro compared to 31 December 2016) driven by deposits from customers, up by 1.8%, from 43,928 million euro to 44,738 million euro, especially in the deposits and current accounts segment, considering customers preference for liquidity, accompanied by the securities component, mainly represented by bond issues, which, conversely, decreased by 46.2%, from 2,394 million euro to 1,289 million euro, mainly due to reimbursements. Deposits from customers include the T2 subordinated loan for 250 million euro, received from a financial company in the BNPP Group in December The indirect component (assets under administration and management) reported significant growth, despite the scenario of volatility in the markets, increasing from 16,069 to 20,477 million (+27.4%). The net balance on the interbank activity was negative for 16,578 million euro, down slightly compared to 16,926 million euro at the end of In detail: the net indebtedness to the parent company BNP Paribas decreased in the year from 8,190 to 6,467 million euro. The amount includes T2 subordinated loans for 514 million euro and other net funding for 5,953 million euro (7,676 million euro as at 31 December 2016); 17

19 Report on Operations Summary of consolidated results The funds received from the European Central Bank, equal to 10,000 million euro, relate to BNL s direct participation in the second series of Targeted Longer-Term Refinancing Operations (TLTRO II). In 2017, BNL recorded 40 million euro in negative interest expense on that transaction, at the more favourable interest rate of -0.40%, as the achievement of the benchmark of a net increase in loans envisaged by the ECB was highly expected. This increase was achieved in January 2018; The net debit balance with third party banks came to 111 million euro. In 2017 the shareholders equity of the BNL Group came to 5,804 million euro, an increase of 194 million euro compared to the value recorded at the end of December 2016 (5,610 million euro). The increase is mainly due - in addition to the profit for the year (149 million euro) - to the increase of 45 million euro in the valuation reserve, which essentially includes: million euro on the component of fixed-income government bonds (BTP) compared to the valuation at the end of 2016; million euro on other fixed-income securities, mainly due to the cancellation of the negative reserve recorded on Tier 2 subordinated bonds issued by Banca Popolare di Vicenza and Veneto Banca; and, lastly, million euro for the negative change in the fair value of cash flow hedges. * * * As is known, the Basel 3 regulatory framework, which became operational in 2014, introduced a transitional period for final application, during which some elements, which once in operation will be accounted for under the Prudential Regulatory Capital ( fully loaded ), only impact it for the percentage portion ( phased in ). As at 31 December 2017, as a ratio to risk-weighted assets (RWA) - which are identified using Group IRBA advanced regulatory models on the segments Large Corporate, Retail exposures and Banks, Central governments and Central Banks and Businesses the fully loaded CET 1 ratio of the BNL Group reached 11%, while the leverage ratio, constructed on nominal, unweighted values, came to 5.5%. The capitalisation of the BNL Group is thus confirmed to exceed the minimum requirements of the regulations and that required by the European Central Bank in November 2016 following the Supervisory Review and Evaluation Process (SREP). The limits that must remain stable through 2017, valid on phased in equity, including the Capital Conservation Buffer (CCB of 1.25%) and the Pillar 2 Requirement (P2R of 1.25%) must reach at least 7% for CET 1, 8.5% for the Tier 1 capital ratio and 10.5% for the Total capital ratio. With reference to the regulatory requirements pertaining to the short-term resilience of the liquidity risk profile, the Liquidity Coverage Ratio (LCR), a figure that refers only to the Parent Company, stands at 91.4%, compared to a minimum regulatory threshold set at 80% since January

20 Report on Operations The market context The market context The global and Eurozone economies In 2017 the global economy grew by an annual rate of 3.7%, much higher than the previous year. Growth was generally widespread, involving most advanced and emerging countries. Volumes of international trade began to grow once again, at a sharper pace than the global economic trend, inverting the trend seen in the previous two years. Following a long period of decreasing, prices of raw materials showed significant increases, especially for metals and energy products. The positive global scenario favoured the start of a recovery phase both for Brazil and Russia, the latter increasingly linked to the performance of the global energy market. Though not lacking in problems growth in China and India continued to be robust, confirming Asia as the most dynamic area in the world. In the United States, the acceleration of consumer spending accompanied investments in increasing the soundness of the economic trend. At the end of the year, the unemployment rate stood at a historical low, decreasing by 0.6 percentage points over the year. Deflation risk seems to be slight, though the trend in prices is still relatively low. The Eurozone improved its growth rate, to which all countries in the zone contributed (through in varying ways). The more positive economic climate favours the attenuation of several weaknesses; however, the achievement of the target values is often far off, especially for inflation and unemployment. Last October, the Fed started a plan to shrink its assets, only partially renewing the securities it holds that reached maturity. In mid-december, the less accommodating US monetary policy was strengthened by the new rise in benchmark rates, the third in the year, and the fifth since the increases began (December 2015). In turn, the ECB confirmed its highly expansive approach, leaving benchmark rates unchanged. However, it announced a reduction in purchases of financial assets starting at the beginning of this year (from 60 to 30 billion euro each month). The Italian economy For the fourth consecutive year, the annual economic total was positive. However, though it is clearly accelerating (around +1.5%), even in 2017 growth will be lower than the average figure for the Eurozone. A significant contribution was made to the favourable economic framework by the trend in consumer spending, favoured by the increase in disposable income. Car sales increased by almost 8%, a much higher rise than that recorded in the rest of the European Union. The reawakening of fixed investments, which grew by around 3%, was not insignificant, driven by the improvement in expectations as well as by more relaxed conditions in the financial market. The employment is decreasing slightly, also because the growth in employed persons was combined with a reawakening of interest of persons who, discouraged during the years of the crisis, decided to withdraw from the job market. The increased liveliness of the economy inevitably favoured imports, whose growth neared double digits by the end of the year. Exports also confirmed their dynamic trend, with an increase in 19

21 Report on Operations The market context sales abroad, which were more intense in countries outside the European Union. The balance of foreign trade of goods and services, though slightly decreased, was generally positive. The trend in prices remained weak, but less sharp than last year. At the end of 2017 the national consumer price index increased by 0.9% on the same figure in December 2016, only by 0.7% if core inflation is considered, that is, inflation calculated excluding energy products and fresh food products. Lending in Italy In Italy, lending showed signs of recovery in 2017, though remaining slight. Loans to the nonfinancial private sector (removing seasonal effects and correcting for the accounting effects of securitisations) increased by 1.4% y/y (November 2017); loans to the public administration grew by +3.7% y/y. The demand for loans to consumer households remained robust (+3.2%), while demand from businesses remained weak, but returned to marginally positive ground (+0.3%). The set of loans to small businesses recorded a further decrease (-1%), though smaller than in the past. On the whole, the trend in loans to businesses was stronger in the areas of the North and Centre of Italy, while the trend in loans to households was stronger in the South and the islands. The improvement in the national economic framework is resulting in a visible improvement in the quality of the loan portfolio. In the 3rd quarter, the annualised ratio of the flow of new impaired loans to total loans decreased to 1.7% as a result of a reduction of 0.5 percentage points in loans to businesses (at 2.6%) and of 0.2 percentage points in loans to households (at 1.2%). If the figure regarding households can be considered physiological, the figure regarding businesses is still high. In addition to the reduced flow of new impaired loans, the quality of the loan portfolio is improved by the sale by numerous banks of significant amounts of past due loans, primarily loans to businesses that have been doubtful for some time. The percentage of (gross) impaired loans on total loans decreased to 16.4%, a figure which is still high, but around 2 percentage points lower than eighteen months ago. In 2017 the process of divestment of the portfolio of government securities accelerated sharply. Its amount decreased over the twelve months by around 50 billion euro, though remaining significant in absolute terms in relation to the figures in the rest of the Eurozone. On the deposits side, current accounts continued to grow (average for the year just under +9%), partially driven by the weakness of other types of deposits. Conversely, the decrease in bonds is not slowing (average for the year almost -10%). Regarding asset management, the year 2017 was another favourable year. Almost 100 billion euro in net deposits achieved during the year drove the total assets under management to almost 2,100 billion euro. 20

22 Report on Operations Consolidated profit evolution Consolidated profit evolution Net banking income In the market context described, the net banking income of the BNL Group reached 2,721 million euro, down compared to 2,761 million euro of last year. Breakdown of net banking income (millions of euro) FY 2017 FY 2016 % Change N et interest income ,5 N et commissions ,6 sub-total ,7 N et result of financial instruments measured at fair v alue ,3 Net result of financial assets available for sale ,4 Income / charges from other banking activities ,3 Net banking income ,4 Among the components of the net banking income, the net interest income and the net commissions came to 2,614 million euro, substantially stable compared to the figure of last year. When considered individually: Net interest income (from 1,650 to 1,576 million euro in 2017, -4.5%): the moderate development of loans to customers, supported by medium-term loans to households and businesses, did not offset the impact of the decrease in commercial spreads, which were eroded by harsh competitive pressure. For loans to households, the decrease in spreads was the result of reduced margins on new business and requests for transfer or renegotiation of outstanding mortgages, specifically in the first half, attenuating in the second part of the year. For loans to businesses, the commercial margins were impacted by the significant concentration of competitors commercial actions on top customers, also accentuated by the widespread availability of TLTRO2 funding. Liquidity received from customers also grew: deposits recorded an increase of 3.6 billion in average volumes, deriving from businesses and households in equal amounts, without an increase in the cost of deposits. Net commissions (from 983 to 1,038 million euro in 2017, +5.6%): the commercial performance for the period showed a positive trend in the aggregate, specifically due to the higher volumes of assets under management and pension/protection products. Positive developments were also seen in monetics and other banking commissions in the Retail sector and the revenue deriving from trade finance and credit commissions of the Corporate Division. In detail, breaking down the main components of net interest income, the following decreased as compared to the figure of last year in relation to interest rates at historical lows: % interest income with ordinary customers, equal to 1,530 million euro; -66.4% interest expense, from 113 million euro to 38 million euro; -21.8% interest income on owned securities, equal to 93 million euro, from 119 million euro in Net interest income on brokerage with banks broke even (-4 million euro in the comparison year) and reflects the actions of overall re-composition of interbank and inter-group funding aimed 21

23 Report on Operations Consolidated profit evolution at reducing the average cost. BNL takes part in the TLTRO II - Targeted Longer-Term Refinancing Operations of 10,000 million euro, performed with the European Central Bank. Implemented to benefit from favourable conditions in terms of interest rates and longer-term maturities, BNL specifically recorded around 40 million euro in negative interest expense at the more favourable interest rate of -0.40%, as the achievement of the benchmark of a net increase in loans envisaged by the ECB was highly expected. This increase was exceeded in January Finally, negative differentials on hedging derivatives came to 9 million euro, also decreasing from the 85 million euro in Breakdown of the net interest income (millions of euro) FY 2017 FY 2016 % Change N et interest w ith customers ,9 - Interest income ,7 - Interest expense (38) (113) -66,4 H edging deriv ativ e differentials (9) (85) -89,4 Interest income on securities ,8 N et interbank interest - (4) -100,0 - Interest income (*) ,5 - Interest expense (**) (70) (91) -23,1 Net interest income ,5 (*) including 58 million euro in negative interest expense on funding (26 million euro in 2016). (**) including 8 million euro in negative interest income on loans (5 million euro in 2016). Net commissions, which rose from 983 to 1,038 million euro, +5.6% compared to 2016, highlight the extensive as well as effective commercial effort made by the BNL Group. This commitment took shape in a positive trend in volumes and in the development of fee-based operations, pursued through distribution policies based on a multichannel strategy, attention to customer needs and cooperation with other entities/hubs of the BNPP Group. In a detailed analysis, commission income, which reached the level of 1,156 million euro, up by 6.4% over 1,086 million at the end of 2016, mainly refers to management, brokerage and consulting services (508 million, +14.9%), services related to credit brokerage (151 million, -3.8%) and guarantees issued (63 million, -7.4%), management and current account services (119 million, - 8.5%) and collection and payment services (148 million, +9.6%). Worthy of note is also the income from electronic payment activities via the Parent Company BNL s ATMs and credit cards, in addition to the income relating to the payment systems promoted by the subsidiary BNL POSitivity, at 38 million euro (+26.7%) and 60 million euro (+5.3%), respectively. Commission expense, totalling 118 million euro, shows a 14.6% increase compared to This essentially refers to charges for services obtained for security management, brokerage and consulting of 35 million euro (23 million euro in 2016), ATM and credit card payment services of 27 million euro (23 million euro at the end of 2016), collection and payment services carried out by third parties of 13 million euro (10 million euro in 2016), as well as information and perusal services related to granting mortgages of 11 million euro and guarantees received of 4 million euro. Finally, we report the charges incurred by the subsidiary BNL POSitivity towards the international and domestic networks regarding electronic payment activities of 18 million euro (19 million euro at the end of 2016). 22

24 Report on Operations Consolidated profit evolution Detail of commission income and expense (millions of euro) Commission income FY 2017 FY 2016 % Change Management, brokerage and consulting serv ices ,9 C redit brokerage serv ices ,8 C ollection and pay ment serv ices ,6 H olding and managing current accounts serv ices ,5 Guarantees giv en ,4 ATM and C redit C ards serv ices ,7 Financing and mortgage management serv ices ,8 BNL POSitiv ity pay ment sy stem ,3 Other serv ices ,0 Total ,4 Commission expense Serv ices inv olv ing the custody and administration of securities and management, brokerage and consultancy (35) (23) 52,2 ATM and C redit C ards serv ices (27) (23) 17,4 BNL POSitiv ity pay ment sy stem (18) (19) -5,3 C ollection and pay ment serv ices (13) (10) 30,0 Information and search serv ices for granting mortgages (11) (12) -8,3 Placement of financial products (4) (4) 0,0 Guarantees receiv ed (4) (4) 0,0 Other serv ices (6) (8) -25,0 Total (118) (103) 14,6 Total net commissions ,6 The other components of the net banking income recorded an overall profit of 108 million euro, compared with 128 million euro of the previous year. In particular, in terms of financial operations, the net result of financial instruments measured at fair value recorded a 35 million euro profit (39 million euro in the previous year), mainly referring to: 26.2 million euro in income from brokerage with customers in securities, exchange rates and derivatives, decreasing overall compared to 30 million euro recorded in December 2016; 7.4 million euro for the assessment of risk on securities issued, including issuer (own) risk, due to the nearing of the maturities of issues of the largest amounts (+9.7 million euro as at 31 December 2016); 1.8 million euro in gains (losses) on risk components of derivatives, both trading and hedging derivatives (CVA, DVA and FVA), which were near zero in The net result of financial assets available for sale, equal to 26 million euro (61 million euro at the end of December 2016), is mainly attributable to the following components: dividends and similar income of 27.3 million euro, which mainly included Bank of Italy dividends of 9.6 million euro, coupon income received on AT1 bank bonds 23

25 Report on Operations Consolidated profit evolution (Intesa-S. Paolo, Santander and Unicredit) of 4.2 million euro, as well as the distribution of reserves of the investee company Sud Factoring in liquidation of 12.3 million euro; profits on the sale of equity investments of 9.2 million euro, mainly due to the capital gain realised on the sale of GGP Greenfield (8.2 million euro); profit on sales of bonds: BTP of 8.2 million euro, AT1 Santander of 2.3 million euro; losses on financial assets available for sale (AFS) totalling 21.9 million euro due to an additional intervention requested by the Voluntary Scheme at the Interbank Deposit Guarantee Fund in order to support banks in difficulty or risking difficulty. Said intervention regarded the recapitalisation of the Casse di Risparmio di Rimini e San Miniato (around 18 million euro) in addition to the loss on the sale of the equity investment held by the Voluntary Scheme of Cassa di Risparmio di Cesena of 3.1 million euro (previously written down at the end of 2016 by 2.5 million euro). The main components of the 2016 figure were income deriving from the sale of the interest in Visa, equal to 39.1 million euro, and the sale of BTP securities, with a total capital gain of 10.3 million euro. The net income from other banking activities reached 46 million euro (28 million euro in 2016) and mainly refers to the capital gains realised in the second quarter of the year on the sale of properties for 32.5 million euro, in addition to the recording of rentals from third parties, nonrecurring income, charges and reimbursements and sundry additional components. The portion of the property capital gain recorded under income regarded the sale of the San Nicola da Tolentino" complex in Rome, in relation to the portion not used in company business. The portion of profits realised on the part used in business, equal to 5.7 million euro, was recorded, according to the Group s principles of accounting representation, under the item Profits on equity investments and other non-current assets. Operating expenses Breakdown of operating expenses (millions of euro) FY 2017 FY 2016 % Change Administrative expenses: (1,556) (1,670) Personnel expenses (961) (1,025) of which: transformation costs (42) Other administrative expenses (595) (645) of which: transformation costs (9) (13) of which: Indirect taxes (27) (32) Depretacion and amortisation of tangible assets (78) (72) Depretacion and amortisation of intangible assets (37) (38) Total operating expenses (1,671) (1,780) Operating expenses equalled 1,671 million euro and included 17.8 million euro of the contribution to the National Resolution Fund and 21.2 million euro the allocation of costs of mandatory 2017 contributions to the Interbank Deposit Guarantee Fund (20 and 16 million euro in 2016, respectively). Last year the aggregate included the contribution of two additional portions to the National Resolution Fund of 46.8 million euro and transformation costs for personnel redundancy of 42.2 million euro. Net of these latter components, total operating expenses decreased by 1.2% compared to the previous year s figure, which impacts personnel costs, which reached 961 million euro, (-2.2% 24

26 Report on Operations Consolidated profit evolution compared to 31 December 2016), and on other administrative expenses, which amounted to 595 million euro (-0.5% on 2016). The cost for amortisation of intangible assets and depreciation of tangible assets, +4.5%, from 110 to 115 million euro: product innovation, support to the distribution network and the new real estate lay-out continue to be the main investments of the Bank. In detail, personnel costs include: million euro for salaries and wages (687 million euro in 2016); million euro for social security charges (179 million euro in 2016); - 45 million for payments to external complementary social security funds (46 million in 2016); - 33 million euro in employee benefits (31 million euro in 2016); - 28 million euro for pension plan expenses (29 million euro in 2016); - 3 million euro in allocations to the staff severance indemnity fund (same as in 2016); - 10 million euro for other expenses (8 million euro in 2016). - in the previous year, 42 million euro was allocated in relation to the voluntary redundancy/pension programs. In detail, the other administrative expenses refer to: million in real estate expenses rent expenses, maintenance, utilities, etc. (110 million in 2016); million euro for maintenance and fees for furniture, machinery, systems and software (116 million euro in 2016); million euro for fees paid to external professionals (89 million euro in 2016); - 71 million euro for software development (72 million euro in 2016); - 52 million euro in postal, telephone, stationery, printer and other charges for the office (49 million euro in 2016); - 39 million for insurance premiums, supervisory expenses and cash counting (41 million in 2016); - 27 million euro for advertisement and entertainment (33 million euro in 2016); - 27 million euro for indirect taxes (32 million euro in 2016); - 7 million euro for transport and travel expenses (8 million euro in 2016); - 31 million euro for other expenses (compared to 95 million euro in 2016, which included the contributions to the National Resolution Fund of 67 million euro and the Interbank Deposit Guarantee Fund of 16 million euro). Confirming the trends described, the cost to income ratio for 2017 defined as operating expenses to net banking income came to 61.4% (64.5% in 2016). 25

27 Report on Operations Consolidated profit evolution Cost of risk Breakdown of cost of risk (milions of euro) FY 2017 FY 2016 % Change Credit Risks: N et v alue adjustments/w rite-backs for impairment of loans (706) (791) -10,7 doubtful loans (458) (486) -5,8 unlikely to pay (266) (345) -22,9 past due impaired loans (19) (23) -17,4 performing loans ,3 Profits on assigned impaired loans 24-3 n/s N et v alue adjustments/w rite-backs for impairment of other financial assets (111) 8 n/s Total credit risks: (793) (786) 0,9 Operating Risks - Net provision and expenses (32) (21) 52,4 The total cost of risk (825) (807) 2,2 In a scenario marked by moderate signs of recovery, the gradual improvement in the financial conditions of businesses and the disposable income of households reflects on the general improvement in credit quality. The cost of risk continues to show a declining trend. Specifically excluding the following phenomena that impact the results: write-down of 94 million euro of the T2 subordinated bonds of Banca Popolare di Vicenza and Veneto Banca; capital gain of 12 million euro pertaining to the sale of a portfolio of doubtful loans, for a gross amount of 900 million euro, with total coverage of 99.3%; write-down of 3.5 million euro of the junior and mezzanine tranches subscribed in relation to the securitisation of NPLs as part of the intervention of the Voluntary Scheme in favour of Caricesena, Carim and Carismi; the cost of risk decreased to 740 million euro, a significant reduction (-67 million euro, -8.3%) on In detail, this includes: - credit risks for 793 million euro (+0.9% compared to 2016), which include: - net write-downs on receivables for 706 million euro (791 million euro in 2016, -10.7%), including 743 million euro in net value adjustments for problem loans and 37 million euro in write-backs on performing loans; - gains on assigned impaired loans for 24 million euro; - net value adjustments on other financial assets for 111 million euro (of which 94 million euro on said T2 bonds of Banca Popolare di Vicenza and Veneto Banca); - operational risks of 32 million euro, which mainly regard costs for revocation and other lawsuits in which the Group is the defendant. The Profits on equity investments and other non-current assets, equal to 6 million euro, refer to the portion of profits on the sale of real estate realised in the portions used in operations. Based on the profit results described above, the profit before tax came to 230 million euro compared to 174 million euro in the previous year (+32.2%). After the direct taxes, totalling 81 million, the BNL Group ended 2016 with a net profit pertaining to the Parent Company of 149 million euro (125 million euro as at 31 December 2016). 26

28 Report on Operations Consolidated equity components Consolidated equity components Loans to customers During the year, the BNL Group ensured its support to initiatives for businesses and incomegenerating and consumer households, focusing attention on credit quality. Loans to customers, net of value adjustments, stood at 61,225 million euro compared to an amount at the beginning of the year equalling 61,268 million euro. This dynamic, driven by the medium-term loans to households and businesses, was also influenced by the sale to Banca Ifis SpA of a portfolio of doubtful loans for a gross amount of 900 million euro, with total coverage of 99.3%, and the cancellation of previous overdue interest accrued and fully allocated on impaired exposures, of around 1,130 million euro, implemented to ensure more streamlined representation of asset quality. (millions of euro) 31/12/ /12/2016 % Change Loans to customers 61,225 61, C urrent accounts 3,902 4, Mortgages and other loans 52,386 52, Credit cards, personal and employee loans 4,431 4, Debt securities Loan quality Within a general economic context that has not fully returned to normal, the economic trend seems characterised by signs of recovery and the slowing trend of inflows of new problem loans already recorded in the two-year period is confirmed. These signs of improvement, along with the actions to reduce the risk taken by over the last few years suggest a trend of gradual reduction of total impaired loans, which, net of value adjustments, came to 5,409 million euro, down compared to the 5,842 million euro of the previous year (-433 million euro, -7.4%). The aforementioned sales of doubtful loans and the cancellation of prior overdue interest influenced qualitative figures: the impact of impaired loans on the total customer loans came to 8.8%, significantly lower than the comparative figure of 9.5%, while the level of coverage came to 52.0%, compared to 55.3% at the end of December Impaired loans (millions of euro, %) 31 December 2017 Gross exposure Value adjustments Net exposure % coverage as % of loans to customers Doubtful loans ,7 + 5,1 Unlikely to pay ,7 + 3,5 Past due impaired loans ,2 + 0,2 Total impaired loans ,0 + 8,8 31 December 2016 Gross exposure Value adjustments Net exposure % coverage as % of loans to customers Doubtful loans ,6 + 5,1 Unlikely to pay ,2 + 4,1 Past due impaired loans ,9 + 0,2 Total impaired loans ,3 + 9,5 27

29 Report on Operations Consolidated equity components In detail, doubtful loans came to 7,743 million euro in gross values (-13.1% on the 8,915 million euro at the end of 2016) and 3,120 million euro in net values. The hedging ratio is 59.7% (64.6% at the end of 2016) while the impact on total customer loans was stable at 5.1% (the same at the end of 2016). Unlikely-to-pay, equalling 3,376 million euro gross, came to 2,170 million euro net of value adjustments, which also decreased compared to 2,534 million euro as at 31 December 2016, with a ratio to customer loans that decreased from 3.5% (4.1% in 2016), and a level of hedging that was substantially stable, at 35.7%, from 36.2%. Impaired past due loans, net of value adjustments, decreased by 34 million euro during the period, reaching 119 million euro, with a hedging level at around 19%. In the area of impaired loans, we note forborne exposures amounting to a total of 2,004 million euro in gross value. Customer performing loans, net of collective adjustments of 132 million euro, came to 55,816 million euro, +0.7% on the 55,426 million euro last year. The level of hedging dropped from 0.3% last year to 0.2% as at 31 December 2017, consequently to the improved risk profile of performing positions, and gross forborne positions in that area came to 202 million euro (312 million euro as at 31 December 2016). Financial asset portfolio (millions of euro) 31/12/ /12/2016 % Change Financial assets held for trading 370 2, debt securities derivatives 370 2, Financial assets available for sale 4,425 5, debt securities 4,009 4, equity instruments and UCI units Total 4,795 7, The portfolio of financial assets amounted to 4,795 million euro, against 7,477 million euro as at 31 December In detail, both components of the aggregate are decreasing: financial assets held for trading, almost completely comprised of derivatives intermediated for customers, which came to 370 million euro from 2,457 million euro last December. The significant decrease, linked to an equivalent performance in the corresponding liability item (financial liabilities held for trading, which dropped from 2,487 to 384 million euro), is due to the different operating methods with the Parent Company, specifically on interest rate derivatives, rationalising old contracts and simplifying exposures; -11.9% the stock of financial assets available for sale, amounting to 4,425 million euro, comprised of debt securities, primarily BTP of the Parent Company, of 3,956 million euro and equity instruments and UCI units of 416 million euro. During the fourth quarter of 2017, the Parent Company sold BTP amounting to 485 million euro in nominal value. That aggregate also comprises securities issued by regulated institutes, included in their regulatory capital, of which, in particular, we note 76 million euro relating to AT1 equity instruments and 17 million euro in T2 subordinated bonds. Lastly, note that the 2016 figure included the contribution to the Voluntary Scheme set up at the FITD, as a result of the intervention in the capital of Cassa di Risparmio di Cesena. The portion pertaining to BNL, recorded at the time as an indirect investment for a net amount of 7.9 million euro, was sold at the end of 2017 following the closing of the complex operation of requalification 28

30 Report on Operations Consolidated equity components and support conducted by the Voluntary Scheme on the three banks of Cesena, Rimini and San Miniato. Against the assets available for sale, the shareholders equity accounts include a positive net valuation reserve totalling 46 million euro, which includes 30 million euro of the component of listed Italian government securities and other fixed income securities and 16 million euro regarding equity instruments and UCITS. Deposits Total customer financial assets, which include direct customer deposits, assets under administration and managed assets, amounted to 66,504 million euro as at 31 December 2017, increasing compared to 62,391 million euro at the end of 2016 (+6.6%). Deposits from customers increased by 1.8%, from 43,928 million euro to 44,738 million euro, especially in the deposits and current accounts segment, considering customers preference for liquidity. Conversely, the securities component, mainly represented by bond issues, decreased by 46.2%, from 2,394 million euro to 1,289 million euro. Deposits from customers include the T2 subordinated loan for 250 million euro, received from a financial company in the BNPP Group in December The indirect component of assets under administration and management grew, increasing from 16,069 to 20,477 million euro (+27.4%). As regards the evolution of the bonds issued by the Parent Company BNL SpA in 2017, new issues amounted to 26 million euro, extinctions to 702 million euro (of which about 637 million euro refers to the fair value option portfolio) and definitive buy-backs to 10 million euro (4 million euro of which refers to securities booked at amortised cost and 6 million euro to securities in Fair Value Option). Two covered bond transactions were finalised during 2017 for a total of 2,950 million euro, repurchased entirely by BNL, with details reported in the Explanatory Notes to the Consolidated Financial Statements of the Group. Customer financial assets (millions of euro) 31/12/ /12/2016 % Change Direct customer deposits: 46,027 46, deposits from customers 44,738 43, funding from securities (*) 1,289 2, Asset administration 20,477 16, Total financial assets of customers 66,504 62, (*) includes securities issued and financial liabilities designated at fair v alue (structured securities) 29

31 Report on Operations Consolidated equity components Customer deposits by type (millions of euro) 31/12/ /12/2016 % Change C /a and deposits 44,075 43, Certificates of deposit Bonds 1,260 2, Other funding Total direct customer funding 46,027 46, Net interbank position Interbank deposits reached 23,516 million euro (21,111 million euro at the end of December 2016) and were mainly comprised of: the net indebtedness to the parent company BNP Paribas, which rose in the year from 11,079 million euro to 12,646 million euro, represented by T2 subordinated loans for 514 million euro (as in 2015) and other funding for 12,132 million euro (10,565 million euro as at 31 December 2016); the funds received from the European Central Bank, equal to 10,000 million euro, relating to BNL s direct participation in the second series of Targeted Longer-Term Refinancing Operations (TLTRO II). In 2017, BNL recorded 40 million euro in negative interest expense on that transaction, at the more favourable interest rate of -0.40%, as the achievement of the benchmark of a net increase in loans envisaged by the ECB was highly expected. This increase was then achieved in January 2018; the other relations with third party credit institutions, equal to 870 million euro, of which 567 million euro with the EIB. (millions of euro) 31/12/ /12/2016 % Change Loans to third banks (*) 759 1, Loans to BNP Paribas 6,179 2, Total Loans 6,938 4, Due to third banks (**) (870) (832) Due to BNP Paribas (12,646) (11,079) deposits from BNP Paribas (12,132) (10,565) deposits from BNP Paribas - subordinated loans (514) (514) deposits from BNP Paribas - lead institution TLTRO - - n/s Due to BCE - TLTRO II (10,000) (9,200) n/s Totale Deposits (23,516) (21,111) Total net interbank deposits (16,578) (16,926) relations with BNP Paribas (6,467) (8,190) relations from BCE (10,000) (9,200) n/s relations with third parties (111) 464 n/s (*) of which: BI - mandatory reserve n/s (**) of which: Loans from BEI (567) (413) Also considering the credit balances with credit institutions, of which we note the Bank of Italy compulsory reserve, which reached 485 million euro, the net balance on the interbank activity was negative for 16,578 million euro, down slightly compared to 16,926 million euro at the end of

32 Report on Operations Consolidated equity components Provisions for liability Provisions for liability (millions of euro) 31/12/ /12/2016 % Change Employee severance indemnity Allowances for risks and contingencies a) post retirement benefits and similar obligations b) other provisions Total 923 1, As at 31 December 2017, provisions for liability totalled 923 million euro (-0.9% compared to 1,017 million euro in 2016) and represented suitable allocations to face future disbursements deemed probable in relation to known events by the date of approval of the draft financial statements for Staff severance indemnity refers only to the individual services provided until the date of transfer of the accruing staff severance indemnity to INPS or to external social security funds, completed in the first half of Liabilities are posted on an actuarial basis considering the probable future date on which the effective financial disbursement will be made. As at 31 December 2017, the fund contained 272 million euro, in line with the previous year s figure. The provisions for risks and contingencies include the post-retirement benefits and similar obligations, which as at 31 December 2017 came to 71 million euro (80 million euro at the end of 2016; -11.3%). Other provisions for risks and contingencies, totalling 580 million euro (665 million euro as at 31 December 2016), included: "employee allowances" which hold 142 million euro and which included allocations for costs mostly referring to benefits paid to employees as part of employment contracts and for the variable portion of wages and salaries. The amounts at the end of 2016, equal to 207 million euro, also included additional allocations: incentives to leave (42 million euro) and allowances for recognition of 25 years of service of employees (20 million euro); "allowances for litigation", totalling 261 million euro (269 million euro at the end of 2016) which represent allocations made against probable negative outcomes from cases in which BNL is the defendant and from claims; the "allowance for costs and expenses", which reached 20 million euro (27 million euro in the comparison period) and refers to expenses for external services mainly related to debt collection activities; "allowances for fraud and malfunctions", totalling 20 million euro (25 million euro at the end of 2016); other specific allowances, which refer to risks deriving from the core business, overall reached 137 million euro, in line with the 2016 figure. 31

33 Report on Operations Consolidated equity components Shareholders' equity The Group s shareholders equity, gross of the portion belonging to third-party shareholders (3 million euro), was 5,804 million euro, with an increase of 194 million euro compared to the value recorded at the end of December 2016 (5,610 million euro). Evolution of the Group's equity (millions of euro) Shareholders equity as at 31/12/2016 5,610 N et C hanges: 45 - change in the valuation reserves 45 Profit (loss) of the Group 149 Shareholders equity at 31/12/2017 5,804 The change is mainly due to the Group profit for the year (+149 million euro) and the increase of 45 million euro in the valuation reserve, net of taxes, which specifically includes: +34 million euro on the fixed-income government securities component (BTP) compared to the valuation at the end of 2016; +28 million euro on other fixed-income securities, which mainly reflect the cancellation of the negative reserve recorded on Tier 2 subordinated bonds issued by Banca Popolare di Vicenza and Veneto Banca; -14 million euro from the negative change in fair value of the cash flow hedge; -3 million euro from the posting in the shareholder s equity of the actuarial gains relating to the employee allowances. 32

34 Report on Operations Consolidated equity components Reconciliation between Parent Company's equity and the year result and the same consolidated amounts (millions of euro) 31/12/2017 Profit for the period Capital and reserves Shareholders equity Financial statements of the Parent Company 121 5,573 5,694 Balances of companies consolidated line-by -line Consolidation adjustments: (6) (45) (51) - book value of equity investments consolidated line-by -line - (53) (53) - valuation of equity -accounted investments other adjustment (6) 6 - Consolidated financial statements (including minority interests) 149 5,655 5,804 Equity of minority interests - (3) (3) Consolidated financial statements (portion pertaining to the Parent Company) 149 5,652 5,801 (millions of euro) 31/12/2016 Profit for the period Capital and reserves Shareholders equity Financial statements of the Parent Company 94 5,433 5,527 Balances of companies consolidated line-by -line Consolidation adjustments: - (51) (51) - book value of equity investments consolidated line-by -line - (52) (52) - valuation of equity -accounted investments other adjustment Consolidated financial statements (including minority interests) 125 5,485 5,610 Equity of minority interests - (4) (4) Consolidated financial statements (portion pertaining to the Parent Company) 125 5,481 5,606 33

35 Report on Operations Consolidated equity components Own funds, capital ratios and leverage ratio The reforms that review the accords of the Basel Committee ( Basel 3 ), which became operational on 1 January 2014 and regard the enhancement of the banks ability to absorb the shocks deriving from financial tensions and improve the management of risks and the governance, in addition to increasing the transparency and disclosure of the same banks, introduced a new regulatory framework and a transitional period for its introduction during which some elements, which once in operation will be accounted for under the Common Equity ( fully loaded ), only affect it for the percentage portion ( phased in ). Own funds, or regulatory capital, are the algebraic sum of the elements specified below: - Tier 1 Capital, which, in turn, is subdivided into CET1 - Common Equity Tier 1 and Additional Tier 1; - Tier 2 Capital. In 2017, the fully operational capital ratios were: - the Common Equity Tier 1 capital ratio, which must be equal to at least 4.5% of the risk-weighted assets; - the Tier 1 capital ratio, which must be equal to at least 6% of the risk-weighted assets; - the Total capital ratio, equal to Tier 1 plus Tier 2, which must be equal to at least 8% of the riskweighted assets; with the additional obligation to hold, in addition to Tier 1 capital needed to satisfy the mentioned requirements regarding own funds, a capital conservation buffer equal to 2.5% of the overall exposure to risk of the Group at the end of On 25 November 2016, on conclusion of the Supervisory Review and Evaluation Process (SREP) conducted by the European Central Bank pursuant to Directive 2013/36/EU, which requires the determination of the adequacy of the level of the own funds on a consolidated level per individual bank, the ECB notified BNL, through the parent company BNP Paribas, the minimum ratios to be maintained stably for The requirements for BNL, valid on phased in equity, including the Capital Conservation Buffer (CCB of 1.25%) and the Pillar 2 Requirement (P2R of 1.25%) must reach at least: - 7% for CET 1 (from 1/1/ % fully loaded); - 8.5% for Tier 1 (from 1/1/ % fully loaded); % for the Total Capital Ratio (from 1/1/ %); The table below reports the most significant data for the BNL Group, compared with the data for the year 2016, highlighted in the two versions: phased in, pertaining to the equity quantification obtained from applying the transitional rules of Basel 3, and fully loaded, which projects the same data without considering the transitional rules that defer the impacts of the 1 In November 2017, the ECB notified BNL, through the parent company BNPP, the SREP decision 2017 following the supervisory review process conducted in the previous quarter. The requirements for 2018 confirm those previously assigned, also considering that last year the national discretion concerning the application of the Capital Conservation Buffer (CCB) was eliminated and phasing-in was adopted in line with the CRDIV. As a result, if for 2017 the CCB to comply with for capital requirements was 1.25%, starting from 1 January 2018 it will be 1.875%, and 2.5% starting from 1 January

36 Report on Operations Consolidated equity components definitive passage from the Basel 2 regulation to the Basel 3 regulation. As at 31 December 2017 the capitalization levels of the Bank were confirmed as exceeding the minimum applicable requirements: CET 1 and Tier 1 capital ratios equal 11.2% (11.0% in the fully loaded operational version); Total capital ratio equals 12.5%. Own funds and capital ratios 31/12/ /12/2016 (milioni di euro e %) phased in fully loaded phased in fully loaded Common Equity Tier 1 Capital Additional Tier 1 Capital Tier 1 Capital Tier 2 Capital Own Funds Credit and Counterparty risk C redit v aluation adjustment risk Settlement risk Market risk Operational risk Risk-Weighted Assets CET 1 capital ratio 11,2 11,0 12,2 12,0 Tier 1 capital ratio 11,2 11,0 12,2 12,0 Total capital ratio 12,5 12,4 13,2 13,0 Regarding the quantification of risk-weighted assets during the second half of 2016, BNL received authorisation to use the Group s new approaches for the Large Corporate segment, which followed the IRBA validation procedure for the credit risk regarding the Retail exposures and the Banks portfolios, completed in 2015, in addition to that completed at the end of 2013 for the exposures of Central Governments and Central Banks and Companies. As at 31 December 2017 risk weighted assets referring to the BNL Group came to 43,663 million euro, up on the 41,815 million euro recorded at the end of This increase mainly refers to the updating of the historical series of loss given default pertaining to the advanced models of the Mid Corporate segment, carried out in concert with the parent company BNPP when quantifying the RWA at the end of Basel 3 regulation introduced a leverage ratio aimed at establishing a prudential measure that supplements the capital ratios. This ratio pursues the objectives set by the Committee and aimed at curbing the accumulation of leverage in the banking sector - the excess of which could jeopardise the financial and economic system as a whole - and at strengthening the system of prudential requirements with a simple supplementary measure that is not based on risk assessments. The requirement was implemented first in January 2013 with reporting to the Supervisory authorities and the relevant information, made public from 2015, is currently subject to a phase of constant monitoring and observation by the same authorities. At the moment, the Supervisory Authorities have not yet set the minimum levels to comply with for the Leverage Ratio and, in the expectation that this indicator will become binding during 2018, that ratio is expressed as a percentage and subject to a transitional regulatory minimum limit of 3%. The leverage ratio as at 31 December 2017, defined, on the basis of applicable legislation, by the ratio between the capital, essentially coinciding with the Tier 1 capital, and the total non- 35

37 Report on Operations Consolidated equity components weighted exposure resulting from the accounting values of the balance sheet and off-balance sheet assets, reached 5.5% (5.8% at the end of 2016). Liquidity coverage and net stable funding ratios The Basel Committee, with the intention of consolidating banks ability to absorb the shocks from financial and economic tension by reducing the risk of contagion between the financial sector and the real economy, further strengthened liquidity regulations by devising two new minimum quantitative requirements. The rules were developed to allow the achievement of two separate, though complementary, objectives. The first, the Liquidity Coverage Ratio (LCR), aims at improving the short-term resilience of the liquidity risk profile of banks to make sure that these have sufficient uncommitted high-quality liquid assets (numerator in the ratio: cash or assets that may be converted into cash in the private markets with a low or zero loss) to face the liquidity needs in a situation of acute stress lasting one month (denominator in the ratio). The provision on the LCR were issued back in June 2013 with the publication of Regulation (EU) 575/2013 and Directive 2013/36/EU as later amended, and, in particular, Commission Delegated Regulation no. 61/2015, which supplemented and partially amended the regulatory provisions. Banks are required to comply with the new regulatory requirement according to a phase-in process set out in art. 38 (80% by 1 January 2017, 100% by 1 January 2018). As at 31 December 2017 the ratio, referring solely to BNL, stood at 91.4% (99.8% as at 31 December 2016). The second goal of the Committee is to provide banks with greater incentives to fund their operations by availing of more stable sources of funding on a structural basis and, in order to ensure that medium and long-term operations do not give rise to excessive imbalances to be financed in the short term, establishes an acceptable minimum amount of funding exceeding one year in relation to the needs deriving from the characteristics of liquidity and residual duration of assets and offbalance sheet exposures. The Net Stable Funding Ratio (NSFR), which remains subject to a period of observation, will enter into force at the end of the legislative process currently under way to apply the global package of reforms on the CRR and CRD IV (Regulation 575/2013 and Directive 2013/36/EU). As at 31 December 2017 this ratio, which is also calculated solely for BNL, came to 95.6% (98.4% at the end of 2016) against a minimum regulatory level of 100% at the end of the observation period, still under way, which is expected to conclude during

38 Report on Operations Operations by business segment Operations and profitability by business segment Operations and profitability by business segment were calculated on the basis of the "IFRS 8 - Operating Segments" accounting standard and refer to the accounting results from The following operating segments of the BNL Group deriving from the business organisation of the BNP Paribas Group are illustrated: Banca Commerciale Activity which encompasses strictly the operations of the commercial bank of the Group and is in turn subdivided mainly into the two business areas Commercial and Private Banking and Corporate Banking. The Special Loans and Other also includes the operations of the Crediti Speciali Division, which manages the recovery of impaired loans of the Bank as well as providing specific support to the Business Lines for customers going through financial difficulties. Other Hubs indicates the set related to the operations of managerial responsibility hubs other than that of commercial bank of the Group, including Corporate & Institutional Banking, Wealth and Asset Management Solutions, Personal Finance and the Corporate Centre of the BNP Paribas Group. Earnings and capital data are shown in the tables below. RWAs take into account the application of Basel 3 regulations when operational. The results for 2017 are shown by business segment below. The comparison of the two business segments Commercial and Private Banking and Corporate Banking with the previous year, on a like-for-like basis, with the new Special Loans Division, is not shown, as it requires an excessively burdensome reconstruction process. SUMMARY TABLES TAB. A - Income Statement BANCA COMMERCIALE ACTIVITY (millions of euro) BNL GROUP COMMERCIAL AND PRIVATE BANKING CORPORATE BANKING CREDITI SPECIALI AND OTHER sub-total BANCA COMMERCIALE ACTIVITY OTHER HUBS TOTAL at 31/12/2017 Net banking income 1, , ,721 Operating expenses (1,200) (271) (163) (1,634) (37) (1,671) Gross operating result (2) 1, ,050 C ost of risk (173) (110) (461) (744) (81) (825) Net operating result (463) 267 (42) 225 N et income from inv estments and other non-current assets Profit (loss) before tax (458) 272 (42) 230 TAB. B - Balance sheet - Assets BANCA COMMERCIALE ACTIVITY (millions of euro) BNL GROUP COMMERCIAL AND PRIVATE BANKING CORPORATE BANKING CREDITI SPECIALI AND OTHER sub-total BANCA COMMERCIALE ACTIVITY OTHER HUBS TOTAL at 31/12/2017 Loans to costumers 33,870 21,897 4,904 60, ,225 Other ,698 10, ,772 Total assets (1) 33,946 22,176 14,602 70,724 1,273 71,997 Risk Weighted Assets 14,810 19,985 7,549 42,344 1,321 43,665 (1) net of Loans to banks (item.60) 37

39 Report on Operations Operations by business segment TAB. C - TOTAL BANCA COMMERCIALE ACTIVITY BANCA COMMERCIALE ACTIVITY Net banking income Operating ex penses Gross operating result C ost of risk Net operating result Net income from investments and other non-current assets Profit (loss) before tax (millions of euro) 31/12/ /12/2016 Change % 2,645 2, % (1,634) (1,739) -6.0% 1, % (744) (798) -6.8% % 5 0 n.s % BANCA COMMERCIALE ACTIVITY Loans to costumers Other Total assets Risk Weighted Assets 31/12/ /12/2016 Change % 60,671 60, % 10,053 11, % 70,724 71, % 42,344 40, % The results obtained by Banca Commerciale Activity, during 2017 show a net banking income decreasing slightly compared to last year (-1.5%). The decrease in net interest income, influenced by competitive pressure and the unfavourable interest rate scenario, was partially offset by the development of fee-based operations, pursued through distribution policies based on a multichannel strategy, attention to customer needs and cooperation with other entities/hubs of the BNPP Group. The result for the year can be attributed to Commercial and Private Banking business for 1,832 million euro (69%) and Corporate Banking for 652 million euro (25%). The Crediti Speciali and Other component, equal to 161 million euro (6%) records the components relating to operations of the Special Loans Division and other items not allocated to the other two Divisions. Total operating costs decreased (-6.0%) on Last year the aggregate included the contribution of two additional portions to the National Resolution Fund and allowances for personnel redundancy. The cost/income ratio came to 61.8%, significantly decreasing on 2016 (64.8%), confirming the positive results of oversight of operating costs and the improvement in operating efficiency. The cost of risk continued its improving trend, and came to a total of -744 million euro, down by -6.8% compared to that recorded in Risk weighted assets (RWA) at the end of 2017 increased by 5.0% compared to The result of Banca Commerciale Activity before tax is 272 million euro as at 31 December 2017, a significant increase compared to 147 million euro recorded in

40 Report on Operations Operations by business segment TAB. D. - OTHER HUBS (millions of euro) OTHER HUBS 31/12/ /12/2016 Change % Net banking income % Operating expenses (1) (37) (41) -9.8% Gross operating result C ost of risk Net operating result % (81) (9) n.s. (42) 27 n.s. Net income from investments and other non-current assets 0 0 n.s. Profit (loss) before tax (42) 27 n.s. OTHER HUBS 31/12/ /12/2016 Change % Loans to costumers Other Total assets Risk Weighted Assets % 719 2, % 1,273 3, % 1,321 1, % Other Hubs showed net banking income of 76 million euro in 2017, which includes capital gains on sales of properties. This result compares with net banking income of 77 million euro in 2016, which included the capital gain on the sale of the equity investment in Visa. The pre-taxation result of the Other Hubs segment for 2017, which was impacted by the capital losses deriving from write-downs of financial assets recorded during the year, came to -42 million euro compared to +27 million euro in

41 Report on Operations Parent company results Parent company results Reclassified financial statements of BNL SpA Reclassified balance sheet (millions of euro) Financial statement item code ASSETS 31/12/ /12/2016 Changes % 10 Cash and cash equivalents ,6 60 Loans to third banks ,4 60 Loans to BNP Paribas ,2 70 Loans to customers ,2 20, 40 Financial assets held for trading and available for sale ,0 80 Hedging derivatives ,5 90 Value adjustments to financial assets subject to macrohedging ,4 100 Equity investments ,9 120, 130 Tangible and intangible assets ,5 140, 150, 160 Tax receivables and other assets ,1 Total assets ,1 (millions of euro) Financial statement item code LIABILITIES AND SHAREHOLDERS EQUITY 31/12/ /12/2016 Changes % 10 Deposits from third banks ,5 10 Deposits from BCE/TLTROII n/s 10 Deposits from BNP Paribas ,1 1. subordinated deposits ,0 2. TLTRO I - n/s 3. other deposits ,1 20, 30, 50 Direct customer deposits ,9 40 Financial liabilities held for trading ,6 60 Hedging derivatives ,6 70 Value adjustments to financial liabilities subject to macrohedging 110, ,8 Allow ances for risks and contingencies and liabilities for retirement indemnities ,1 80, 100 Tax payables and other liabilities ,7 from 130 to 200 Shareholders equity ,0 Total liabilities and shareholders equity ,1 40

42 Report on Operations Parent company results Reclassified income statement (*) (millions of euro) FY 2017 FY 2016 Changes % 1 Net interest income 1,510 1, N et commissions Net result of financial instruments measured at fair value Net result of financial assets available for sale Income / charges from other banking activities Net banking income 2,618 2, Operating expenses (1,612) (1,722) a - personnel costs (799) (846) transformation costs - (34) n/s - other ordinary costs (799) (812) b - other administrative expenses (702) (770) transformation costs (9) (21) other ordinary expenses (693) (749) c - depreciation and amortisation of tangible and intangible assets (111) (106) Gross operating result 1, C ost of risk (827) (806) Net operating result Net profit from equity investments and other non-current assets 5 - n/s 12 Profit before tax Income taxes (63) (32) Profit (Loss) for the year (*) The reclassified income statement of the parent company BNL SpA has been drawn up with the same criteria as those used for drawing up the reclassified consolidated income statement, explained in the last paragraph of this Directors report. 41

43 Report on Operations Parent company results Income items of BNL SpA The year 2017, characterised by a favourable economic outlook, though still subject to factors of fragility and uncertainty concerning growth in the Italian economy that remains lower than the European average, was affected by positive economic elements, such as the reawakening of investments, the trend in industrial production and the return of confidence of businesses to prerecession levels. In this context, Banca Nazionale del Lavoro continued its commercial action, developing and adjusting its organisational structure to best meet commercial needs and its operating priorities. Moreover, a key factor in achieving the 2017 result was the Bank s ability to maintain the decrease in revenues compared to 2016 within the amount planned. The weakness of revenues triggered by the very low or even negative level of interest rates and pricing competition on products and services was partially offset by a structured, as well as effective, commercial commitment. This commitment took shape in a positive trend in volumes and in the development of fee-based operations, pursued through distribution policies based on a multichannel strategy, attention to customer needs and cooperation with other entities/hubs of the BNPP Group. The reduction of the cost structure positively reflected the effectiveness of the initiatives implemented to rationalise activities and the improvement in efficiency levels (human resources, real estate, operations), and make it possible to guarantee actions and investments to support strategies and commercial development (digital offering, marketing, adjustment of the distribution network). At the same time, the cost of risk decreased compared to the previous year, due to a scenario of conditions favourable to reducing risk: improvement in the rating mix of loans and concentration on top customers, pro-active management of at-risk exposures and a further slowdown in new non-performing loans. Examining the results in detail: The net interest income and the net commissions came to 2,505 million euro, substantially stable on the 2016 figure (-0.9%). In detail: Net interest income (from 1,590 to 1,510 million euro in 2017, -5.0%): the moderate development of loans to customers, supported by medium-term loans to households and businesses, did not offset the impact of the decrease in commercial spreads, which were eroded by harsh competitive pressure. For loans to households, the decrease in spreads was the result of reduced margins on new business and requests for transfer or renegotiation of outstanding mortgages, specifically in the first half, attenuating in the second part of the year. For loans to businesses, the commercial margins were impacted by the significant concentration of competitors commercial actions on top customers, also accentuated by the widespread availability of TLTRO2 funding. Liquidity received from customers also grew: deposits recorded an increase of 3.6 billion in average volumes, deriving from businesses and households in equal amounts, without an increase in the cost of deposits. Net commissions (from 938 to 995 million euro in 2017, +6.1%): the commercial performance for the period showed a positive trend in the aggregate, specifically due to the higher volumes of assets under management and pension/protection products. Positive developments were also seen in monetics and other banking commissions in the Retail sector and the revenue deriving from trade finance and credit commissions of the Corporate Division. The net result of financial instruments measured at fair value recorded a 35 million euro 42

44 Report on Operations Parent company results profit (39 million euro in the previous year), mainly referring to: 26.2 million euro in income from brokerage with customers in securities, exchange rates and derivatives, decreasing overall compared to 30 million euro recorded in December 2016; 7.4 million euro for the assessment of risk on securities issued, including issuer (own) risk, due to the nearing of the maturities of issues of the largest amounts (+9.7 million euro as at 31 December 2016); 1.8 million euro in gains (losses) on risk components of derivatives, both trading and hedging derivatives (CVA, DVA and FVA), which were near zero in The net result of financial assets available for sale, equal to 32 million euro (61 million euro at the end of December 2016), is mainly attributable to the following components: dividends and similar income of 34.3 million euro, which mainly included BNL Finance dividends of 7.0 and Bank of Italy dividends of 9.6 million euro, coupon income received on AT1 bank bonds (Intesa-S. Paolo, Santander and Unicredit) of 4.2 million euro, as well as the distribution of reserves of the investee company Sud Factoring in liquidation of 12.3 million euro; profits on the sale of equity investments of 9.2 million euro, mainly due to the capital gain realised on the sale of GGP Greenfield (8.2 million euro); profit on sales of bonds: BTP of 8.2 million euro, AT1 Santander of 2.3 million euro; losses on financial assets available for sale (AFS) totalling 21.9 million euro due to an additional intervention requested by the Voluntary Scheme at the Interbank Deposit Guarantee Fund in order to support banks in difficulty or risking difficulty. Said intervention regarded the recapitalisation of the Casse di Risparmio di Rimini e San Miniato (around 18 million euro) in addition to the loss on the sale of the equity investment held by the Voluntary Scheme of Cassa di Risparmio di Cesena of 3.1 million euro (previously written down at the end of 2016 by 2.5 million euro). The main components of the 2016 figure were income deriving from the sale of the interest in Visa, equal to 39.1 million euro, and the sale of BTP securities, with a total capital gain of 10.3 million euro. The net income from other banking activities reached 46 million euro (26 million euro in 2016) and mainly refers to the capital gains realised in the second quarter of the year on the sale of the "San Nicola da Tolentino" property complex for 32.5 million euro, in relation to the portion not used in company business, and to the recording of rentals from third parties, non-recurring income, charges and reimbursements and sundry additional components. The portion of profits realised on the portion of property used in business, equal to 5.7 million euro, was recorded, according to the Group s principles of accounting representation, under the item Profits on equity investments and other non-current assets. As a result of the results illustrated, the net banking income reached 2,618 million euro compared to 2,654 million euro in the previous year. Operating expenses equalled 1,612 million euro and included 17.8 million euro of the contribution to the National Resolution Fund and 21.2 million euro the allocation of costs of mandatory 2017 contributions to the Interbank Deposit Guarantee Fund (20 and 16 million euro in 2016, respectively). Last year the aggregate included the contribution of two additional portions to the National Resolution Fund of 46.8 million euro and transformation costs for personnel 43

45 Report on Operations Parent company results redundancy of 42.2 million euro. Net of those components, operating expenses decreased by 1.3% compared to the previous year s figure. Personnel costs decreased, reaching 799 million euro, (-1.6% compared to 31 December 2016), while other administrative expenses, which amounted to 702 million euro, were down 1.9%. The cost for amortisation of intangible assets and depreciation of tangible assets, +4.7%, from 106 to 111 million euro: product innovation, support to the distribution network and the new branch lay-out continue to be the main investments of the Bank. Confirming the trends described, the cost to income ratio for 2017 defined as operating expenses to net banking income came to 61.6% (64.9% in 2016). In a scenario marked by moderate signs of recovery, the gradual improvement in the financial conditions of businesses and the disposable income of households reflects on the general improvement in credit quality. The cost of risk continues to show a declining trend. Specifically excluding the following phenomena that impact the results: write-down of 94 million euro of the T2 subordinated bonds of Banca Popolare di Vicenza and Veneto Banca; capital gain of around 12 million euro pertaining to the sale of a portfolio of doubtful loans, for a gross amount of 900 million euro, with total coverage of 99.3%; write-down of 3.5 million euro of the junior and mezzanine tranches subscribed in relation to the securitisation of NPLs as part of the intervention of the Voluntary Scheme in favour of Caricesena, Carim and Carismi; the cost of risk decreased to 742 million euro, a significant reduction (-64 million euro, -7.9%) on The Profits on equity investments and other non-current assets, equal to 6 million euro, refer, as illustrated above, to the portion of profits on the sale of the portions used in operations of the San Nicola da Tolentino property complex. Based on the profit results described above, the net operating result came to 179 million euro compared to 126 million euro in the previous year (+42.1%). After the direct taxes, totalling 63 million, BNL SpA ended 2017 with a net profit of 121 million euro (+28.7% on 94 million euro as at 31 December 2016). 44

46 Report on Operations Parent company results Equity components of BNL SpA At balance sheet level, total assets came to 77,952 million euro (+0.1% on December 2016). The growth in customer loans, already seen at the end of last year, continued and gained strength, amounting to 60,763 million euro. This positive dynamic, driven by the medium-term loans to households and businesses, was also influenced by the aforementioned sale to Banca Ifis SpA of doubtful loans and the cancellation of previous overdue interest accrued and fully allocated on impaired exposures, of around 1,130 million euro, implemented to ensure more streamlined representation of asset quality. Total impaired loans came to 11,244 million euro in gross values and 5,396 million euro in net values, amounting to 18.5% of customer loans (21.5% at the end of 2016) in gross values and 8.9% (9.6% at the end of 2016) net of value adjustments. The level of hedging dropped to 52.0% (55.3% at the end of 2016). In detail, doubtful loans came to 7,740 million euro in gross values and 3,120 million euro in net values, amounting to 12.7% of gross total customer loans (14.7% at the end of 2016) and 5.1% (5.2% at the end of 2016) net of value adjustments, with a level of hedging of 59.7% (64.6% at the end of 2016). Unlikely-to-pay, equalling 3,367 million euro gross, came to 2,165 million euro net of value adjustments, with an impact on customer loans that decreased to 3.6% (4.2 in 2016) and a level of hedging that came to 35.7%, compared to 36.2% last year. The value of past due loans was 137 million euro before adjustments and 111 million euro net. Their level of hedging is 19.0%. Lastly, in the area of impaired loans, we note forborne exposures, primarily classified under unlikely to pay, amounting to a total of 2,004 million euro in gross value (2,185 million euro as at 31 December 2016). Customer performing loans, net of collective adjustments of 131 million euro, came to 55,367 million euro, +1.0% on the 54,815 million euro last year. Gross forborne positions in that area came to 202 million euro (312 million euro as at 31 December 2016). The portfolio of financial assets amounted to 4,782 million euro, against 7,474 million euro as at 31 December In detail, both components of the aggregate are decreasing: financial assets held for trading, almost completely comprised of derivatives intermediated for customers, which came to 370 million euro from 2,457 million euro last December. The significant decrease, linked to an equivalent performance in the corresponding liability item (financial liabilities held for trading, which dropped from 2,487 to 384 million euro), is due to the different operating methods with the parent company BNPP; -12.1% the stock of financial assets available for sale, amounting to 4,412 million euro, comprised of debt securities, primarily BTP, of 3,956 million euro and equity instruments and UCI units of 404 million euro. During the fourth quarter of 2017, BTP amounting to 485 million euro in nominal value were sold. That aggregate also comprises securities issued by regulated institutes, included in their regulatory capital, of which, in particular, we note 76 million euro relating to AT1 equity instruments and 17 million euro in T2 subordinated bonds. Under liabilities, direct customer deposits decreased slightly, amounting to 45,871 million euro (-405 million euro compared to 31 December 2016) driven by deposits from customers, up by 1.0%, from 44,663 million euro to 45,117 million euro, especially in the deposits and current accounts segment, considering customers preference for liquidity, accompanied by the securities 45

47 Report on Operations Parent company results component, mainly represented by bond issues, which, conversely, decreased by 53.3%, from 1,613 million euro to 754 million euro, mainly due to reimbursements. Deposits from customers include the T2 subordinated loan for 250 million euro, received from a financial company in the BNPP Group in December Interbank deposits reached 22,931 million euro and were mainly comprised of: the net indebtedness to the parent company BNP Paribas, which rose in the year from 10,045 million euro to 11,862 million euro, represented by T2 subordinated loans for 514 million euro and other funding for 11,348 million euro (514 million euro and 9,531 million euro as at 31 December 2016, respectively); the funding from the European Central Bank, which includes the amount of 10,000 million euro, relating to BNL s direct participation in the second series of Targeted Longer- Term Refinancing Operations (TLTRO II). In 2017, BNL recorded 40 million euro in negative interest expense on that transaction, at the more favourable interest rate of -0.40%, as the achievement of the benchmark of a net increase in loans envisaged by the ECB was highly expected. This increase was effectively achieved in January 2018; the other relations with third party credit institutions, equal to 1,069 million euro, of which 567 million euro with the EIB. Also considering the credit balances, of which we note the Bank of Italy compulsory reserve, which reached 485 million euro, the net balance on the interbank activity was negative for 16,248 million euro, in line with the end of The shareholders equity of the Bank, including the income statement result, came to 5,695 million euro with an increase of 168 million euro compared to the value recorded at the end of December 2016 (5,527 million euro). The increase was generated by the profit for the period of 121 million euro and the increase of 47 million euro in the valuation reserve which included, in detail: million euro on the fixed-income government securities component (BTP) compared to the valuation at the end of 2016; million euro on other fixed-income securities, which mainly reflect the cancellation of the negative reserve recorded on Tier 2 subordinated bonds issued by Banca Popolare di Vicenza and Veneto Banca; million euro from the negative change in fair value of the cash flow hedge; -2.0 million euro from the posting in the shareholder s equity of the actuarial gains relating to the employee allowances. 46

48 Report on Operations Parent company results Own funds, capital ratios and leverage ratio of BNL SpA The reforms that review the accords of the Basel Committee ( Basel 3 ), which became operational on 1 January 2014 and regard the enhancement of the banks ability to absorb the shocks deriving from financial tensions and improve the management of risks and the governance, in addition to increasing the transparency and disclosure of the same banks, introduced a new regulatory framework and a transitional period for its introduction during which some elements, which once in operation will be accounted for under the Common Equity ( fully loaded ), only affect it for the percentage portion ( phased in ). Own funds, or regulatory capital, are the algebraic sum of the elements specified below: - Tier 1 Capital, which, in turn, is subdivided into CET1 - Common Equity Tier 1 and Additional Tier 1; - Tier 2 Capital. In 2017, the fully operational capital ratios were: - the Common Equity Tier 1 capital ratio, which must be equal to at least 4.5% of the risk-weighted assets; - the Tier 1 capital ratio, which must be equal to at least 6% of the risk-weighted assets; - the Total capital ratio, equal to Tier 1 plus Tier 2, which must be equal to at least 8% of the riskweighted assets; with the additional obligation to hold, in addition to Tier 1 capital needed to satisfy the mentioned requirements regarding own funds, a capital conservation buffer equal to 2.5% of the overall exposure to risk of the Bank at the end of On 25 November 2016, on conclusion of the Supervisory Review and Evaluation Process (SREP) conducted by the European Central Bank pursuant to Directive 2013/36/EU, which requires the determination of the adequacy of the level of the own funds on a consolidated level per individual bank, the ECB notified BNL, through the parent company BNP Paribas, the minimum ratios to be maintained stably for The requirements for BNL, valid on phased in equity, including the Capital Conservation Buffer (CCB of 1.25%) and the Pillar 2 Requirement (P2R of 1.25%) must reach at least: - 7% for CET 1 (from 1/1/ % fully loaded); - 8.5% for Tier 1 (from 1/1/ % fully loaded); % for the Total Capital Ratio (from 1/1/ %); * * * The table below reports the most significant data, compared with the data for the year 2016, highlighted in the two versions: phased in, pertaining to the equity quantification obtained from 1 In November 2017, the ECB notified BNL, through the parent company BNPP, the SREP decision 2017 following the supervisory review process conducted in the previous quarter. The requirements for 2018 confirm those previously assigned, also considering that last year the national discretion concerning the application of the Capital Conservation Buffer (CCB) was eliminated and phasing-in was adopted in line with the CRDIV. As a result, if for 2017 the CCB to comply with for capital requirements was 1.25%, starting from 1 January 2018 it will be 1.875%, and 2.5% starting from 1 January

49 Report on Operations Parent company results applying the transitional rules of Basel 3, and fully loaded, which projects the same data without considering the transitional rules that defer the impacts of the definitive passage from the Basel 2 regulation to the Basel 3 regulation. As at 31 December 2017 the capitalization levels of the Bank were confirmed as exceeding the minimum applicable requirements: CET 1 and Tier 1 capital ratios equal 11.5% (11.3% in the fully loaded operational version); Total capital ratio equals 12.8%. Regarding the quantification of risk-weighted assets during the second half of 2016, BNL received authorisation to use the Group s new approaches for the Large Corporate segment, which followed the IRBA validation procedure for the credit risk regarding the Retail exposures and the Banks portfolios, completed in 2015, in addition to that completed at the end of 2013 for the exposures of Central Governments and Central Banks and Companies. As at 31 December 2017 risk weighted assets referring to BNL came to 41,920 million euro, up on the 40,120 million euro recorded at the end of This increase mainly refers to the updating of the historical series of loss given default pertaining to the advanced models of the Mid Corporate segment, carried out in concert with the parent company BNPP when quantifying the RWA at the end of Own funds and capital ratios (millions of euro e %) 31/12/ /12/2016 phased in fully loaded phased in fully loaded Common Equity Tier 1 Capital Additional Tier 1 Capital Tier 1 Capital Tier 2 Capital Own Funds Credit and Counterparty risk C redit v aluation adjustment risk Settlement risk Market risk Operational risk Risk-Weighted Assets CET 1 capital ratio 11,5 11,3 12,6 12,3 Tier 1 capital ratio 11,5 11,3 12,6 12,3 Total capital ratio 12,8 12,7 13,5 13,4 Basel 3 regulation introduced a leverage ratio aimed at establishing a prudential measure that supplements the capital ratios. This ratio pursues the objectives set by the Committee and aimed at curbing the accumulation of leverage in the banking sector - the excess of which could jeopardise the financial and economic system as a whole - and at strengthening the system of prudential requirements with a simple supplementary measure that is not based on risk assessments. The requirement was implemented first in January 2013 with reporting to the Supervisory authorities and the relevant information, made public from 2015, is currently subject to a phase of constant monitoring and observation by the same authorities. 48

50 Report on Operations Parent company results At the moment, the Supervisory Authorities have not yet set the minimum levels to comply with for the Leverage Ratio and, in the expectation that this indicator will become binding during 2018, that ratio is expressed as a percentage and subject to a transitional regulatory minimum limit of 3%. The leverage ratio as at 31 December 2017, defined, on the basis of applicable legislation, by the ratio between the capital, essentially coinciding with the Tier 1 capital, and the total nonweighted exposure resulting from the accounting values of the balance sheet and off-balance sheet assets, reached 5.5% (5.8% at the end of 2016). The provision on the Liquidity Coverage Ratio (LCR) were issued back in June 2013 with the publication of Regulation (EU) 575/2013 and Directive 2013/36/EU as later amended, and, in particular, Commission Delegated Regulation no. 61/2015, which supplemented and partially amended the regulatory provisions. Banks are required to comply with the new regulatory requirement regarding the short-term resilience of the short-term liquidity risk profile according to a phase-in process set out in art. 38 (80% by 1 January 2017, 100% by 1 January 2018). As at 31 December 2017 the ratio, referring solely to BNL, stood at 91.4% (99.8% as at 31 December 2016). The Net Stable Funding Ratio (NSFR), aimed at promoting greater use of stable funding, to ensure that medium and long-term operations do not give rise to excessive imbalances to be financed in the short term, establishes an acceptable minimum amount of funding exceeding one year in relation to the needs deriving from the characteristics of liquidity and residual duration of assets and off-balance sheet exposures. The regulatory requirement of the NSFR, which remains subject to a period of observation, will enter into force at the end of the legislative process currently under way to apply the global package of reforms on the CRR and CRD IV (Regulation 575/2013 and Directive 2013/36/EU). As at 31 December 2017 this ratio, which is also calculated solely for BNL, came to 95.6% (98.4% at the end of 2016) against a minimum regulatory level of 100% at the end of the observation period, still under way, which is expected to conclude during

51 Report on Operations Significant events after the close of the year Significant events after the close of the year In preparing the financial statements as at 31 December 2017, the BNL Group considered all the events occurred after the close of the year and until the date of approval of the Financial Statements by the Board of Directors on 30 March Early termination of the securitisation transactions regarding residential mortgages called Vela Home, Series 3 At the end of April 2018, the early closure of the securitisation transactions regarding residential mortgages called Vela Home, Series 3, finalised in 2005, is planned. By exercising the contractually agreed call option, the residual portfolio will be repurchased for about 168 million euro and the Series 3 securities issued by the vehicle company Vela Home Srl will be fully repaid. Disposal of doubtful loans On 8 January 2018 the disposal of a portfolio of doubtful loans was finalised, for a gross amount of 577 million euro. The closing of the transaction, with the signing of the contract and payment of the price, resulted in BNL recording a gross capital gain of 11.6 million euro, with an impact on the income statement of 6.8 million euro, taking account of additional charges relating to the disposal of 4.8 million euro. Introduction of the international accounting standard IFRS 9 - Financial Instruments (Reg. EU 2016/2067) The adoption of IFRS 9 initiated significant changes as compared to IAS 39, regarding the rules of classification and measurement of loans and debt securities, mainly: the classification of capital instruments at fair value, recognising differences in the income statement or under other income components. In this latter case, different from that set out in IAS 39 for financial assets available for sale, the new standard eliminates the requirement of recognising impairment and envisages that, in the event of disposal of the instrument, the gains and losses on disposal shall be classified under other reserves of shareholders equity, not to the income statement; the adoption of a new accounting model for impairment based on an expected losses approach (instead of the current incurred losses approach) and on the concept of lifetime expected loss, with significant increases in value adjustments to loans. With regard to the estimate of the impacts of First Time Adoption, refer to that set out in the respective paragraphs IFRS 9 of Part A of the Explanatory Notes to the separate and consolidated financial statements. 50

52 Report on Operations Business outlook for 2018 Business outlook for 2018 In 2018, growth in the Italian economy is destined to confirm the positive trends recorded in 2017, accompanied by an additional, slight drop in unemployment rates. This dynamic is favoured by the combination of various factors, such as the positive effect on Italian exports of the positive phase of the global economy and the positive signs from internal demand. There are several elements of uncertainty, both economic such as the impact of the tapering of the Quantitative Easing and the confirmation of several measures of restriction of international trade and political primarily the management of the results of the Italian legislative elections. That being said, also in light of interest rates that will remain at very low levels throughout 2018, favourable conditions for businesses and households to access credit in Italy remain favourable. Nonetheless, the increase in loans will continue at a moderate pace, given the positive liquidity situation of businesses and the relative financial soundness of households, together with the residual phenomena of renegotiation of loans at higher interest rates. As regards deposits, the slight rise in loans and the still excessive liquidity available will drive Italian banks to focus on reducing the cost of funding from customers through, among other actions, the reduction in the net stock of bonds placed in the retail segment. At the same time, unattractive market returns and considerable liquidity will continue to fuel credit balances on current accounts and deposits at lower interest rates. Risks and uncertainties In this area, as they are incentivised to do by the Supervisory Authorities, Italian banks will be required to focus on managing the amount of impaired loans, which remains high, with a view to their gradual reduction. At the same time, banks shall pursue their medium-term objectives which, in most cases, are aimed at introducing new service models, streamlining the workforce and networks, upgrading IT system and the increasing importance of the issues of organisational simplification. In 2018, BNL will focus its business in line with the objectives defined in the 2020 Plan of the BNP Paribas Group, with significant attention to the quality of relations with customers, innovation in the range of products and services and widespread dissemination of the culture of risk and compliance. Defence of revenues and oversight of operating efficiency will accompany the reduction in the cost of risk, enabling presumable growth in the profit for the year. 51

53 Report on Operations Main changes in the Group investment portfolio Main changes in the Group investment portfolio The portfolio is comprised of 11 subsidiaries, 63 Italian minority interests (14 of which nonoperational), 11 participatory financial instruments and 31 profit-sharing agreements on films. Below is a summary of the main operations carried out in 2017: Disposals During 2017 the investment of 20% held by BNL S.p.A. in Scandolara Holding S.p.A. and the investment held in GGP Greenfield S.A (now named STIGA SA) were disposed of. Acquisitions BNL S.p.A. acquired the remaining 20% of the units of GIANSO S.r.l. in liquidation, thus becoming the exclusive controlling partner of the company. During the year, the Bank subscribed units of the FSI Mid-Market Growth Equity Fund, with a total commitment of 50 million euro. Actions to support the banking industry BNL S.p.A. invested 2 million euro in the Voluntary Scheme at the FITD to benefit Carim and Carismi. That investment was completely written down. Investments in bonds BNL S.p.A. purchased newly-issued AT1 Unicredit 6.625% bonds for a total nominal value of 15 million euro. The Bank also sold all of its AT1 BANCO SANTANDER % bonds. Acquisitions of equity investments through restructuring of loans An equity investment in the IDEA CCR II Fund, valued at 17.3 million euro, was acquired. Striking off of companies The liquidation of the company Tamleasing S.r.l. in Liq.ne (100% BNL) was completed. 52

54 Report on Operations Results of the main Group Companies Results of the main Group Companies A brief description of the economic and equity results of the main BNL Group companies is provided below. Artigiancassa S.p.A. Capital: 10,000,000 euro BNL S.p.A. shareholding: 73.86% In the year 2017 Artigiancassa continued to focus on the two business lines envisaged by the business plan: management of the subsidised measures for the Public Administration and distribution of the Group s products towards artisans and SMEs. Despite the decrease in the stock of traditional subsidies present in the Bank s portfolio, subsidised activities counted on the management of non-traditional subsidised measures (Fondo Crescita, Marche FEM, Bando Lazio) and on the supply chain of guarantees, which enabled the achievement of total revenues from subsidised services of 8.5 million euro, up compared to 2016 (+600 thousand euro; +7.6%). In the area of distribution of the Group s products to artisan companies and SMEs, net commissions came to 7 million euro, down compared to 2016 by around 1.6 million euro, as a result in the reduction in disbursements. As regards income results, the year 2017 ended with: operating income of 16 million euro, down by 5.9% (-1 million euro) compared to 2016, mainly linked to the performance of distribution activities; operating expenses of 15.9 million euro, down by around 227 thousand euro (-1.4% compared to 2016); profit for the year of 43 thousand euro, down on 2016 (by 369 thousand euro). In 2017 Artigiancassa confirmed its effective management of past due loans to the Regions. The balance decreased further to 2.9 million euro (from 6.4 million euro in 2016), in consideration of collections of 6.4 million euro and new invoices issued during the year for 2.9 million euro. BNL Finance S.p.A. Capital: 14,950,000 euro BNL S.p.A. shareholding: 100% In 2017 the company confirmed its leadership position on the reference market (which grew by 4.9% overall compared to 2016) with a market share of 11% in volumes and 16.4% in the number of contracts, while the market share referring to volumes of target pensioners came to 17.8% (25.3% in terms of contracts disbursed). During 2017 BNL Finance also increased the focus of the direct network on cross-selling, with significant returns in terms of growth in business opportunities for the Group (increase of +83% in referrals on current accounts compared to 2016, +118% on mortgages). The year 2017 was also the year of participation in the Assofin protocol, which results in the implementation of significant organisational changes, with specific reference to controls and adjusting processes to the new reference regulations. As at 31 December 2017, the Balance Sheet showed loans totalling around 2 billion euro, up by 11% compared to December Liabilities mainly comprise loans from the parent company BNP 53

55 Report on Operations Results of the main Group Companies Paribas and BNL to finance the company s lending activity, which amounted to 1,821 million euro, up 9% compared to December The income statement shows margins growing significantly on In particular, the positive trend in net interest income (+12.9% compared to 2016) is linked to greater average interestbearing stock (+237 million euro) and lower leverage (against growth of 14% in average interestbearing stock, the average funding stock against payment grew by 11%), while there were no changes on the average profitability of the previous year. The pre-taxation result came to 47.1 million euro, up by 12.4% compared to 2016, with net profit of around 31 million euro, up by 9.7% compared to 2016, generating an ROE of 30.3% (37.1% in 2016). BNL POSitivity S.r.l. Capital: 4,773,000 euro BNL SpA shareholding: 90%; BNL Finance S.p.A.: 10% The Company carries out merchant acquiring activities through its sales network, BNL branches and an agent network. Revenues are generated by charging customers (typically commercial operations) mainly commissions for transactions carried out on POS terminals. As at 31 December 2017, the volume of sales carried out at BNL POSitivity POS terminals totalled 8.2 billion euro, generated by more than 115 million transactions, with a growth of 9.3% compared to The volumes are broken down as follows: 7.9 billion euro (+9.3%) referring to sales made via the VISA, Mastercard, Union Pay and PagoBancomat networks, which the company is a licensee or sub-licensee of; 282 million euro (+9.6%) for volumes generated by services rendered to other networks (American Express and Diners). Such transactions resulted in net commissions of 30.3 million euro (+0.9): 24.8 million euro recognised as direct Interchange costs and 5.9 million euro as direct costs paid to international networks for scheme fees are subtracted from the item commission income, which reached 61 million euro. Adding the net interest income (38 thousand euro) and the net trading profit/loss (-47 thousand euro), net banking income came to 30.3 million euro (+0.5%). Operating expenses came to 26.3 million euro (2016: 24.9 million euro; +5.7%) and are mostly attributable to costs for the management of POS terminals, processing services and personnel expenses. In 2017 the company recorded a net profit of 2.3 million euro (net profit 2.6 million euro in 2016), which raised the shareholders equity to 13.4 million in total. BUSINESS PARTNER ITALIA S.C.p.A. Capital: 5,710,300 euro BNL S.p.A. shareholding: 91.98% The Income Statement of Business Partner Italia SCpA as at 31 December 2017 recorded pretaxation profit of 510 thousand euro. The pre-taxation profit is substantially composed of the algebraic sum of the income for services provided to the companies in the consortium for million euro (down by 8.2% compared to 2016) and operating expenses of million euro (down by 7.8% compared to 2016). The net result for the year was equal to zero, considering that the pre-taxation profit of 515 thousand euro was exactly equal to the net taxation for the period (IRES - Corporate Income Tax and IRAP - Regional Business Tax). 54

56 Report on Operations Results of the main Group Companies EUTIMM S.r.l. Capital: 500,000 euro BNL S.p.A. shareholding: 100% During 2017 the company appraised 1,293 properties (756 in 2016; +71%) both with auctions scheduled and auctions awaiting scheduling, in order to analyse the potential participation while promoting the awarding to third parties. Currently, EUTIMM s portfolio holds a residential apartment, with a total historical purchase by auction value of 900 thousand euro, net of write-downs. Sales made generated profits of 764 thousand euro. Eutimm closed FY 2017 with a net profit of 301 thousand euro, due to real estate sales carried out. Sviluppo HQ Tiburtina S.r.l. Capital: 10,000 euro BNL S.p.A. shareholding: 100% The purpose of the Company, established to build BNL S.p.A. s new Rome headquarters, is to purchase, sell, convert, lease through non-financial lease and manage properties and directly or indirectly conduct construction activities in general, including the construction, restructuring, renovation and transformation of buildings, also on behalf of third parties, limited to buildings for mainly industrial/service/commercial use. The 2017 financial statements closed with a net profit of around 47 thousand euro. As at 31 December 2017, total Balance Sheet Assets came to 281 million euro. On 1 February 2018 the capital of the company increased by 10 thousand euro to 306 million euro following the contribution of a real estate company division by BNL S.p.A. Note that, following said contribution, the company is now fully operational. Companies in liquidation Sud Factoring S.r.l. Capital: 50,000 euro BNL S.p.A. shareholding: 100% As at 31 December 2017 the company had assets comprised of receivables to be collected of 72.5 million euro, fully written down and/or transferred to losses. Provisions established to cover the risk of losing, as well as to cover future liquidation costs, equal to 5.6 million, comply with the forecasts, considering that the possibility of losing lawsuits could arise only in the event of decisions against the previous rulings favourable to the company, issued by the Court of Cassation in completely similar lawsuits. The financial year was characterised by contingent revenues of 180 thousand euro, comprising 124 thousand euro from revaluations for the collection of receivables already written down or transferred to losses and costs of around 350 thousand euro (wages, remuneration of company bodies, legal fees and management fees). In 2017 the company was transformed from a joint-stock company (Spa) to a limited liability company (Srl), the staff was reduced to one resource and all the main costs were reduced. As regards the residual time required for liquidation, intending to assume the - certainly achievable - final end date as that of settlement of only the lawsuits against the company, it is deemed that the residual duration may be determined as 2-3 years and it is likely that, save for the occurrence of events that are currently unforeseeable, the shareholder may receive additional advances on its final allocation. 55

57 Report on Operations Results of the main Group Companies Gianso S.r.l. in liquidazione (former Artigiansoa) Capital: 100,000 euro BNL S.p.A. shareholding 100% The company, whose operations consisted of issuing SOA certifications necessary for companies operating with the Public Administration to participate in public tenders of amounts exceeding 150 thousand euro, was placed in liquidation in April 2014 following the transfer of the company division to Protos Soa spa. On 21 November of last year, BNL SPA, which held 80% of the shares, purchased the minority shares (ANCI, Confartigianato and Casartigiani) remaining the sole shareholder, with 100% of shares. The income statement for 2017 closed with a loss of 8 thousand euro due to total costs of 99 thousand euro, against which revenues of 91 thousand euro were recorded. The balance sheet assets totalled 423 thousand euro, almost completely represented by cash and cash equivalents of 379 thousand euro and net trade receivables of 11 thousand euro, in addition to residual tax receivables of 29 thousand euro. Liabilities included trade payables of 36 thousand euro, of which 15 thousand euro was settled this year, and invoices to be received of 38 thousand euro. The company s shareholders equity amounted to 347 thousand euro. The liquidation procedure is expected to close during the current year. 56

58 Report on Operations Parent Company relations with subsidiaries, associated companies, the Holding Company and with Subsidiaries of the latter and resolutions as per art ter of the Italian Civil Code Parent Company relations with subsidiaries, associated companies, the Holding Company and with Subsidiaries of the latter and resolutions as per art ter of the Italian Civil Code Below are the main equity relations existing in the accounts as at 31 December 2017 (overall balances for counterparties over 500 thousand euro) with the subsidiaries, the Holding Company and companies controlled by the latter, as defined within the intercompany area used for drafting the consolidated financial statements of BNP Paribas. Counterparty BNL creditor Positive FV derivatives for BNL BNL debitor Negative FV derivatives for BNL Guarantees given SOCIETA' OPERATIVE GRUPPO BNL ARTIGIANCASSA S.p.A BNL FINANCE S.p.A BNL POSITIVITY S.r.l BUSINESS PARTNER ITALIA SCPA SVILUPPO HQ TIBURTINA S.r.l PERMICRO S.p.A EUTIMM S.r.l SOCIETA' IN LIQUIDAZIONE GRUPPO BNL SUD FACTORING S.p.A. (in liquidazione) CORIT-Concessionaria Riscossione Tributi S.p.A. (in liquidazione) GIANSO S.r.l. (in liquidazione) CONSOLIDATE INTEGRALI GRUPPO BNP PARIBAS BNP PARIBAS BNP PARIBAS (CHINA) LIMITED BNP PARIBAS (SUISSE) SA BNP PARIBAS ARBITRAGE BNP PARIBAS BANK JSC BNP PARIBAS ASSET MANAGEMENT SAS BNP PARIBAS CARDIF VITA COMPAGNIA DI ASSICURAZIONE E RIASSICURAZIONE S.P.A BNP PARIBAS COMMODITY FUTURES LIMITED BNP PARIBAS EL DJAZAIR BNP PARIBAS ESPANA SA BNP PARIBAS FORTIS BNP PARIBAS FORTIS FACTOR NV BNP PARIBAS INVESTMENT PARTNERS SOCIETA DI GESTIONE DEL RISPARMIO S.P.A BNP PARIBAS LEASE GROUP BPLG BNP PARIBAS LEASE GROUP LEASING SOLUTIONS S.P.A BNP PARIBAS PERSONAL FINANCE BNP PARIBAS REAL ESTATE BNP PARIBAS REAL ESTATE INVESTMENT MANAGEMENT ITALY SOCIETA DI GESTIONE DEL RISPARMIO P.A BNP PARIBAS SECURITIES SERVICES ARVAL SERVICE LEASE ITALIA S.P.A BANCO BNPP BRASIL SA BANK BGZ BNPP SA BANK OF THE WEST BANQUE MAROCAINE POUR LE COMMERCE ET L'INDUSTRIE BGL BNP PARIBAS CARDIF ASSURANCE VIE CARDIF ASSURANCES RISQUES DIVERS CNH INDUSTRIAL CAPITAL EUROPE FINDOMESTIC BANCA S.P.A INTERNATIONAL FACTORS ITALIA S.P.A JCB FINANCE LION INTERNATIONAL INVESTMENTS SA TURK EKONOMI BANKASI A.S SAGIP UNION BANCAIRE POUR LE COMMERCE ET L'INDUSTRIE

59 Report on Operations Parent Company relations with subsidiaries, associated companies, the Holding Company and with Subsidiaries of the latter and resolutions as per art ter of the Italian Civil Code For additional information, please see the contents of the Explanatory Notes on transactions with related parties (see Explanatory Notes Part H). Reference is also made to the specific section of the Explanatory Notes (see explanatory notes - Part E, Section C1) for details on relations with company vehicles to securitize receivables. * * * BNL SpA is subject to the control and management of BNP Paribas SA. Below are the main resolutions made during the year by the Bank's Board of Directors regarding contracts with companies of the affiliated group, which are included in the provision pursuant to art ter of the Italian Civil Code. The list below indicates the grounds for the decisions made, consistently with the organisational choices made by the relevant Group. BNP PARIBAS SA - Transfer of assets between BNL SpA and BNP Paribas SA; - GGP GREENFIELD S.A. (GGP) Sale of assets held by BNL SpA to BNPP SA Italian Branch; - Provision of IT Services by BNP Paribas SA for the financial years * * * The following transactions are also classified within those set forth by art ter of the Italian Civil Code: - Partnership agreement between BNL SpA and Cardif Assurance Risques Divers SA- General Agency for Italy, regarding the placement of insurance products for protection from risks relating to the home, income, the individual and portable electronic devices. - Signing of the agreement for the provision of IT services by BNL to Findomestic in the BNP Paribas Group. - New issue of covered bonds (vehicle company Vela OBG Srl). - Strengthening of capital levels - issue of subordinate bond classifiable under Tier 2 granted by a company in the BNP Paribas Group. - Rationalisation of the BNPP Group in Italy start of the project to separate lease operations of BNL from the total portfolio of customers of BNPP Leasing Solutions through the contribution by BNP Paribas SA to BNL SpA of 73.83% of the shares of a new company named BNL Leasing SpA, deriving from the spin-off of BNP Paribas Leasing Solutions. - Amendment of the existing partnership agreements between BNL Spa and the insurance companies Cardif Vita S.p.A. and Cardif Assurance Risques Divers s.a. - General Agency for Italy, regarding the promotion and placement of PPI - Payment Protection Insurance products; - Framework Agreement between BNL Spa and BNP Paribas Real Estate Advisory Italy Spa Milan for carrying out technical advisory services to valuate real estate guarantees, also as part of taking on subrogations and renegotiations of mortgages. - Annual renewal of the Global Policy Banking Risks entered into with Le Sphinx Assurances Luxembourg S.A. 58

60 Report on Operations Parent Company relations with subsidiaries, associated companies, the Holding Company and with Subsidiaries of the latter and resolutions as per art ter of the Italian Civil Code - Agreement between BNL Spa and Findomestic Banca Spa to promote and place BNL Mortgages through the Findomestic network: amendment to Annex A regarding the determination of economic fees. - New distribution agreements between BNL S.p.A. and Cardif Assurance Risques Divers S.A. - General Agency for Italy, regarding the promotion and placement of the BNL Key Manager Protection Policy and BNL Sostegno Futuro Policy insurance products. * * * Credit line agreements were also formalised with some BNP Paribas Group companies in * * * The Notes to the consolidated financial statements and the separate financial statements of BNL S.p.A. set forth information on significant and non-recurring events and transactions as well as on atypical or unusual transactions. 59

61 Report on Operations Corporate governance and organisational structures Corporate governance and organisational structures The Parent Company BNL SpA has a share capital made up of 2,076,940,000 ordinary shares with a nominal value of 1 euro each. The capital is held entirely by the holding company BNP Paribas S.A. Paris, the Bank s sole shareholder. As a consequence, Banca Nazionale del Lavoro is subject to the Control and Management of the sole shareholder BNP Paribas SA. The Bank is included among the significant banks subject to the supervisory procedure exercised, in cooperation with the responsible national authorities, by the ECB according to the provisions of the Single Supervisory Mechanism (SSM). Corporate Governance The Bank is the parent company of the Banca Nazionale del Lavoro Banking Group, registered in the Bank of Italy register of Banking Groups. In this role, it manages and coordinates the Group Companies and makes arrangements for the execution of instructions issued by the Bank of Italy in the interest of the stability of the Banking Group. The traditional type Administration and Control System is broken down into: Shareholders' Meeting, Board of Directors, Managing Director and Board of Statutory Auditors. * * * The Shareholders Meeting appoints the Directors and members of the Board of Statutory Auditors. The Board of Directors is made of a variable number of members, ranging from five to sixteen (currently eleven). The Board of Statutory Auditors is made up of three acting auditors and two alternates. In accordance with the governance model, the Board of Directors is entrusted with the functions of strategic supervision and management. Operating powers are not assigned to the Chairman and the Deputy Chairman either by the Articles of Association or by the Board of Directors. Pursuant to art. 28 of the Articles of Association, the Chairman ensures the coordination between the Bodies formed by the Articles of Association and, in the context of the organisational structure adopted by the Board of Directors, supervises company, institutional and representation relations, ensuring the adequacy of information provided to Directors and to the Market. The Board of Directors appointed a Managing Director who was given all management and administration powers of the Bank, except for those that lie with the Board of Directors according to the law and the Articles of Association, or kept by the Board of Directors within its sole authority. The powers above, except for those reserved exclusively for the Board of Directors, can be exercised, pursuant to art. 28 of the Articles of Association, jointly by the Chairman and the Managing Director, with resolution for urgent matters to be submitted for information to the next meeting of the Board of Directors, Pursuant to art. 19 of the Articles of Association, the Managing Director also performs the functions of General Manager. Pursuant to Art. 34 of the Articles of Association, the Board of Directors appoints one or more Deputy General Managers, identifying, in case of more than one being available, the one to serve as Acting deputy, who is assigned the powers that are typical of the function of General 60

62 Report on Operations Corporate governance and organisational structures Manager, to ensure in this way that the Bank s governance is effectively governed without interruption. Pursuant to the Articles of Association, the Chairman and Managing Director are responsible for legal representation of the Bank and signing on its behalf. The Board of Directors appointed a Remuneration Committee, an Appointments Committee and an Internal Control and Risk Committee, also granting the latter the powers of Supervisory Body pursuant to Legislative Decree. 231/2001. The Board of Directors has adopted a Regulation regarding its operation and annually runs a self-assessment analysis. The Board of Directors has adopted the policy for the management of relations with associated parties, in application of the supervisory provisions regarding risk activities and conflicts of interest in force since 1 January The Board of Statutory Auditors is the Control body that exercises its functions according to legal provisions and the Articles of Association. A self-assessment process was activated in The Board of Directors, whose composition is shown on page 9 of this document, was appointed by the shareholders' meeting on 27 April 2015, and the office expires on the approval date of the 2017 financial statements. Internal Board Committees Remuneration Committee The Remuneration Committee was formed on 27 April 2015 following the appointment of the new Board of Directors for the three-year period The Remuneration Committee is made up of three Non-Executive Directors, Messrs. Roger Abravanel, as Chairman, Jean Clamon and Bernard Lemée as members. The Chairman of the Board of Directors and the Managing Director take part in the Committee s activities, with the exception of the resolutions which concern them, and, when called upon to attend, the Managers of Company Functions. The Chairman calls and chairs the Committee meetings and the Secretary of the Board of Directors or a substitute, in his/her absence, carries out the functions of Secretary. Minutes are drawn up of meetings of the Committee, which are signed by the Chairman of the Committee and by the Secretary, transcribed on an endorsed Book. In urgent cases when the Committee s opinion is sought, an opinion can be given by the Chairman of the Committee to the Chairman of the Board of Directors, with the Chairman being obliged to inform the Committee during the next following meeting. The Committee reports annually to the Board of Directors and at the Bank s Shareholders Meeting on the activities carried out. The members of the Committee, in addition to receiving the specific remuneration agreed by the Shareholders Meeting, are refunded for any expenses they incur in carrying out their duties. The Committee, to perform its duties and activities, has its own internal Regulation, which is aimed at organising the activity according to efficiency and effectiveness criteria, possibly using external experts. The Remuneration Committee is assigned advising and proposing functions to support the Board of Directors, in collaboration, where required, with the Internal Control and Risk Committee and with the Board of Statutory Auditors, regarding: The bank s remuneration policies, with due regard to the Bank of Italy s applicable supervisory provisions, also using the relevant Company Functions; Remuneration - except for as previously resolved by the Shareholders Meeting of the 61

63 Report on Operations Corporate governance and organisational structures Chairman and the Managing Director; Remuneration for: - The managers of Inspection Générale Hub Italy, the Compliance Department, the Risk Department, the Anti-money laundering corporate division and the Basel 2 Certification Italy structure; - The managers of the other Control Functions defined from time to time (currently Human Resource Manager, Director in Charge of drafting the company accounting documents); - Any other more important Positions identified from time to time in compliance with the provisions of the Bank of Italy; - General Manager and Deputy General Managers for the Bank; remuneration regarding the assignment of special tasks to the members of the Bank s Board of Directors under art of the Italian Civil Code. The Committee may perform similar functions also for unlisted banks controlled by BNL, should the latter decide to not establish internal board committees as envisaged by Bank of Italy circular no. 285 of 17 December Operation: 1. The Committee meets at least twice a year and in any case each time the Committee s Chairman deems it necessary, or a request is made to the Chairman by the Committee Members, the Chairman of the Board of Directors or the Managing Director. For the validity of the meetings the participation of the majority of the members in office is required. 2. The Committee s Chairman sets the agenda of the meetings of the Committee, taking into account any proposals that may have been put forward by the Committee Members as well as by the Chairman of the Board of Directors and the Managing Director, and, directly or by means of the Secretary, calls the meeting, in writing, with any suitable means, three days prior. In urgent cases, verbal calls are possible, without time constraints. 3. The Committee is chaired by the Chairman of the Committee. In case of absence or impediment, the Committee is chaired by the most senior Director and, in case of parity, by the eldest; in case of absence or impediment of the Chairman of the Committee, the meeting can be called by one of its members by acknowledging this circumstance in the notice of call. 4. The documents regarding the items on the agenda of the meeting are sent to the members of the Committee as soon as these become available, except for extraordinary cases when this is not possible. 5. The Secretary of the Committee is supported directly by the Corporate and Legal Department to perform its activities, as well as by the other Departments of the Bank for needs that require their competence. 6. The meetings of the Committee are usually held at the Bank s registered office. The Committee may also meet in any other place in Italy and abroad; in any case the meetings can be validly held also via video conference or by telephone. 7. The failure to take part in two consecutive sessions without justification results in this circumstance being reported by the Secretary of the Board of Directors to the Chairman of the Board of Directors. 8. Resolutions are taken by the absolute majority of votes and, in case of absence of one of the members, unanimously by the participants. In urgent cases, these resolutions can be passed by the Chairman of the Committee, who reports about them to the Committee in the next meeting. 9. The Chairman of the Committee agrees, also informally, with the Chairman of the Internal Control and Risk Committee and the Chairman of the Board of Statutory Auditors on the 62

64 Report on Operations Corporate governance and organisational structures methods to be adopted to exchange information or opinions about subjects of common interest. 10. The Committee reserves the right to resort to external consultants of its choice, for particularly complex issues and for comparative market analyses, requesting the Managing Director to assign the necessary tasks at the Bank s expenses. 11. The minutes of each meeting, transcribed on specific books, stamped and endorsed, are stored by the Secretary. The speeches can also be summarised by using the audio recording of the meeting; in this case, the specific magnetic/electronic medium is erased immediately after reporting the same speeches in the minutes. The documents examined or mentioned during the meetings and regarding: remuneration policies, remuneration schemes, agreements or individual measures, will be stored by the Human Resources Director. 12. The minutes are made available to the Board of Directors for consultation purposes via request made by the same Chairman of the Board to the Secretary and Chairman of the Committee. Appointments Committee The Appointments Committee was formed on 27 April 2015 following the appointment of the new Board of Directors for the three-year period The Appointments Committee is made up of three Non-Executive Directors, Messrs. Roger Abravanel, as Chairman, Mario Girotti and Roberto Hugo Tentori as members. The Chairman of the Board of Directors and the Managing Director take part in the Committee s activities and, when called upon to attend, the Managers of Company Functions. The Chairman calls and chairs the Committee meetings and the Secretary of the Board of Directors or a substitute, in his/her absence, carries out the functions of Secretary. Minutes are drawn up of meetings of the Committee, which are signed by the Chairman of the Committee and by the Secretary, transcribed on an endorsed Book. In urgent cases when the Committee s opinion is sought, an opinion can be given by the Chairman of the Committee to the Chairman of the Board of Directors, with the Chairman being obliged to inform the Committee during the next following meeting. The Committee reports annually to the Board of Directors. The members of the Committee, in addition to receiving the specific remuneration agreed by the Shareholders Meeting, are refunded for any expenses they incur in carrying out their duties. The Committee, to perform its duties and activities, has its own internal Regulation, which is aimed at organising the activity according to efficiency and effectiveness criteria, possibly using external experts. The Appointments Committee is assigned advising and proposing functions to support the Board of Directors with regard to: Appointment and co-opting of the Directors, in consideration of the applicable regulatory provisions of the Bank of Italy; Adequate composition of the Board of Directors, making proposals to it also in terms of gender quotas; Verifying the requirements of professionalism, integrity and independence of Directors and Statutory Auditors; Procedures for the self-assessment of the operation of the Board of Directors; Conferral of special tasks to Members of the Bank s Board of Directors; Definition of the plans for the succession in key management positions. The Committee also works with the Internal Control and Risk Committee and with the Board of Statutory Auditors, where required. 63

65 Report on Operations Corporate governance and organisational structures The Committee may perform similar functions also for unlisted banks controlled by BNL, should the latter decide to not establish internal board committees as envisaged by Bank of Italy circular no. 285 of 17 December Operation: 1. The Committee meets at least twice a year and in any case each time the Committee s Chairman deems it necessary, or a request is made to the Chairman by the Committee Members, the Chairman of the Board of Directors or the Managing Director. For the validity of the meetings the participation of the majority of the members in office is required. 2. The Committee s Chairman sets the agenda of the meetings of the Committee, taking into account any proposals that may have been put forward by the Committee Members as well as by the Chairman of the Board of Directors and the Managing Director, and, directly or by means of the Secretary, calls the meeting, in writing, with any suitable means, three days prior. In urgent cases, verbal calls are possible, without time constraints. 3. The Committee is chaired by the Chairman of the Committee. In case of absence or impediment, the Committee is chaired by the most senior Director and, in case of parity, by the eldest; in case of absence or impediment of the Chairman of the Committee, the meeting can be called by one of its members by acknowledging this circumstance in the notice of call. 4. The documents regarding the items on the agenda of the meeting are sent to the members of the Committee as soon as these become available, except for extraordinary cases when this is not possible. 5. The Secretary of the Committee is supported directly by the Corporate and Legal Department to perform its activities, as well as by the other Departments of the Bank for needs that require their competence. 6. The meetings of the Committee are usually held at the Bank s registered office. The Committee may also meet in any other place in Italy and abroad; in any case the meetings can be validly held also via video conference or by telephone. 7. The failure to take part in two consecutive sessions without justification results in this circumstance being reported by the Secretary of the Board of Directors to the Chairman of the Board of Directors. 8. Resolutions are taken by the absolute majority of votes and, in case of absence of one of the members, unanimously by the participants. In urgent cases, these resolutions can be passed by the Chairman of the Committee, who reports about them to the Committee in the next meeting. 9. The Chairman of the Committee agrees, also informally, with the Chairman of the Internal Control and Risk Committee and the Chairman of the Board of Statutory Auditors on the methods to be adopted to exchange information or opinions about subjects of common interest. 10. The Committee reserves the right to resort to external consultants of its choice, for particularly complex issues and for comparative market analyses, requesting the Managing Director to assign the necessary tasks at the Bank s expenses. 11. The minutes of each meeting, transcribed on specific books, stamped and endorsed, are stored by the Secretary. The speeches can also be summarised by using the audio recording of the meeting; in this case, the specific magnetic/electronic medium is erased immediately after reporting the same speeches in the minutes. 12. The minutes are made available to the Board of Directors for consultation purposes via request made by the same Chairman of the Board to the Secretary and Chairman of the Committee. 64

66 Report on Operations Corporate governance and organisational structures Internal Control and Risk Committee and Supervisory Body under Legislative Decree 231/2001 The Internal Control and Risk Committee was re-established on 27 April 2015 following the appointment of the new Board of Directors for the three-year period In line with the Organisation, Management and Control Model adopted by the Bank, most recently through resolution of the Board of Directors Meeting of 18 December 2017, the role of the Internal Control and Risk Committee also as Supervisory Body was confirmed, in accordance with the mentioned provisions and the model to which reference is made in full. The role as Supervisory Body is performed at Board level by the same members of the Internal Control and Risk Committee. The Committee is made up of three Non-Executive Directors, Messrs. Paolo Mazzotto, as Chairman, Mario Girotti and Roberto Hugo Tentori as members. The Chairman of the Board of Directors and the Chairman of the Board of Statutory Auditors and/or another Auditor appointed by the latter and, if invited, the Managing Director, take part in the Committee s activities; the Controller of the Internal Audit Department, the Manager of the Risk Management Department, the Manager of the Compliance Department, the Manager of the antimoney laundering corporate division, the Manager of the Basel 2 Certification Italy Unit and the Managers of other corporate divisions also take part in relation to matters under their responsibility. The duties of Secretary shall be carried out by the Secretary of the Board of Directors or, in his/her absence, by a Substitute. Operation: 1. The Committee meets systematically, based on the annual calendar that is usually defined by the end of the previous year. 2. The Committee is chaired by the Chairman or, in case of absence or impediment, by the most senior Director or, in case of parity, by the eldest director. 3. The Chairman sets the agenda of the meetings of the Internal Control and Risk Committee, taking into account the proposals made by the Members of the Committee and any Managers of the Functions concerned. Calls the meeting, informing the same Members, the Chairman of the Board of Directors, the Chairman of the Board of Statutory Auditors and the Secretary of the Board of Directors and others invited permanently, maximum five days prior to the meeting. 4. In case of absence or impediment of the Chairman, the Committee can be called by one of its Members, who acknowledges this circumstance in the notice of call. For the validity of the meetings the intervention of the majority of the Members is required. 5. In urgent cases, verbal calls and/or calls with any suitable means are possible, without time constraints. 6. The documents regarding the items on the agenda of the meeting, within the third business day prior to the meeting, are sent to the Members of the Committee, except for extraordinary cases when this is not possible. 7. The meetings are organised in a way to discuss the subjects pertaining to the various sessions attributable to all or part of the Components separately, i.e.: a. general activities of the Internal Control and Risk Committee (General Session); b. specific activities of the Supervisory Body (pursuant to Legislative Decree 231/2001) (Supervisory Body Session pursuant to Legislative Decree 231/2001); c. specific activities of the Group of Independent Directors (Bank of Italy - prudential supervisory regulations for Banks Circular no. 263/2006 (Title V Chap. 5) concerning: Risk activities and conflicts of interest of associated parties ) (Independent Directors Session). 8. The Committee may perform similar functions also for unlisted banks controlled by BNL, 65

67 Report on Operations Corporate governance and organisational structures should the latter decide to not establish internal board committees as envisaged by Bank of Italy circular no. 285 of 17 December The Secretary of the Committee uses the Corporate and Legal Department of the Bank to perform its activities. 10. The meetings of the Committee are usually held at the Bank s registered office. The Committee may also meet in any other place in Italy and abroad; in any case the meetings can be validly held also via video conference or by telephone. In these cases, the meeting is considered held in the place where the Chairman, or the Committee member replacing him/her, and the Secretary are present. 11. The failure to take part in three consecutive sessions without justification results in this circumstance being reported by the Secretary of the Internal Control and Risk Committee to the Board of Statutory Auditors for the consequent determinations. 12. Resolutions are taken by the absolute majority of votes. In urgent cases, these resolutions can be passed by the same Chairman, who reports about them to the Committee in the next meeting. 13. The Secretary prepares a single report for each session, which he/she signs together with the Chairman, transcribing the reports in suitable endorsed books stored by him/her. The speeches are summarised by using the audio recording of the meeting; the specific electronic medium is erased after reporting the minutes. 14. The minutes are made available to the Board of Directors for consultation purposes via request made by the same Chairman of the Board to the Chairman and Secretary. In executing the mandate of the Board of Directors and in exercising its functional independence, the Committee directs its activity according to the following lines of intervention: the guidelines of the internal control system, which must be made in line with the system of internal controls and the corporate organisation, and the compliance with the requirements by the corporate control functions; the adequacy and effective control of the internal control system, so that the main business risks are identified and properly handled and any weaknesses are brought to the attention of Board of Directors; the work plan prepared by the Controller of the Internal Audit Department, the Manager of the Risk Management Department, the Compliance Director, the Manager of the anti-money laundering corporate division and the Basel 2 Certification Italy Manager and the results of the respective reports; the definition and approval of the strategic guidelines and the risk governance policies, formulating opinions concerning the Risk Profile Statement RPS (i.e. Risk Appetite Framework RAF), with particular regard to the risk limits and the attention thresholds, checking their correct implementation; the consistency of the incentives underlying the Bank s remuneration and incentive system with the RPS, without prejudice to the competence of the Remuneration Committee; the correct use of the accounting principles for the preparation of the financial statements and consolidated financial statements, in coordination with the Director in Charge of drafting the company s accounting documents and the Board of Statutory Auditors; the definition of the policies and the corporate asset valuation processes, including the check that the price and the conditions of the transactions with the clientele are in line with the business model and the risk strategy; the definition of the company outsourcing policy of the auditing departments; the regulation of Risk activities and conflicts of interest of associated parties ; The appointment (identification and proposal availing of the contribution of the 66

68 Report on Operations Corporate governance and organisational structures Appointments Committee), dismissal and the economic treatment (the latter in cooperation with the Remuneration Committee) of the Manager of the Inspection Générale Hub Italy (Internal Audit Department), the Manager of the Risk Department (Risk Management Department), the Manager of the Compliance Department (Compliance Department), the Manager of the anti-money laundering corporate division and the Basel 2 Certification Italy Unit Manager and, the opinion, only for the appointment, of the Director in Charge of drafting the company s accounting documents; the additional tasks assigned by the Board of Directors in light of the new supervisory provisions. The Internal Control and Risk Committee reports to the Board of Director at least once a year on the activities carried out and on the adequacy of the internal auditing system and carries out its tasks in coordination with the Board of Statutory Auditors. The Committee receives the flows of information addressed to it for the various matters under its responsibility, in accordance with applicable regulations on internal controls and risks. The Committee may perform similar functions also for unlisted banks controlled by BNL, should the latter decide to not establish internal board committees as envisaged by Bank of Italy circular no. 285 of 17 December The Committee is also assigned the role as Supervisory Body, according to art. 6 of the Decree pursuant to Legislative Decree 231/2001, as required by the Organisation, Management and Control Model - already adopted, according to the mentioned regulations, by the Board of Directors with resolution dated 18 December 2017, and fully confirmed in this case - based on the relevant responsibilities. Having confirmed that the responsibility for adopting the Model rests with the head of the Board of Directors, the Supervisory Body is entrusted with supervising the following points, through independent initiative and control powers: the effectiveness and adequacy of the Model in relation to the corporate structure and the actual ability to prevent crimes from being perpetrated; compliance with the Model by all the addressees, including the Corporate Bodies. Specifically, the Supervisory Body is assigned the duties of: updating the Model when the following are found: - shortcomings and significant breaches of the Model, also following verifications of its effectiveness; - changes to the internal organisational structure of the company and/or the methods of conducting business to an extent that impacts the level of exposure to risks of the commission of crimes pursuant to Legislative Decree 231/2001; - identification of new sensitive activities/macro-processes or changes to those previously identified; - regulatory changes regarding the administrative liability of bodies (e.g. introduction of new predicate offences relevant for the purposes of Legislative Decree 231/2001, or changes to the offences already contemplated in the Decree); - formulation of observations by the Ministry of Justice on the Guidelines and regulations pursuant to art. 6 of Legislative Decree 231/2001 and art. 5 et. seq. of Ministerial Decree no. 201 of 26 June 2003; checking and auditing the ongoing and effective implementation and effectiveness of the model; obligations of notifying and reporting to the Board of Directors, which it directly reports to and also reports breaches verified. In order to carry out its functions and exercise its powers, the Supervisory Body: 67

69 Report on Operations Corporate governance and organisational structures avails of the Bank s Control Functions (Compliance Department, Risk Department, Inspection Générale-Hub Italy) and the structures under these departments, the Legal and Corporate Department as well as all other internal functions that may be deemed suitable to involve due to the matters under its responsibility; receives information flows addressed to it, as defined in the Model and specific internal application provisions, regarding, inter alia, the outcome suitably aggregated in order to provide the necessary significance of controls concerning compliance with the monitoring defined in the protocols, the suitability of the measures adopted, any anomalies/breaches found and any changes in the organisation or in company operations which could require changes to the Model; constitutes in that sense an essential part of the system of reporting the outcome of controls suitably aggregated to the Supervisory Body, pursuant to the Fundamental Points of Supervision and KRI, identified as potentially significant also for the purposes of mitigating the risks of crimes pursuant to Legislative Decree 231/2001 is required to submit a written report on the results of its activities to the Board of Directors, annually and any time this is urgently required or requested by a member of the Supervisory Body or the Board of Directors. Each year the Supervisory Body also submits to the Board of Directors a plan of the activities scheduled for the next year; irrevocably receives the annual financial means, whose amount is initially approved by the Board of Directors and subsequently tacitly renewed. These means must be increased by the Board of Directors, on the motivated request of the same Supervisory Body. The internal control system related to the financial reporting process Consequently to the listing of some bond issues with the Luxembourg Stock Exchange, the Bank had the status as issuer having Italy as Member State of origin, whose securities are admitted for trading at another Member State in the European Union pursuant to art. 1, paragraph w-quater), of Legislative Decree of 24 February 1998/58 (Consolidated Finance Act or TUF). After the repayment/maturity of all the bond issues listed on the Official List of the Luxembourg Stock Exchange, given the absence of additional financial instruments listed in regulatory markets, the obligations set by the provisions above ceased to apply. On 25 June 2015, the Board of Directors of the Bank, acknowledging this circumstance, resolved, on the one hand, to exempt the Officer in charge from the regulatory commitments that are no longer mandatory consequently to the mentioned change in status, and, on the other hand, to continue to entrust the Director in Charge and CFO with all the monitoring activities and the compliance with the current internal regulations of the Bank regarding audits and reporting and referring to the previous "status as listed issuer". That being said, the governance and control system is suitable to continuously control the typical risks of the Bank and the Group. The Director in Charge of drafting the company accounting documents monitors the accounting and financial disclosure internal control system, based on the relevant Regulation approved, after hearing the opinion of the Board of Statutory Auditors, by a resolution of the Board of Directors, prior to examination by the Internal Control and Risk Committee. The Director in Charge was appointed by the Board of Directors, on proposal from the Managing Director, after the compulsory opinion of the Board of Statutory Auditors. To carry out this role, the Director in Charge relies on the Accounting & Reporting structure established within the Finance Department and other dedicated divisions. 68

70 Report on Operations Corporate governance and organisational structures The system of internal accounting controls sets itself the target of checking the completeness and correctness of the accounting entries, the prevention and identification of errors, and the quality of the data to be used for drafting the financial statements, the production of vigilance alerts and all other accounting and financial information. The system is compliant with the standards set forth by the Parent Company BNP Paribas. The methodological approach is based on verifying the existence of suitable governance systems, of behavioural standards characterised by corporate ethics and integrity, of employee disciplinary systems, of suitable organisational structures, of a clear delegations and responsibility structure, of effective codes of conduct and fraud prevention systems. The items mentioned are analysed on the basis of reporting produced by the BNL-BNP Paribas Inspection Générale Department - Hub Italy and by the various dedicated Corporate functions, possibly with detailed analyses by the Director in Charge, focused on organisational arrangements and operating mechanisms. When assessing the system of internal accounting controls, particular attention is placed on controlling the suitability and effective application of administrative and accounting procedures, as well as the rules for correctly managing technological infrastructures, applications and operating systems. The analyses are conducted with specific methodologies, supervised by the Director in Charge through the Accounting & Reporting division. The monitoring of accounting and financial information quality pivots on the analysis of organisational arrangements and the functioning of internal controls, through a control plan which continuously assesses the suitability and effective application of administrative and accounting procedures, which support the preparation of financial statement documents and all other financial communications. The Bank formalises the quality of the accounting information processes and the effectiveness of the internal control system by drawing up a Group Certificate issued on a quarterly basis. 69

71 Report on Operations Corporate governance and organisational structures Organisational structure The Bank's Central Management organisational structure breaks the structures down into: Business Lines, that oversee the Markets and support the Bank s sales and marketing activities; Divisions, that oversee the Bank s governance processes. The Business Lines are organised into: Commercial and Private Division and Corporate Division Banking to ensure that sales, revenue, capital and customer satisfaction targets as well as objectives related to the quality and cost of credit and supervision/containment of operational risks are met for the applicable customers. Each Division is also in charge of co-ordinating the relevant Local Network and of developing synergies with the other BNP Paribas Group functions and companies. BNPP-BNL Corporate & Institutional Banking Division 1 for implementing the global corporate institutional banking business model in all lines of business and achieving the sale, revenue and customer-satisfaction targets as well as the objectives related to the quality and cost of the credit risk and supervision/containment of operational risks defined for the applicable customers. The Division hierarchically reports to the Managing Director of the Bank and to the Head of BNPP Corporate & Institutional Banking. The Special Loans Division, to achieve the targets of reducing the cost of risk and protecting the bank s profit and equity interests, to define and implement the management strategies for non-performing customers, to oversee the optimum recovery of impaired loans, to control/contain operational risks, to coordinate the structures of the Territorial Network and to develop synergies with other Functions and Companies of the BNP Paribas Group. International Financial Services Italia for implementing the global business model of International Financial Services in Italy, which is engaged in the assets under management, property and life and indemnity insurance segments. The Head of International Financial Services Italia hierarchically reports to the Managing Director and to the Head of BNPP International Financial Solutions. The following operate as Divisions: Compliance Department to identify, assess and monitor reputational and non-compliance risks and to supervise the relative mitigation actions; BNL s Compliance Department is integrated inside the compliance organisational model of the BNP Paribas Group with a consequent close relationship with and reporting of the Compliance Director to the Domestic Markets Compliance Department of BNP Paribas. The Compliance manager directly depends from the Board of Directors and, for it, to the Chairman, the Internal Control and Risk Committee and the Managing Director of BNL. Communications Department to monitor and develop all communication within and outside of the Bank, to support commercial development, and enhance the positioning of BNL s notoriety/image; to supervise and develop Quality and Innovation initiatives. 1 On 18 December 2017 the Board of Directors of BNL resolved on the Bank s new organisational structure as a result of the elimination of the BNPP BNL CIB Division, with the resulting change in the scopes of responsibility and distribution of activities between BNP Paribas SA and BNL. These organisational changes took effect in January

72 Report on Operations Corporate governance and organisational structures Finance Department to monitor strategic development, planning, budget and management control processes of the Bank and its subsidiaries; to prepare the financial statements, the consolidated financial statements and obligatory periodic disclosures to the Parent Company and Supervisory Reporting; to optimise the corporate and financial structure and carry out the administrative management of non-recurring transactions in the portfolio companies; to develop applications related to Management activities; to develop and coordinate relations with Italian regulators for the companies of the BNP Paribas Group in Italy (so-called Regulatory Relationship Desk); to define accounting processes and controls; to plan, support and consult on tax topics. Property Department to define medium- and long-term plans and strategies to enhance and use the real-estate assets; to manage properties and provide insurance and physical security services, to monitor prevention and protection topics; to collaborate in the implementation of the sales outlet development plan. IT Department, for developing and managing IT systems and procedures; for the governance, development and management of the company's information systems, to support the business and in compliance with the guidelines established by BNP Paribas, for implementing and maintaining data and guaranteeing its integrity and availability. Corporate and Legal Department to monitor the evolution of external regulations (legislative and regulatory), case law and doctrines; to provide support and consult on legal topics, including litigation management activities - as well as to manage and monitor judicial rulings for the operating and documental organisation of the activities of the Board of Directors of the Bank and the support to the Board of the Companies within the Banking Group, to monitor the activities regarding the Bank s Control Bodies, the Internal Board Committees and the BNL Foundation. It is integrated inside the legal organisational model of the BNP Paribas Group with a consequent close relationship with and reporting of the Legal Director to the Legal Group of BNP Paribas. Operations Department to monitor the evolution of the organisational structure, the management of processes with an end to end approach. Risk Department to monitor the level of credit, market and ALM risks assumed by the Bank and to define credit policies and processes; to define, develop and implement credit, market and ALM risk management and control assessment models and methodologies; to monitoring operational risks and prevention of/protection from internal/external frauds, to coordinate the permanent control activities. The Basel 2 Certification Italy division operates as part of this in this Department. Human Resources Department to monitor processes and tools used to individually manage human resources, to monitor labour, union relation, labour law regulation and regulatory process policies, to define, monitor and achieve the staff plan and the Human Resources cost budget. Inspection Générale - Hub Italy for internal audit activities for the entities of the BNP Paribas Group and the BNL Group operating in Italy, intended to improve the effectiveness and efficiency of the organisation as well as to assess the operations of the internal control system by carrying out periodic controls. It functionally reports to the Board of Directors and, for it, to the Chairman of BNL; to the Internal Control and Risk Committee and the Managing Director of BNL. ALM Treasury: to manage the liquidity, interest rate and exchange rate risks of the Bank; to optimise the management of the cost of deposits and the interest margin; to manage the accounting positions and optimise the relevant hedging transactions. 71

73 Report on Operations Corporate governance and organisational structures Data Office to implement the data governance model of the Bank; to define the strategic vision and possible evolution of data quality and integrity; to effectively manage critical situations and remediation processes relating to data quality/integrity issues. Corporate Social Responsibility to implement Corporate Social Responsibility (CSR) policy, in line with the directive of the Parent Company, supporting the Top Management in integrating and disseminating the issues within company activities and in defining the action plan necessary to achieve the targets. Customer Experience Advocacy & Claims to promote at all level of the Bank constant dialogue with the customer, definition and measurement of the NPS, Customer Satisfaction and Customer Experience indicators, promoting interaction with all of the Bank s units involved in the process of measuring Customer Journeys. The following Services, which report to the Chairman of the Board as well as to General Management, are also included among the Functions: Institutional Relations Service for the Bank s and the BNP Paribas Group s public relations and institutional communications with exponents from Italian institutional, political, economic, financial and cultural circles; for the management of BNL s artistic heritage and historical archive. Media Relations Service for governing relations with the information media to ensure that the Group is correctly positioned in the media. Research Service for overseeing analysis and research on Italian macro-economic and banking scenarios. An Acting Deputy General Manager and three Deputy General Managers also report directly to the Managing Director. Inter-functional Committees were also established, focusing on: coordination activities for achieving the Bank's strategic objectives, Asset & Liability Management, supervising costs and investments, monitoring significant projects, risk assessment and monitoring, revision of the internal rating models, defining credit delegations, resolving on investments and loans, and defining new products. If provided for, the Inter-functional Committees operate with the powers delegated by the Administrative Bodies (Board of Directors and Managing Director). 72

74 Report on Operations The main risks and uncertainties to which the Group is exposed and risk monitoring and management The main risks and uncertainties to which the Group is exposed and risk monitoring and management Risk oversight is ensured by the Risk Department, and is integrated in the RISK organisational model of the BNP Paribas Group with a consequent close relationship with and reporting of the Risk Director to the Domestic Markets RISK of BNP Paribas. The Risk Department checks that the level of the credit, counterparty, operational and market risks, as well as the risks managed by the ALM and Treasury (ALMT) function specifically including banking book interest rate risk and liquidity risk undertaken by the Bank is in line with the relevant policies and consistent with the Bank s economic and equity structure. More specifically, the Risk Department ensures: the qualitative and quantitative monitoring of the risk levels through a system of control of the credit, counterparty, market, ALMT and operational risks; the development and implementation of models and methods to measure, manage and control credit risks; the control of the rating system, through dedicated and independent validation and internal audit structures (second and third level); the validation and revision of the ALMT risk models and metrics; the definition of credit policies and processes - in collaboration with the business structures; the supervision of operational risks of the Bank and the coordination of permanent control activities; that the corporate and control bodies of the bank are informed about the integrated exposure to credit, counterparty, market, ALMT and operational risks; the predisposition of the Risk Appetite Framework and the control of the operating metrics, i.e. the reference framework that defines the limits of the risk indicators, in line with the Parent Company, to be submitted to the approval of the Bank s governance and control bodies 1. The Risk Department, through specific information flows, has an overview of all the risks as a whole and their mutual interaction. In particular, the Department directly monitors credit risk, counterparty risk, market risk, concentration risk, country risk, operational risk and ALMT risk and, in line with the structure of the BNP Paribas Group, it indirectly monitors strategic and reputational risk. The Risk Department directly reports to the Managing Director and is independent from the company functions that decide to assume risks and that are in charge of the operational management of risks. However, as the Risk Department takes part in the various Inter-functional Committees, at the same time it is not very distant from the operating context. As regards credit risk, in particular, monitoring by the Risk Department is ensured, not only thorough the participation in the Committees, but also with the provision of a mandatory but not binding opinion (risk opinion) on the credit line proposals to ensure continuous interaction with the business units (Corporate Banking, Commercial and Private Banking, Corporate & Institutional Banking divisions and Special 1 The RAF is the reference framework that defines the propensity towards risk, the tolerance thresholds, the risk limits, the risk governance policies and the reference processes needed to define and implement them. 73

75 Report on Operations The main risks and uncertainties to which the Group is exposed and risk monitoring and management Loans Department), which propose and resolve on the assumption of the credit risk and are directly responsible. Cost of risk As regards collective impairment of performing loans, the Group method is used, which is based on the concept of expected loss at maturity. In particular, provisions are calculated only for counterparties with the highest risk in terms of creditworthiness. For quantifying impairment, the probability of default at maturity is stressed, on a prudential basis to cater for possible external stresses. The Risk Department calculates collective impairment on a quarterly basis. The analytical impairment of non-performing loans applies to all non-performing positions starting with past due positions, adopting an analytical or lump sum write-down. Specifically, for past due exposures and for all other non-performing exposures below a specific threshold, lump sum percentage allocations are made, while for other non-performing exposures, value adjustments are determined using a judgemental approach. Market and Counterparty Risks The Risk Department's Risk Management function ensures that the measurement and control systems and the processes for managing and monitoring positions and the relative operating limits are qualitatively controlled at the local level, regarding: - counterparty risk generated by the activity in over-the-counter derivatives and other securities financing transactions; - market risks pertaining to the trading portfolio. In this respect, the use of the same measurement and control systems as the Parent Company, centrally managed by the RISK Department allows for the integrated monitoring of these risks and the full supervision of the overall exposure trend. As regards market risks, the measurement, control and monitoring model called Market Risk explorer (MRX) is applied, which covers the perimeter of BNL s trading portfolio and which is only defined for the Global Markets activities carried out by the BNPP-BNL Corporate & Institutional Banking Division. Note that, with joint ruling effective, the French and Italian Supervisory Authorities (ACPR and Bank of Italy) authorised the use of MRX from the end of 2011, for the purposes of the VaR based internal model to calculate the capital requirements for the generic and specific position risk of the trading portfolio and the additional requirements set for the Stressed VaR and the Incremental Risk Charge. For qualitative and quantitative information on market risks please see the chapters of the Explanatory Notes. ALMT Risks The Asset & Liability Committee (ALCO) is responsible for managing liquidity, interest rate and operating exchange risks (ALMT risks), and it resolves on the control and management of those risks for both the Bank and the portfolio companies. Liquidity Risk Liquidity risk management policies are based on the strategy defined by the Parent Company BNPP, essentially founded on centralised liquidity management for all Group companies, for both the short and the medium/long term. 74

76 Report on Operations The main risks and uncertainties to which the Group is exposed and risk monitoring and management In BNL's organisation, operational management is carried out by ALMT with the policies approved by ALCO, in compliance with the assigned limits and the guidelines of the Parent Company. ALMT, which is independent with respect to the business lines, applies the liquidity costs and returns by loan and deposit type/counterparty through the system for internal invoicing to the sales divisions, gathering the net balances of activities in its own portfolios. In relation to internal delegations, specific responsibilities are assigned to monitor and manage limits of exposure to liquidity risk, understood as the ratio of liabilities to assets measured on the time frame of 1 year (1y Liquidity Gap) and as the LCR (Liquidity Coverage Requirement). The 1Y Liquidity Gap is monitored on a quarterly basis and periodically examined by ALCO. In addition to the constant monitoring of limits, periodic stress tests are conducted on the short-term liquidity position, which measure the Bank s ability to offset the effects of pre-defines stress scenarios with its own liquidity reserve (cash and other liquid/liquidable assets). The Parent Company also monitors liquidity risk by receiving information through the dedicated quarterly consolidation process. Interest Rate Risk Operational aspects of interest rate risk are managed by ALMT for short-term components and for medium/long-term risk. In particular, the risk on the medium/long-term financial statement component is managed with a view to optimisation, with the aim of stabilising the interest margin over the medium/long-period, regarding the counter-cyclical role assigned to ALMT. As occurs for liquidity risk, also interest rate risk is managed in the same structure, through a suitable Internal Transfer Rates system connected with the sales divisions. As regards the banking portfolio, measurement criteria of interest rate risk were harmonised with criteria of the Parent Company. Special new limits were therefore adopted. In the recognition process of interest rate risk, the behavioural models developed by the Parent Company BNPP are applied, and adapted to the Italian market. Interest rate risk for medium/long-term commercial lending and funding operations is limited through the hedging of generic fair value, meaning portfolio value (macrohedging), with microhedging transactions and with cash flow hedge transactions for hedging highly likely future transactions. The Bank formally documents hedging reporting. That documentation describes, inter alia, the methodology used. Operating exchange risk Operating exchange risk refers to the risk of a fluctuation in the equivalent value in euro of the margin achieved on sales transactions denominated in currencies other than the euro. That margin in foreign currency is automatically transferred to ALMT, which negotiates it against the euro. Given the essentially domestic scope of the Bank s activities, this risk is marginal. Operational Risks The monitoring of operational risks is entrusted to the RISK Operational Risk and Control structure of BNL, in the Risk Department, also identified by the Group name Risk ORC. In light of the transversal nature of operational risk and in compliance with BNP Paribas Group policy, the Operational Risks and Permanent Controls areas were made closely complementary to maximise efficiency in managing the risk through the implementation of an analysis system that considers both areas at the same time. The organisational model is arranged into a first and second line of defence and thus separates the operational activities from the control and supervision, in managing operational risks and permanent controls. 75

77 Report on Operations The main risks and uncertainties to which the Group is exposed and risk monitoring and management Each Department/Division has a permanent control system that is adjusted according to the risk profile, so-called first line of defence (Operational Permanent Control), in order to: identify and assess the risks which assets are exposed to; put control methods into practice within the limits of tolerance to risks defined by the Group or by the same divisions; define and implement the risk mitigation actions (action plan); solve the recommendations from internal (conducted by the Inspéction Générale) and external audits (regulators and auditors). Second level control is ensured by an independent division (second line of defence) called BNL Risk ORC, whose objective is to: coordinate and animate the system; ensure the utmost respect of the rules and standards defined in terms of permanent control and operational risk; monitor the mitigation actions, the results of the controls, the closing of the findings of the internal audit; carry out checks to assess the adequacy of the risk mitigation system implemented by the first line of defence; take care of the reporting. Among its main duties, BNL RISK ORC controls the dissemination of and supervision over compliance with external and internal regulations, and identification of operational risks and relative mapping, qualifies and quantifies impacts to determine the capital necessary to face operational risks, monitors incidents related to the Bank's and its subsidiaries' operations, measures the Risk Appetite Framework indicators and contains them within the defined limits, and integrated reporting on Operational Risks. Thus, for the purpose of calculating the asset requirement linked to the operational risks and related fulfilments the following calculation methodologies were used: - the adoption, from 1 July 2011, of AMA in BNL SpA in accordance with the BNP Paribas Group approach; - the application of the TSA method from 2011 for Artigiancassa SpA and from 2013 for BNL Finance SpA.; - the application of the BIA method for BNL POSitivity Srl. 76

78 Report on Operations The main risks and uncertainties to which the Group is exposed and risk monitoring and management Integrated risk management and capital adequacy (ICAAP process) and liquidity adequacy (ILAAP process) Within the framework of governance provisions and integrated risk management and control mechanisms, the Finance Department - in partnership with the operational units that assume risks in carrying out their activity and the other control functions, the Risk Division first of all - is responsible for calculating asset absorption as well as, in general, for the coordination of the various phases that make up the ICAAP (Internal Capital Adequacy Assessment Process) process, through which the Bank carries out an independent periodic assessment of its current and outlook capital adequacy, in relation to the risks assumed and the strategies resolved. The Internal Liquidity Adequacy Assessment Process (ILAAP) is included in the risk management and control mechanisms and governance. It aims to determine the liquidity requirements as part of the supervisory review and evaluation process (SREP). The ILAAP is a multifunctional process aiming to identify, measure, manage and monitor the liquidity and funding of the Bank with the objective of assessing its adequacy, based on qualitative and quantitative information showing the Bank s current and expected propensity to risk. As a consequence the ILAAP approach is proportional to the Bank s propensity to risk as well as the complexity of the operating context it is in. For additional information on organisational aspects, management policies, measurement and control systems, and methodologies and models to control each type of risk, please see Part E of the Consolidated Explanatory Notes, "Information on risks and related hedging policies". 77

79 Report on Operations Distribution network Distribution network During 2017 the presence throughout the country was rationalised with the closure of 35 Retail branches, opening 5 MICRO branches in order to maintain oversight of the area; the number of Corporate Centres stood at 48, while the number of sales outlets dedicated to private customers reached 37 Private Centres and 2 Large Equity Centres. During 2017, the Asia (5 Retail branches) and Micro projects (5 Retail branches) and the application of the Europe concept to 15 branches brought the transformation works on the Network to 165, renewing a total of 22% of the Network, according to standards that, also physically, express the new way of perceiving relations with customers and monitoring the Territory. The distribution network of Retail branches Piedmont, Liguria and Valle d'aosta Lombardy Triveneto Emilia Romagna and Marche Tuscany and Umbria Lazio and Sardinia Rome Campania and Basilicata Puglia, Abruzzo and Molise Calabria and Sicily Grand total Branches as at Openings Closures Branches as at % change As regards the Automatic Teller Machine (ATM) fleet, 2017 was dedicated to the full implementation of the projects ASIA, EUROPE and MATIN, resulting in a considerable decrease in Cash-out machines operating in the territory and a marked increase in Multifunction ATMs after the closure of the branches planned as part of the Matin project; as a consequence, the overall growth of the fleet was negative (-2.8%) while installations of multifunction ATMs increased by 4.8%. ATM fleet 31 December 2016 Installations in the year 31 December 2017 % change ATM Cash out Multifunction ATMs Kiosks Grand total

80 Report on Operations Customer Satisfaction Customer Satisfaction Client & Employee Advocacy With the goal of making BNL the highest recommended bank by its Staff and its Customers, the Client and Employee Advocacy program aims to strengthen the capacity to effectively support the development of community in the present and future and measure, using the Net Promoter Score (NPS) methodology, the level of propensity to recommend it and suggest it. To accelerate the implementation of the initiatives planned by acting on company processes, organisation and culture, a specific new structure was created, which reports to the Managing Director, focused on implementing and managing the Bank s advocacy model, named Customer Experience Advocacy & Claims. The NPS monitoring system includes three macro-areas of investigation: 1. Benchmark Surveys, used to understand BNL s positioning in relation to its competitors in terms of NPS. This type of survey indicates the gaps in relation to the best in class and, above all, the areas in which we are the weakest. 2. Relational Surveys, which investigate the comprehensive customer-bank relationship on each single market. The goal is to increase customer loyalty and resolve critical issues in relationships. 3. Transactional Surveys, which are monitored on the spot, sent to customers after a specific event to record their satisfaction and whether they would recommend the Bank as a result of the event. The goal is to improve specific products/services. During 2017 the NPS methodology was implemented in BNL with the following results: around 650 thousand Individuals, Small Business, Private and Corporate customers contacted over 50 thousand reports collected from customers around 1,200 colleagues involved, with 98% of detractor customers re-contacted The NPS index for 2017 calculated for Individual Customers of BNL came to +xxp. Complaints Retail and Small Business Complaints In 2017 a total of 8796 claims were received, of which 631 mediations, down by 34% on the previous year. On the whole, 54% of mediations related to anatocism (compound interest) and alleged usury on loans. 38% of claims concerned current accounts and related services (slightly up on 2016) and the main cause of the complaint regarded the failure to terminate or delayed termination of the accounts (27% of the total) and mistakes in operations (13%); alleged anatocism and usury were down, comprising around 8% of claims. 36% of claims concerned loans (down by 5 percentage points on 2016); the phenomenon relating to anatocism, the alleged application of usury interest rates, misleading advertising on the application of the TAEG (effective annual rate), which in total covered 28% of claims regarding loans. 18% of the cases concerned problems relating to renegotiations and subrogations of mortgages. 79

81 Report on Operations Customer Satisfaction The percentage of claims concerning monetics was substantially steady on 2016, with 10% of the total. The main reasons regarded fraud and theft and loss of cards, comprising 21%. Complaints relating to failure to cancel or delayed cancellation of cards also came to around 20%. The weight of financial products and investment services was 8%. Among these, around 25% concerned the execution of transactions deemed inappropriate and inadequate in relation to the customer profile and the lack of adequacy of disclosure prior to the transaction. It is worth noting the increase in the percentage weight of the claims concerning insurance products, which rose from 4% to 7% due to the entry into force of IVASS Measure no. 46/2016, which attributes to banking intermediaries the management of claims regarding the sales of policies (over 50% of cases relate to this type of product). Corporate and Public Administration Complaints The number of complaints from Corporate and Public Administration customers decreased: 466 compared to 530 in 2016, including 84 mediations, continuing to decrease on previous years and primarily relating to alleged anatocism/usury on current accounts. The breakdown of the various types of product generally confirms a sharp concentration on issues linked to Current Accounts (65%); the percentage weight of complaints on Loans (23%, compared to 18% in the previous year) and on Financial Products (10%, 8% in 2016) increased slightly. In terms of reasons, with regard to complaints on current accounts, the majority regard problems linked to alleged anatocism and usury (28%), while in relation to loans, disputed mainly are incorrect reports to the Central Credit Register (20%). The only claims from the Public Administration sector cover 20%, and in 78% of the cases relate to issues concerning current accounts and related services. 80

82 Report on Operations Human resources Human resources As at 31 December 2017 the number of employees in the consolidated BNL Group totalled 13,436, of whom 11,067 employed by the Parent Company. Employees of the BNL Group 31/12/ /12/2016 PARENT COMPANY Executives Non-executives CONSOLIDATED SUBSIDIARIES Executives Non-executives TOTAL RESOURCES OF THE CONSOLIDATED GROUP (1) OTHER INVESTEE COMPANIES Executives Non-executives - 1 TOTAL RESOURCES OF THE GROUP (1) Personnel under the authority of consolidated subsidiaries is counted as belonging to the staff of the individual company in question instead of the Parent Company, in line with the corresponding allocation of costs of remuneration. Selection & Employer Branding Growing and constant commitment was dedicated in 2017 to Employer Branding with the aim of increasing and strengthening the presence of BNL and the BNPP Group in the labour market. The Employer Branding focused on the enhancement of people and innovation. Our commitment was also recognised by the external market: Top Employer Italia for the seventh year running, the Top Employer Institute awarded BNL s excellence as a result of its commitment and attention to its people, through targeted training programmes at all company levels and activities aimed at the professional and personal growth of its staff; Best Employer of Choice an annual ranking which rates BNL in 1st place among banks and 9th place among all companies in Italy. BNL ranks 2nd, instead, in the choices of young new graduates with business or social degrees, but is still a leader among companies in the banking sector; Le Fonti Innovation Awards Prize (November 2017): #1 Team HR-Recruiting & Employer Branding and Human Resource Management - for distinguishing itself as international excellence with deep roots in Italy, an innovative leader in human resource management and an excellent leader in innovative projects capable of attracting new generations, which awards the activities carried out through the innovative Recruiting Day formula and the Ambassador Programme (Employer Branding programme involving real people reporting on the values of our company among students of Italian universities where they obtained their degrees); Potential Park: #7 in the general Italian ranking for online communications with talents; Universum: #3 most attractive bank in Italy. We also note the following initiatives: Recruiting Day 2017: a selection event that aims to identify quality young people with high potential. At the end of the day of assessment, the best candidates receive a letter of 81

83 Report on Operations Human resources engagement. This is an innovating recruiting model which, in addition to a shortened process, allows participants to gain first-hand experience of the company context they may join. Through accounts from BNL people that work in the same positions, the candidates may have a preview of the work they would be doing, to test it, and be more aware of their real interest in the position offered (4 sessions held in 2017 in Rome, Milan and Verona); OrientaMente 2017: 3 events organised and over 100 participants. Lastly, throughout the year, the presence on social media was intensified and a strategy was devised to strengthen and renew partnerships with the main Italian universities and business schools to further increase students awareness about BNL and the BNPP Group. Diversity and equal opportunities For BNL and BNP Paribas diversity and inclusion are a commitment and an opportunity: in a quickly changing world, promoting diversity in the company aids in better serving customers, promoting the various internal skills and generating the engagement of all workers. For years we have been promoting initiatives and actions that make diversity not only an ethical choice but also a value rooted in the company organisation, in line with the commitments that the BNP Paribas Group promotes at strategic level through global governance. As part of Diversity & Inclusion activities carried out by the Human Resources Department and aimed at increasing the inclusion of all people and professional skills within the company and promoting diversity, the action plan up to 2020 was developed in line with the process carried out last year, which achieved important goals, including: The creation and implementation of a single BNP-BPI framework of initiatives in all the areas of action and periodic monitoring of their impact (GPS +5% p.p vs on the visibility of company actions, 23% women SMP, 31% managers +3 p.p vs. 2016) disseminated by employee communities (overall, 900 colleagues are members of MixCity Italy and BNP Paribas Pride Italia); Second annual Diversity & Inclusion week in Italy: a week of events and meetings in which more than 900 employees from all Group companies in Italy provided with information on the issue, and stimulated internal debate (27 events, 5 cities, 6000 Echonet accesses, 300,000 views on social media, 10 internal and external associations involved); Provision of a training module on Unconscious Bias, to discover the potential interference of cognitive bias on people s capacity to reason, assess and judge, to become aware of how our attribution categories act in professional relationships, understand and perceive the value of difference: 100 managers already involved in 2017 and numerous sessions planned for 2018 to disseminate knowledge and tools for managing these biases; The MixMentoring programme was launched, a cross-entity mentoring project promoted by the MixCity Italy network to promote gender diversity (40 participants in 2017, 20 mentors/20 mentees), over 20 initiatives organised by the MixCity network, aimed at creating awareness and opportunities for dialogue between colleagues and members of the top management on gender diversity; As part of the initiatives to support gender diversity, BNL has developed, in partnership with Valore D, several training courses aimed at providing practical Mentorship, Skill Building, Work Life Balance and Role Model tools (80 participants in 2017) and organised events for the 82

84 Report on Operations Human resources international days formalised by the United Nationals (8 March and the day against violence against women #diciamono (120 participants in Rome). Lastly, BNL is one of the signing companies of the Valore D Manifesto to assist and support diversity in the company; Consolidation and implementation of the output of the ageing laboratory, which involved 22 colleagues over a period of 12 months and created 10 projects, 2 of which have already been implemented: in December 2017 a survey on Senior colleagues (over 55) was launched, to listen to the over 4,500 colleagues in the company to identify their main needs in terms of work-life balance, inter-generational relationships, transferring and sharing their skills and professional experience. The results of that survey will be used for an action plant to promote the full inclusion and promotion of seniors in the company; As part of initiatives focused on the inclusion of various gender identities and sexual orientations in the company, in March 2017, BNL joined Parks Liberi e uguali, the association of employers committed to promoting the culture of diversity and inclusion. In May 2017, the BNP Paribas Pride Italia network was set up, dedicated to supporting the LGBT community in the company, and the treatment in terms of leave and benefits for common-law couples and civil unions was standardised; In 2017, BNL was also the first bank in Italy to hire a person with Down s Syndrome for an internship, thanks to its partnership with WOW (Wow Wonderful Work). Human Resource Management and Development There was significant participation in the various Corporate Seminars (workshops dedicated to developing leadership skills) organised throughout the world by BNP Paribas to increase knowledge of the Group and enable international exchanges between various teams. In particular, for the first time in Italy, the Social Enterprise Hackathon was held with a leading partner (Social Enterprise) to stimulate awareness in young talents of sustainable leadership, with a positive impact on the society our company operates in (Corporate Social Leadership Development): the project involved 28 talents from the company network Leaders for Tomorrow, from all over the world, to work on 4 challenges expressed by a leading Italian social enterprise with the purpose of identifying innovative solutions to support them in achieving those goals. This experience, unique in Italy due to its type, purposes and method of implementation, generated highly positive results both for the company that hosted our talents and for the participants, who had the opportunity to test themselves in the field and be immersed in the day-today work of a company with a social purpose, integrating their leadership profiles with the skills acquired during the project. In 2017, development projects also concentrated on clusters of Group talents (Emerging, Advanced and Top) and on young local talents (Energy Lab) in order to expand their profile of skills and engagement through various solutions: a personalised, development process, shared by the talent and his/her manager, programmes for sharing experiences by getting to know other company situations (e.g. Learn from Each Other, an international Group project involving the exchange of talents between the various BNPP companies, Learning Tour, which involves the exchange of young talents among the various organisational structures of BNL and BPO, One Young World, to share projects on various issues worldwide). A mentoring programme was launched that involves a group of talents as mentees and a group of top managers of BPI as mentors in a voluntary, interactive, non-hierarchical relationship for 8 months. The purpose of the programme is to facilitate the professional and personal development of the mentees through the exchange of reciprocal experiences between the mentor/mentee pair. 83

85 Report on Operations Human resources As usual, all colleagues were involved in the assessment process through the Dialogo tool, which contributes to analysing, assessing and developing professional services and skills. In particular, the focus during that assessment was concentrated on the quality of the feedback to give/receive between the supervisor and worker relating to strengths and areas for improvement detected, as well as on the individual development plan agreed by both parties, for the purpose of closing the gaps found. In its annual edition Dialogo involved almost 100% of the population in the assessment, assignment of objectives and sharing between Managers and collaborators of the Development Plan. Lastly, BNL and BNP Paribas encourage the development of transversal skills, also through mobility between different geographical areas and business areas, in order to offer all employees the opportunity to increase their work experience and employability over time. In 2017: the daily management of development expectations by managers and HR resulted in the realisation of mobility for over 3,100 people, of which 2,700 within the same Division/Department to different positions/cities and over 400 transversal moves to different company organisational units; numerous events called Mobility Days were organised, in correlation with those of the BNP Paribas Group in more than 30 different countries, which involved over 300 people in group and individual meetings as well as a significant number of interactions through social channels. Training Around 60,000 training days were held in % concerned BNL and 10% BPI. In % of colleagues participated in at least one training session. Net of mandatory regulatory training, 86% of colleagues participated in one or more programmes to increase their skills, with an average investment per person trained of 4.5 training days over the year. 49% of training days provided during 2017 concentrated on technical-specialistic subjects, 34% on mandatory regulations, 14% on increasing behavioural-management soft skills and 4% on improving language skills. In 2017, the trend under way of changing the methods for using training content was confirmed, increasingly diversified and organised in courses involving various methods didactically designed and, as a result, united with greater use of synchronous virtual classrooms. In terms of training days held in 2017, 37% were provided in physical classrooms, 56% through e-learning, 6% through On-the-Job Training and 1% through synchronous virtual classrooms. The colleagues are actually changing their methods of using training, in line with habits of consumption on other fronts, as indicated by statistical data that testify to the sudden growth in the dissemination of internet use and average daily connection times: 67% of colleagues participated in physical classroom training, 100% made use of e-learning course, 5% of On-the-Job Training and 17% of synchronous virtual classrooms. On this latter point, we believe that the substantial doubling, as compared to the previous year, of the number of people trained through this method is highly significant. This demonstrates the dissemination of this new channel for providing training content which, in order to be effective, must provide training sessions with a short duration (thus, with a relatively low impact on the amount of hours provided) but eliminates commuting time, in compliance with the company policy of environmental sustainability and reducing impacts of physical mobility of the participants. The main actions, excluding the mandatory regulatory training, concentrated on the new aspects that the business is taking on in line with the challenges inherent in the Business Plan, which includes a significant investment in digitalisation, new service models and customer journeys for our customers, the dissemination of the NPS (Net Promoter Score) system as well as the need to change our way of working by implementing flexibility, agility and cooperation. All the 84

86 Report on Operations Human resources investments in training aimed to support colleagues in working better and increasing their skills in order to handle the numerous changes that these new issues have brought to the forefront: over 200 colleagues received certification of skills relating to the process for access to primary positions in the Commercial and Private Banking Division, with a specific training investment prior to taking on the new role, to ensure more readiness and awareness about the contents and skills to use; 1,800 people participated in Smart Meetings, to support the move to the new offices in Tiburtina which involved the adoption of new methods of working in terms of spaces, digital instruments (laptops, remote cooperation and sharing instruments), Flexible Working (working from home) and enhancing effective behavioural skills to adopt to work in this new way, favouring cooperation and sharing; 2,800 people availed of the various courses on new protection products with various sessions to ensure that they know about and are able to effectively offer those products in line with awareness of the customers needs and with a complete understanding of the product; over 4,500 people participated in the modules on the new KYC policy and the related procedure (first contact and the specific questionnaire); 1,200 people participated in the course on the new tool related to the Advances on Invoices procedure; 1,200 people participated in the course on the issues of Forbearance and Forborne Loans; 870 people participated in the management and behavioural training programme to support the correct implementation of the Flexible Working project, aimed at reaching a better balance between private and professional life, and greater accountability for all the workers involved, and saving energy in relation to the decrease in physical mobility, also due to the dissemination of tools for remote working and methods of communication/interaction with the rest of the team and other colleagues; 7,000 people participated in the training module regarding MiFID 2; over 1,400 people have already received classroom training on the main changes introduced by these regulations; 800 people participated in the classroom training module on Bancassurance products; 600 managers participated in the "ConVision - One Bank" change management project, aimed at increasing awareness of the challenges inherent in the business plan, increasing the capacity of engagement of one s team members and supporting workers with full accountability to fully contribute to those new challenges; 450 Branch Managers participated in in-depth technical sessions relating to the Farò managerial process launched in 2016, for the purpose of increasing the technical and managerial skills of that position, useful to support the ongoing transformation; 360 colleagues participated in training courses on the WCB (World Class Manufacturing) methodology for the purpose of lowering waste and improving the quality of services provided; 270 colleagues participated in the workshops on the digital strategy of the Corporate Banking Division, as part of the ambitious plan to digitalise the main tools and services for Corporate customers to position the Bank as a recognised, excellent market player; 300 Corporate Network colleagues participated in the Change Management programme of the Corporate Banking Division for the purpose of engaging all the Division s people in implementing new behaviour to generate expected results, in line with the vision of becoming the in Bank that is the most recommended by workers and customers; 85

87 Report on Operations Human resources 290 Personal Advisors, equal to around 40% of people in this position, participated in the Vendere Valore sessions, aimed at increasing the ability to provide advisory services of excellent quality on financial products and instruments; 370 colleagues of various Departments participated in the Employee Advocacy course, to disseminate awareness of the Advocacy project, the NPS system and the most innovative products/services of BNL with an experience-based, practical approach of directly adopting those instruments in order to know how to promote them to other acquaintances; 210 Business/Prospect Relationship Managers participated in training on contacting prospective customers and strategic advisory services, equal to 100% of the colleagues in this position; 140 colleagues participated in the training module on the corporate credit process; 140 Private Bankers participated in the module for WMU - Wealth Management Advisory certification; 120 colleagues participated in the course on the Judgmental Rating model; 120 colleagues participated in the module on structured finance; 120 colleagues participated in the course on the new Corporate Commercial Dashboard; 120 people participated in the change management course on the new format branches in Asia and Europe, equal to 98% of the target people; 100 colleagues participated in the course on agrarian credit; Around 120 colleagues in the Workout Department and the Special Loans Department began the managerial course on Accountability; 50 colleagues in Operations Commercial Assistance participated in the course to strengthen their relationship and phone skills; 44 colleagues in the Operations Department participated in the Lean Academy for the purpose of acquiring Black Belt certification; Lastly, several innovative training and development products aimed at strengthening a new leadership model, for the purpose of effectively managing digitalisation, the flexibility of work places that go beyond the confines of the office, unconscious prejudice towards diversity in gender, age, sexual orientation, culture and the differently abled, being a responsible leader in terms of social and environmental impact, as described in greater detail in the above sections. 86

88 Report on Operations Human resources Industrial Relations 40 agreements with Trade Union Organisations were signed in 2017: - 21 agreements regarding companies in the BNL Group (4 Artigiancassa; 3 BNL Finance; 2 BNL POSitivity and 1 Business Partner Italia) and Ifitalia (11 agreements); - 8 agreements for BNL; - 11 agreements with other Group companies. As regards industrial relations, 2017 was mainly characterised by the implementation, by way of an Agreement signed in July, of the provisions of the Protocol on social issues and reconciliation of the work/life balance whose base version was entered into in 2016 with the purpose of guaranteeing concrete equal treatment of all workers of BNL and BPI, irrespective of their sexual orientation or gender identity, also involving the application to such workers of additional instruments of reconciliation to be added to those already existing, certain aspects of which were fine-tuned. Specific attention was paid to those who, for varying reasons, require greater assistance and support at specific times of their lives. Subsequently, in November 2017, the expansion of the above provisions to all companies in the BNL Group and Ifitalia was agreed with the Trade Unions: that way, the attention to and joint intention to promote and share initiatives aimed at social solidarity and better reconciliation of the work/life balance and favour all employees of the Group and Ifitalia, with solutions that place us at the cutting edge of the Italian lending sector and in the country, which have no equivalents, in some cases, even in the most advanced companies in this regard (for example, granting new fathers extraordinary paid leave of 10 consecutive days on the birth of a child). In that way the BNL Group has confirmed its intention to take concrete action to create the conditions for an inclusive environment, which guarantees the equal treatment of all workers, irrespective of their sexual orientation or gender identity, promotes and supports differences, provides effective support to workers in particular phases of their lives and reconciles work and personal life. Without prejudice to the above, during the year the policies for personnel of the entire BNL Group and Ifitalia were harmonised, standardising the application methods of several contractual instruments, with the goal of ensuring that the same conditions apply to work within the BNL Group and at Ifitalia. Lastly, also in 2017, the healthcare was defined for employees of the BNL Group for the three-year period through the Health Fund for Personnel of the BNL Group and BNP PARIBAS Italy, without increases in costs. This confirmed the objective of safeguarding the systems of overseeing the values of solidarity: the nuclear family, no lapse in insurance and no discrimination, joined with the best service that can be provided and the quality of insurance coverage. Approaches that have characterised the fund since the trade union agreements in 2007 which gave rise to the BNL Health Fund, characterising its history over the last 10 years. Lastly, as part of the 2020 Plan, 2017 also featured meetings with the trade unions, both at national and local level, to manage the impacts deriving from the implementation of the plans launched as part of the latest reorganisation (scenario ) with the goal of understanding and successfully handling the complex challenges that our Group will have to face in the upcoming years. 87

89 Report on Operations Research and development Research and development During 2017 numerous initiatives were organised concerning investments, technological development and internal skill enhancement, with a view to innovative customer services, improved efficiency in company processes and their convergence toward the Group's assets and standards. With the objective of innovating the services offered to customers and the digital platforms, the following actions were carried out in 2017: The introduction of the new Mobile Token also for BNL customers, guaranteeing an increasingly improved customer experience and the concurrent availability of mobile systems and systems for iwatches and Android Watches; The upgrading of the Trading on Line platform to operate on the main foreign markets; The introduction - on the BNLPay and HelloPay apps - of NFC payment services, virtual cards and additional functionalities so users can manage their payment instruments by themselves (change the card credit limit, re-issue PIN, change address for shipping the card); The release of new Dynamic channel functions on the web and apps, which guarantee the option of replying to customers through the best communications channel ( , chat, ) based on the product/service and the availability of the contact centre; Integration of real-time marketing engines into the online commercial portals, in order to conduct real time dedicated campaigns with customers; The creation of a service of conversion of withdrawals from international cards directly using the ATM network of BNL (Dynamic Currency Change service); The start of work on a new commercial portal for companies, to increase digital management of relationships and use of services; The release of the app CREDITBIZ, for the real-time assessment of the feasibility of access to credit and its granting, dedicated to prospects on the Small Business market; The launch of the creation of MygiordHome, a service provided through a new web platform and App dedicated to digital customers and integrated with the bank s systems, which will enable the sale and management of mortgages, setting up the interaction between users involved. Improving the efficiency of processes continued: the assessment and granting of loans to customers through the Artigiancassa channel, through the release of the ARTIK application, which, through an entirely digital process, reduces the timescales for disbursement of the loan and increases the perceived quality; by developing various functionalities relating to biometric signature, including managing revocation and renewal, to avoid customers and managers from having to once again collect the signature; revision of the process of management and archiving of hard copies of documents, by implementing tools (scanners, OCR) to digitalise all the hardy copy documentation signed or acquired from the Customer to enable the archiving and search of all digitalised documentation. In a view to reducing risks and enabling synergies, the activities aimed at increasing the quality of the financial and risk reporting information at Group level (BNL and BNPP) continued. At regulatory level, the activities continue to obtain compliance with the regulatory provisions in force: 88

90 Report on Operations Research and development MIFID2: The IT system was upgraded to fulfil the regulatory obligations set out by the MiFID 2 Directive; Know Your Customer: an action plan is under way to align the tools and processes already used to the new Know Your Customer rules set out by BNPP; FATCA and Automatic Exchange of Information: the activities to strengthen the model for acquiring and exchanging the tax-related information of non-resident customers continued The activities to strengthen the Banking Transparency controls and management processes are continuing, based on the indications from the Bank of Italy. In order to improve efficiency and reduce IT costs, the following objectives were achieved: The launch of a programme, still under way, for the purpose of standardising the methods of providing to the Legal Entities the HR administration service, converging towards the unified SAP platform; The automation of several manual processes between Development and Operations (DevOps); To ensure the achievement of the targets of the Business Plan, the Digital IT programme is under way, which involves the upgrading of the IT system and the development and dissemination of the Agile working method. The programme is speeding up capacity of IT delivery, improving time to market and reducing operational complexity. Findomestic, a company in the BNPP Group, launched an initiative to develop its own digital bank for the Individuals market, which will leverage the Core Banking services provided by BNL. With regard to technological innovations, experiments and implementations were carried out, such as: Implementation of the API management platform to offer BNL services to group companies and partners; POC (proof of concept) for the use of innovative technologies, such as ultrasound, to send commercial and other notifications to BNL customers on the mobile app; Initial implementations, in synergy with Group infrastructures, of the first Big Data use cases; Continuation of the IT Transform programme to enable multi-channel operations and technological innovations at branches in order to simplify the operating and management processes. During 2017 the initiatives to improve the quality of services and facilitate smart working through flexibility and the new methods of using space continued: laptops, smartphones, digital windows, collaboration systems, support technologies of the new Orizzonte Europa and Diamante offices and, naturally, the Asia and Europe branches. Important initiatives for the optimisation and evolution of infrastructures were also completed and launched, for the purpose of reducing costs and risk: The Data Centre in Rome was moved to the premises in Via Aldobrandeschi, which resulted in the reduction of the use of space from 3,000 m2 to 400 m2; The introduction of Open Cloud Infrastructure continued, covering around 28% of installed data. The programme for upgrading obsolete operating systems and middleware (Conformity phase II and Conformity 1 bis) is concluding. 89

91 Report on Operations BNL Group social and environmental responsibility BNL Group social and environmental responsibility 2017 was a year marked by the strengthened commitment of institutions, companies and people to fulfil the commitments of the UN 2030 Agenda for Sustainable Development. The environmental and social changes under way have encouraged collective efforts to support energy transition, decarbonise the economy and favour financial inclusion. BNL has made significant progress in the area of Corporate Social Responsibility (CSR), ensuring an even more central role for sustainability in relation to the Bank s core business and strategies, replying to the petitions of the various stakeholders and guaranteeing full adoption of the model of the BNP Paribas Group. Sustainability integrated into the core business entails the Bank making sustainable choices about what to finance and where to invest, strongly influencing the system and encouraging virtuous conduct. The vision of BNL and the BNP Paribas Group is aimed at supporting responsible, sustainable growth and having a positive impact on society as a whole. CSR is part of the 2020 Strategic Plan, comprising 3 main strategies: Company culture based on responsibility and ethics Positive impact on society through inclusive, solidarity loans and actions Acting as a leading player in the decarbonisation of the economy The CSR strategy of the BNP Paribas Group and BNL evolved based on the 17 UN Sustainability Development Goals (SDGs), which indicate the course that governments, local authorities, businesses and individuals must follow together and urgently to end poverty, combat inequality and ensure social and economic development. By offering loans to all business sectors, the Bank has the privilege to contribute to all the SDGs, through many initiatives. BNL was awarded the Sustainable Development Grand Prize from Assosef as the Financial Institution that is contributing to achieving the Sustainable Development Goals in Italy. BNL adopts a sustainability governance model based on 4 areas of commitment - economic, as employer, towards the community and environmental and 13 concrete, measurable goals which have a weight of 20% on the assignment of deferred variable remuneration of 6,300 key managers. For BNL, economic responsibility means financing the economy in an ethical manner, fulfilling the primary role of a Bank in managing customers loans and investments by generating a positive impact on society and systematically integrating the analyses of environmental and social risks. BNL has adopted strict sector policies, imposing rules that voluntarily limit investments in sensitive sectors (defence and arms, nuclear energy, palm oil and wood pulp, electricity from coal, mining operations, agriculture and oil sands, tobacco and unconventional fossil fuels). Throughout the world we refuse to finance new power plants fuelled by coal or unconventional fossil fuels which are more harmful to the environment and to Arctic exploration, and support only those companies that demonstrate virtuous environmental and social conduct in sensitive sectors such as agriculture and real estate. Moreover, in 2017 BNL and the Group stopped financing and investments in relation to tobacco companies. In 2017, around 155 transactions were assessed in Italy in terms of environmental, social and governance risks, and 12 of these were rejected. BNL promotes its offer of SRI investments (Socially Responsible Investments), i.e. investments which, along with performance, aim to generate social or environmental value, also excluding from its selection companies and/or sectors with low performance and actively exercising its right to vote to encourage responsible company conduct. In December 2017 Retail and Private deposits of BNL amounted to 1,501 million euro. 90

92 Report on Operations BNL Group social and environmental responsibility In May 2017 the BNL Group/BNP Paribas Italy Staff Pension Fund moved to an active, ex ante approach in identifying the range of companies which, as they comply with the ESG (Environmental, Social and Governance) criteria, can be invested in by the Fund. The BNL Group/BNP Paribas Italy Staff Pension Fund, already an investor with 1 million euro in the Oltre II Fund of Oltre Venture, contributed 160,000 euro in 2017, concretely invested in the ecosystem of companies with high social impacts. The Bank supports new types of social businesses in order to support inclusion and the creation of new jobs. The experience of BNL and BNP Paribas demonstrates that Social Business has an important role to play for a sustainable future, enabling integration and improved distribution of value. Social enterprises are among the first players in giving employment to the disadvantaged or persons excluded from the world of work, whose social mission prevails over their economic goal. To finance the roughly 110 social enterprises that are customers of BNL, for a total of around 94 million euro, dedicated service models have been developed, with trained personnel and dedicated credit policies. In order to contribute to developing the ecosystem of investments with social impact in Italy, we confirmed our participation in the Social Impact Agenda, an association promoted by the Human Foundation to continue the works of the Social Impact Investment Taskforce, set up during the UK Presidency of the G7. Moreover, for the third consecutive year BNL offered two grants to fully cover the enrolment fee for the Executive Master s in Social Entrepreneurship dedicated to social enterprises, provided by Altis of Università Cattolica del Sacro Cuore. BNL is also a partner in the Master Finanza: Strumenti, Mercati e Sostenibilità (Master s in Finance: Instruments, Markets and Sustainability), providing its experts to give in-class lectures and accepting a student at its offices for a curricular internship. In 2017, BNL strengthened its work with San Patrignano, a residential rehabilitation community for re-entry into society and work of people with problems of addition and marginalisation. In 2017, as part of the training programme of BNP Paribas the Social Enterprise HACKATHON was held at San Patrignano, to stimulate among young talents the awareness of sustainable leadership. With reference to the adhesion to the Italian Code for Responsible Payments (CPR) launched by Assolombarda, together with which BNL, as one of the first subscribers, has become committed to respecting the payment terms agreed with suppliers and spreading efficient and punctual payment terms with the corporate and system objective of improving its reputation in national and international markets and enhancing competitiveness. Average payment terms for BNL s suppliers equal 62 days (65 days in the previous year). Responsibility as employer means developing and empowering people responsibly through three concrete commitments: being a company that promotes diversity and inclusion, creating a favourable work environment, and being a company oriented towards continuous learning, with diversified career opportunities. In 2017, BNL s commitment focused on the issues of work/life balance and promoting diversity. Around 2,000 people availed of flexible working, i.e. the option to work from home one day a week. Paid leave on the birth of a child was extended to 10 days and the treatment for common-law couples and civil unions was completely standardised. In March 2017, BNL joined Parks Liberi e uguali, the association of employers committed to promoting the culture of diversity and inclusion. In May 2017, the BNP Paribas Pride Italia network was set up, dedicated to supporting the LGBT community in the company. Based on the agreement signed with the trade union organisations, for women who have entered programmes for protection against violence against women are provided with 4 months paid leave and priority re-assignment. Moreover, during the year, numerous laboratories and events were held, such as Diversity & Inclusion Week, with over 27 events organised throughout the 91

93 Report on Operations BNL Group social and environmental responsibility country, 900 participants and 6,000 accesses to the company intranet, 300,000 views on social channels, and the International Day for the Elimination of Violence against Women, to increase employees awareness and knowledge of the instruments that the Bank makes available. For more details and other initiatives dedicated to employees, see the chapter Human resources. Responsibility to communities means being a positive agent of change within the community where the Bank operates. This means increasing access to credit, combating social exclusion and promoting human rights, in addition to continuing with the philanthropic commitment to solidarity, the environment and art. Financial inclusion is the microcredit mission, which disburses credit to people and companies with a slight possibility of accessing traditional credit, with a maximum focus on the project and business abilities. BNL is a business partner of PerMicro, a national leader in the microcredit sector, disbursing a total of million euro, of which 25.4 million euro in 2017 in the form of 3,125 loans. The partnership with Telethon Foundation has reached its 26th year and is a fundamental part of BNL s business culture and company values. This year the Bank donated over 10 million euro, exceeding a total of 290 million euro raised, contributing to finance 2,629 projects and the study of over 571 rare genetic diseases. A result achieved due to the commitment of BNL employees and the entire BNP Paribas Group in Italy, customers, prospects, partner companies, in a marathon that lasts the entire year. BNL is also involved in supporting the community also by sponsoring cultural and social activities, in addition to assisting individuals in their projects for their lives. One example is the partnership with the MAXXI Foundation to develop educational activities of the MAXXI Museum in Rome, the Invito a Palazzo initiative of the Italian Banking Association to promote the Bank s art assets and the free financial education courses Educare, open to everyone, on key issues of financial education, for the purpose of increasing individuals awareness of their financial choices. In 2017, 69 seminars were held, involving 4,094 people. These specifically included the EduCare Tour Campus format, dedicated to students at the leading Italian universities, which involved over 1,000 participants in 2017, covering the current macroeconomic scenarios and issues such as Open Innovation, digitalisation and Industrialisation 4.0. Since 2006 the BNL Foundation has approved and supported grants of over 12 million euro in favour of more than 650 projects promoted by various volunteer associations and non-profit organisations. In 2017, in particular, as part of the BNP Paribas international project Support to Refugees, launched in 2016 to support humanitarian organisations that offer assistants to asylum seekers and refugees, BNP Paribas and the BNL Foundation financed the renovation of the canteen at the premises of the Associazione Centro Astalli, which has worked in providing shelters for over 30 years. Following the earthquake that hit Central Italy in August 2016, BNL launched fundraising that resulted in around 10,000 donations, equal to 529,000 euro to be allocated to the Italian Red Cross. In 2017, BNL approved the allocation of funds raised to build the structure to house the elderly, Casa Amica Camerino. The BNP Paribas Group also launched fundraising from employees and customers throughout the world through the Rescue & Recovery Fund, allocating 184,000 euro Red Cross first aid projects. BNL is also involved in the Work/Study project, making available to schools its Job Masters, i.e. specialised employees who are available to customers each day, both for economicfinancial training at the schools and at their offices. The project involves 18 schools, including economic technical institutes, scientific and language high schools in Turin, Verona, Milan, Florence, Rome and Bari, according to selection criteria identified by Consorzio Elis, which has operated work- 92

94 Report on Operations BNL Group social and environmental responsibility study programmes for years for a total of 120 hours allocated to 54 young people hosted at BNL s offices for 4 weeks. Environmental responsibility means acting against climate change and assisting customers with an energy transition through investment and financing policies. In line with the Group goals of doubling the financing of renewable energy between 2015 and 2020, in 2017 BNL authorised loans of 370 million euro, an increase of 27% on the previous year. In terms of direct impacts, the global Carbon 2020 programme also envisages a set of concrete actions in Italy aimed at reducing CO2 emissions by 25% by 2020 (based on 2012), consumption of paper by 30% and using at least 80% of paper from sustainable sources. Moreover, we set important targets for reducing waste and maximising recycling. In 2017, BNL decreased per capita emissions of CO 2 by 1%; work trips by 5%, replacing them with webconferences, with an increase of 3% in train travel and a reduction of 23% in travel by plane. At BNL, we purchase 100% of energy from renewable sources. To achieve the reduction in paper consumption of 30% we will aim to optimise and decrease printing processes, dematerialise transactions with customers and ensure digital archiving. We will also increasingly use paper from sustainable sources. In 2017 over 90% of the paper used came from sustainable sources and paper consumption per employee decreased by 5%. In 2017 the move to the new headquarters of the BNL Group in Rome, Orizzonte EUROPA contributed to reducing environmental impacts. The building was constructed in accordance with the most modern structural and architectonic criteria, with an extensive focus on energy efficiency, with systems that have low water and electricity consumption and modular natural light. At the Orizzonte EUROPA building, a photovoltaic field is capable of generating around 50% of the energy needs for the building s air conditioning, and a tank to collect rainwater supplies 50% of the requirements for the sanitary systems and contributes to irrigating the green areas. In 2017, the headquarters obtained LEED GOLD certification both for its Core & Shell and for its Interior Design issued by the Green Building Certification Institute, the US body for green building as it promoted an approach focused on sustainability through energy and water savings, reducing CO 2 emissions, improving the ecological characteristics of the interiors, and using specific materials and resources. The Orizzonte EUROPA building was also awarded the Smart Building 2017 prize. Moreover, in 2017 BNL promoted internal policies to reduce, reuse and recycle supplies at its offices, with a view to developing a circular economy. To reuse company furniture and goods that are no longer needed following the move to the new headquarters, in partnership with Legambiente, BNL transferred 20,000 m2 of furniture (for a volume equal to that of four football pitches) to over 100 associations, schools and non-profit entities, based on proposals from workers. BNL transferred IT assets to a social enterprisevesti Solidale, which deals in desktops, monitors and printers, for their reuse, giving work to the disadvantaged and generating economic resources to be allocated to social projects. Thanks to its partnership with Elior, manager of the company catering at Orizzonte EUROPA, 25 surplus meals are recovered per day to be donated to a church near the Bank s headquarters, thereby contributing to combating waste. * * * 93

95 Report on Operations BNL Group social and environmental responsibility Following the entry into force of Legislative Decree 254/16, which endorsed into Italian law Directive EU 2014/95 on non-financial information, starting from 2017, public-interest entities that exceed certain size thresholds are required to draw up and publish the non-financial statement on and individual or consolidated basis, adopting a recognised reporting standard or an autonomous reporting methodology. According to that set out in art. 3, paragraph 10 of the Decree, that statement must be certified by an entity authorised to conduct statutory auditing. The non-financial statement may: a) be contained in a specific section of the Directors' report; b) constitute a separate report and, once approved by the management body, the separate report shall be made available to the Board of Statutory Auditors and the Independent Auditors by the same deadlines set out for presenting the draft financial statements, and shall be published in the register of companies, by the directors, along with the directors report. The consolidated non-financial statement of the BNL Group for 2017, drawn up pursuant to Legislative Decree 254/16, constitutes a separate report ( 2017 Sustainability Report of the BNL Group ) from this Directors' report, as envisaged in art. 5, paragraph 3, letter b) of Legislative Decree 254/16, and is available on the website in the Responsabilità sociale (Social Responsibility) section at the url 94

96 Report on Operations Other information Other information Relations with the Parent Company BNP Paribas For information on equity, economic and financial relations with the Parent Company and sole shareholder BNP Paribas SA, please see Part H of the Explanatory Notes - Related Party Transactions, and the chapter "Parent Company relations with subsidiaries, associated companies, the Holding Company and with subsidiaries of the latter and resolutions as per art ter of the Italian Civil Code" in the Directors' Report. 95

97 Report on Operations BNL SpA - Proposal for 2017 profit allocation Proposal for 2017 profit allocation The Board of Directors of Banca Nazionale del Lavoro S.p.A., having heard the report filed and acknowledging that the income statement of the Bank closes with a profit for the year of 121,210,054 euro resolves to submit the allocation below to the approval of the Shareholders Meeting called on 27 April 2018: Profit for the year euro Proposal for allocation to: - 5% legal reserve euro - other reserves euro euro Once the transactions referred to above are completed, the shareholders equity of BNL SpA at 31 December 2017 shall come to 5,695 million euro (5,527 million euro at 31 December 2016). 96

98 Report on Operations Reconciliation table between the reclassified consolidated and the official income statements Reconciliation table between the reclassified consolidated and the official income statements (millions of euro) Reclassified financial statement items Type of Processing (*) Official financial statement items booked Amounts (**) 2017 Amounts (**) Net interest income A 10. Interest income and similar rev enue A 20. Interest ex pense and similar charges (47) (247) A 100. Profit (loss) from sale or purchase of: d) financial liabilities (3) C 130 Net adjustments/w rite-backs due to deterioration in: a) loans (transfer of reserv e interest from discounting) C 100. Profit (loss) from sale or purchase of: a) loans 190. Net prov isions for risks and contingencies (allow ance for compound interest) (3) 7 1. Net interest income Net commissions A 40. Commission income A 50. Commission expenses (116) (102) 190. Net prov isions for risks and contingencies (14) (21) Net result of financial instruments measured at fair v alue A 80. Net trading profit (loss) A 90. Net result of hedging activ ity (3) (4) A 110. Net result of financial assets v alued at fair v alue 7 9 C 190. Net prov isions for risks and contingencies Net result of financial assets av ailable for sale A 100. Profit (loss) from sale or purchase of: b) financial assets av ailable for sale (1) 55 C 240. Profit from equity inv estments 1 C 100. Profit (loss) from sale or purchase of: a) credit C 130. Net adjustments/w rite-backs due to deteriorations in: b) financial assets available for sale ( excluding securities from restructured loans) (1) (8) C 70. Div idends and similar income (minority interest div idends and income from shares of UCITs) C item 190. net prov isions for risks and charges of official format (net prov isions for risks and charges relating to investments) 5. Income / charges from other banking activ ities C 220. Other operating charges / income (operating income related to banking activ ities) C 220. Other operating charges / income (operating charges related to banking activ ities) C 100. Profit (loss) from sale or purchase of: a) loans C 200. Net v alue adjustments/w rite-backs on tangible assets (depreciation of properties leased to third parties) (2) (1) (2) (2) C C 190. Net prov isions for risks and contingencies (operating charges related to banking activities) 240. Profit (loss) equity inv estment 9 3 A 270. Profit (loss) of disposal of inv estments depreciation of operating lease assets Net banking income Operating expenses 7a personnel costs A 180. Administrative expenses: a) personnel expenses (954) (1.020) C 190. Net prov isions for risks and contingencies (prov ision for risks and (7) (5) contingencies related to personnel) (961) (1.025) 97

99 Report on Operations Reconciliation table between the reclassified consolidated and the official income statements Type of Amounts (**) Amounts (**) Reclassified financial statement items Processing Official financial statement items booked (*) 7b - other administrative expenses A 180. Administrative expenses: b) other administrative expenses (617) (660) C 190. Net prov isions for risks and contingencies (prov ision for risks and (2) (5) contingencies related to administrative expenses) C 220. Other operating charges / income (operating lease fees) (4) (4) C 220. Other operating charges / income (others)) (595) (645) 7c Depreciation and amortisation of tangible and intangible assets B 200. Net v alue adjustments/w rite-backs on tangible assets (58) (62) - depreciation of properties leased to third parties 1 2 A 210. Net v alue adjustments/w rite-backs on intangible assets (37) (38) C 220. Other operating charges / income (amortisation of improv ements to third party assets) (21) (12) (115) (110) 8. Gross operating result Cost of risk B 130 Net v alue adjustments/w rite-backs due to deterioration in: a) loans (539) (611) - transfer of reserv e interest from discounting (167) (180) C 100. Profit (loss) from sale or purchase of: a) loans 24 (3) C 130. Net adjustments/w rite-backs due to deteriorations in: b) financial assets (98) 3 available for sale (securities from restructured loans) C 190. Prov ision for risks and contingencies (prov ision for risks and contingencies relating to rev ocations, law suits and other risks relating to credit activ ity ) (16) (6) C A 220. Other operating charges / income (losses relating to law suits and other risks relating to credit activ ity ) 130 Net adjustments/w rite-backs due to deterioration in: d) other transactions (provisions for guarantees and commitments) (16) (15) (13) 5 (825) (807) 10. Net operating result Net profit from equity inv estments and other non current assets C 240. Profit from equity inv estments C 280. Profit (loss) of disposal of inv estments Profit (Loss) before tax Income tax es A 300. Income tax on current operations for the period (81) (49) 12. Profit (Loss) for the year Profit (Loss) for the y ear pertaining to minority interests A 330. Profit for the y ear pertaining to minority interests 14. Profit (Loss) for the year pertaining to the Parent Company (*) Type of Processing: A The entire item relates to the official financial statements; B The entire item relates to the official financial statements except for the portions preceded by the sign - ; C Only the portion of the item highlighted between parentheses relates. (**) The amounts are marked with the signs of the official financial statements ( + : revenues; - : costs). 98

100 CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER

101 Consolidated Financial Statements 2017 CONSOLIDATED FINANCIAL STATEMENTS Consolidated financial statements: Consolidated balance sheet Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements: Part A Accounting policies Part B - Information on the consolidated balance sheet Part C Information on the consolidated income statement Part D Comprehensive Income Part E - Information on risks and hedging policies Part F - Information on consolidated equity Part G Business combinations Part H - Related party transactions Part I Payment agreements based on equity instruments Part L - Segment reporting Independent Auditors' Report

102 Consolidated Financial Statements 2017 CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheet ASSETS 31/12/ /12/ Cash and cash equivalents Financial assets held for trading Available for sale financial assets Loans and receivables to banks Loans and receivables to customers Hedging derivatives Change in fair value of portfolio hedged items (+/-) Equity investments Property, plant and equipment Intangible assets Tax assets a) current b) deferred of which pursuant to Law No. 214/ Non current assets and disposal groups held for sale Other assets Total assets

103 Consolidated Financial Statements 2017 LIABILITIES AND SHAREHOLDERS' EQUITY 31/12/ /12/ Deposits from banks Deposits from customers Debt securities issued Financial liabilities held for trading Financial liabilities at fair value through profit or loss Hedging derivatives Change in fair value of portfolio hedged items (+/-) Tax liabilities a) current b) deferred Other liabilities Post employ ment benefits Provisions for risks and charges a) pension and similar obligations b) other provisions Valuation reserves (33.796) 170 Reserv es Share premium Share capital Non-controlling interests(+/-) Profit (loss) for the year (+/-) Total liabilities and shareholders' equity

104 Consolidated Financial Statements 2017 Consolidated income statement Interest income and similar income Interst and similar expenses (46.631) ( ) 30 Net interest income Fee and commission income Fee and commission expenses ( ) ( ) 60 Net fee and commission income Dividends and similar income N et result form trading N et result from hedging (2.696) (4.077) 100 Income/(loss) from disposal or repurchase of: a) loans and receivable (2.957) b) available for sale financial assets (1.545) d) financial liabilities - (2.849) 110 Net result on financial assets/liabilities at fair value through profit or loss Operating income N et impairment losses on: ( ) ( ) a) loans and receivable ( ) ( ) b) available for sale financial assets (98.607) (5.321) d) other financial transactions (13.309) Net financial income Administrative expenses: ( ) ( ) a) personnel expenses ( ) ( ) b) other administrative expenses ( ) ( ) 190 Net provisions for risks and charges (33.358) (27.535) 200 Net impairment losses on property, plant and equipment (58.898) (59.633) 210 Net impairment losses on intangible assets (37.075) (37.592) 220 Other net operating income/(expense) (6.613) Operating expenses ( ) ( ) 240 Profit/losses on investments 550 (302) 270 Gains/losses on sale of investments Pre-tax profit (loss) from continuing operations Taxes on income for the year from continuing operations (81.404) (49.669) 300 Post-tax profit (loss) from continuing operations Profit (loss) of discontinued operations, net of tax es Profit (loss) for the year (Profit) loss attributable to non-controlling interests Profit (loss) for the year attributable to the Parent

105 Consolidated Financial Statements 2017 Consolidated statement of comprehensive income (euro) Item Profit (loss) for the year Other income components net of taxes without reversal to income statement 20. Property, plant and equipment Intangible assets Defined benefits plans (2.805) (8.300) 50. Non-current assets of dismission Share of reserves from evaluation of investment securities valued at equity - - Other income components net of taxes with reversal to income statement 70. Hedging of forex investment Exchange differences Cash flow hedging (14.183) (10.562) 100. Financial activities available for sale ( ) 110. Non-current assets of dismission Share of reserves from evaluation of investment securities valued at equity Total other income components net of taxes ( ) 140. Comprehensive Income (Voce ) (25.576) 150. Consolidated comprehensive income pertaining to minority interests (86) Consolidated comprehensive income pertaining to the Parent Company (25.640) 104

106 Consolidated Financial Statements 2017 Consolidated statement of changes in equity 2017 Change in Balance as at opening balance Allocation of profit from Changes during the period Shareholders previous years Transactions on shareholders' equity ' equity Shareholders Minority Balance as at C omprehensiv pertaining to C hanges in Purchase of Ex traordinary C hanges in Deriv ativ es C hanges in ' Equity as at interests as at Div idends and Issue of new e income for the Parent Reserv es reserv es treasury distribution of capital on treasury Stock options partecipation other uses shares the year 2017 Company as shares div idends instruments shares interests at Share capital: a) ordinary shares b) other shares Share premium Reserves: (173) a) income reserv es b) other reserves (173) Valuation reserves: (33.847) - (33.847) (148) Capital instruments Treasury shares Profit (loss) for the period ( ) Shareholders' equity (173) Shareholders' equity pertaining to the Parent Company (173) Minority interests (86) Consolidated statement of changes in equity 2016 Allocation of profit from Changes during the period Shareholders previous years Transactions on shareholders' equity ' equity Change in Shareholders Minority Balance as at Balance as at C omprehensiv pertaining to opening C hanges in Purchase of Ex traordinary C hanges in Deriv ativ es C hanges in ' Equity as at interests as at Div idends and Issue of new e income for the Parent balance Reserv es reserv es treasury distribution of capital on treasury Stock options partecipation other uses shares the year 2016 Company as shares div idends instruments shares interests at Share capital: (2.324) a) ordinary shares (2.324) b) other shares Share premium Reserves: (151) (10.900) a) income reserv es (151) (10.891) b) other reserves (9) Valuation reserves: ( ) (33.847) (33.796) (51) Capital instruments Treasury shares Profit (loss) for the period (17.616) Shareholders' equity (151) (13.224) (25.576) Shareholders' equity pertaining to the Parent Company (9.116) (25.640) Minority interests (151) (4.108)

107 Consolidated Financial Statements 2017 Consolidated statement of cash flows Indirect method A OPERATING ACTIVITIES 31/12/ /12/ Management profit (loss) for the year (+/-) gains/losses on financial assets held for trading and on financial assets/liabilities measured at fair v alue (+/-) (25.711) gains/losses on hedging (+/-) net value adjustments for impairment (+/-) net value adjustments to tangible and intangible assets (+/-) net allowances for risks and contingencies and other costs/revenues (+/-) net premiums not collected (-) other insurance income/charges not collected (+/-) taxes and duties not settled (+) net value adjustments to discontinued operations net of taxes (+/-) other adjustments (+/-) (20.936) 2.Cash flow generated/absorbed by financial assets ( ) ( ) - financial assets held for trading financial assets measured at fair value financial assets available for sale ( ) - loans to customers ( ) ( ) - loans to banks - repayable on demand ( ) loans to banks - other loans ( ) ( ) - other assets Cash flow generated/absorbed by financial liabilities ( ) deposits from banks - repayable on demand deposits from banks - other payables ( ) - deposits from customers outstanding securities ( ) ( ) - financial trading liabilities ( ) (98.541) - financial liabilities measured at fair value ( ) ( ) - other liabilities ( ) ( ) Cash flow generated/absorbed by operating activities B. INVESTING ACTIVITIES 1.Cash flow generated by: sale of inv estments dividends collected on investments sale of financial assets held to maturity sale of tangible assets sale of intangible assets 6 (2.137) - sale of subsidiaries and businesses Cash flow absorbed by: ( ) ( ) - purchase of inv estments purchase of financial assets held to maturity purchase of tangibles assets ( ) ( ) - purchase of intangible assets (61.322) (47.182) - purchase of subsidiaries and businesses - (13.230) Net cash flow generated/absorbed by investing activities (57.267) ( ) C. FUNDING ACTIVITIES - issue/purchase of treasury shares issue/purchase of capital instruments distribution of dividends and other uses (173) (135) Net cash flow generated/absorbed by funding activities (173) (135) NET CASH FLOW GENERATED/ABSORBED DURING THE YEAR

108 Consolidated Financial Statements 2017 Consolidated statement of cash flows Reconciliation Financial statement items 31/12/ /12/2016 Cash and cash equivalents at the beginning of the year Total net cash flow generated/absorbed during the year Cash and cash equivalents: effect of changes in exchange rates - - Cash and cash equivalents at the end of the year

109 Notes to the consolidated financial statements 108

110 Part A Accounting policies Part A Accounting policies 109

111 Part A Accounting policies A.1 - General information Section 1 Declaration of compliance with International Financial Reporting Standards The financial statements as at 31 December 2017 of the BNL Group are compliant with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and approved by the European Commission, as well as with the provisions implementing in art. 43 of Legislative Decree no. 136/2015. In order to better steer the application and interpretation of international accounting principles reference has also been made to the following sources: - Framework for the Preparation and Presentation of Financial Statements issued by IASB; - Implementation Guidance, Basis for Conclusions and other documents for the interpretation of IAS/IFRS adopted by IASB or IFRSIC (International Financial Reporting Standard Interpretations Committee); - documents prepared by the Italian Accounting Body (OIC) and the Italian Banking Association (ABI); - documents prepared by the Italian Association of Auditors (Assirevi); - the ESMA (European Securities and Markets Authority) and CONSOB documents that reference the application of specific provisions of the IFRSs. Section 2 Basis of preparation The contents of the financial statements The consolidated financial statements as at 31 December 2017 are comprised of: - Consolidated balance sheet; - Consolidated income statement; - Consolidated statement of comprehensive income; - Consolidated statement of changes in equity; - Consolidated statement of cash flow; - Notes to the consolidated financial statements. This is accompanied by the Directors Report on the performance of operations and the Group situation. Pursuant to art. 43 of Legislative Decree no. 136/2015, as regards the systems and rules for their compilation, the consolidated financial statements have been drafted in accordance with Circular 262/2005 as subsequently amended and extended, issued by the Bank of Italy by a ruling on the 22 December In addition, the information referred to in the joint Bank of Italy CONSOB ISVAP documents has been included: - Document no. 2 of 6 February 2009 about "Information to supply in financial reports on business continuity, financial risks, impairment testing and on uncertainties in the use of estimates"; - Document no. 4 of 3 March 2010 about "Information to be provided in financial reports on impairment testing, on the contractual clauses of financial debts, on debt restructuring and on the fair value hierarchy". Finally, consideration was given to CONSOB Communication no /16 of 28 January 2016 regarding the Communication on the most relevant issues in financial reports as at 31 December The consolidated financial statements are drawn up in thousands of euros. Section 3 Scope and methods of consolidation The line-by-line consolidation area includes the banking, financial and business-related subsidiaries forming part of the BNL Banking Group, registered as such pursuant to art. 64 of Legislative Decree 385/1993, and the other subsidiaries that carry on businesses other than those referred to above, and entities or company vehicles in which the Group is exposed to the majority of 110

112 Part A Accounting policies risks and obtains the majority of benefits (SPE/SPV) except for a few minor entities whose asset and financial consolidation is not significant with regard to the consolidated accounts, in accordance with the provisions of the Systematic framework for preparing and presenting Financial Statements under international accounting principles (framework). The following companies are consolidated using the equity method. Financial statements used for consolidation The financial statements taken as a basis of the line-by-line consolidation are those referring to 31 December 2017, as approved by the competent company bodies, and adjusted, when required, to homogeneous Group accounting standards and submitted to auditing by an independent auditor of subsidiaries. Valuation using the equity method was carried out on the latest available financial statements of draft financial statements of the investee companies. 1. Investments in consolidated subsidiaries Below is a list of wholly-owned subsidiary companies consolidated on a line-by-line basis as at 31 December N ame Operating office Registered office Ty pe of relationship (1) Inv estment relation of inv esting bank % of Inv esting company inv estment % of v otes av ailable (2) 1 ARTIGIANCASSA SpA. (*) ROME ROME 1 BANCA NAZIONALE DEL LAVORO SpA 73,86 73,86 2 BNL FINANCE SpA (*) ROME ROME 1 BANCA NAZIONALE DEL LAVORO SpA 100,00 100,00 3 BNL POSITIVITY Srl (*) ROME ROME 1 BANCA NAZIONALE DEL LAVORO SpA 90,00 90,00 BNL FINANCE SpA 10,00 10,00 4 BUSINESS PARTNER ITALIA SCpA (*) ROME ROME 1 BANCA NAZIONALE DEL LAVORO SpA 91,98 91,98 ARTIGIANCASSA SpA 0,16 0,16 BNL POSITIVITY Srl 0,09 0,09 BNL FINANCE SpA 0,09 0,09 SVILUPPO HQ TIBURTINA Srl 0,09 0,09 5 SVILUPPO HQ TIBURTINA Srl (*) ROMA ROMA 1 BANCA NAZIONALE DEL LAVORO SpA 100,00 100,00 6 EMF - IT Srl (**) ROMA ROMA 1 BANCA NAZIONALE DEL LAVORO SpA 100,00 100,00 7 VELA ABS (**) CONEGLIANO CONEGLIANO 4 BANCA NAZIONALE DEL LAVORO SpA VELA CONSUMER (**) CONEGLIANO CONEGLIANO 4 BANCA NAZIONALE DEL LAVORO SpA VELA HOME Srl (**) CONEGLIANO CONEGLIANO 4 BANCA NAZIONALE DEL LAVORO SpA 9,00 9,00 10 VELA MORTGAGE Srl (**) CONEGLIANO CONEGLIANO 4 BANCA NAZIONALE DEL LAVORO SpA VELA OBG Srl (*) (**) CONEGLIANO CONEGLIANO 1 BANCA NAZIONALE DEL LAVORO SpA 70,00 70,00 12 VELA RMBS Srl (**) CONEGLIANO CONEGLIANO 4 BANCA NAZIONALE DEL LAVORO SpA VELA CONSUMER 2 Srl (**) CONEGLIANO CONEGLIANO 4 BANCA NAZIONALE DEL LAVORO SpA - - (1) Ty pe of relationship: 1 majority of voting in ordinary share holders' meeting 2 dominant influence in ordinary shareholders' meeting 3 agreement with other shareholders 4 other types of control 5 sole management under art. 26,paragraph 1 of "Italian Legislative Decree 87/92" 6 sole management under art. 26,paragraph 2 of "Italian Legislative Decree 87/92" (2) voting rights at ordinary shareholders' meeting, distinguishing between actual and potential (*) companies belonging to the "BNL Banking Group" (**) these are vehicles pursuant Law no. 130/99 "securitization of credit" 2. Assessment and significant assumptions to determine the area of consolidation Subsidiaries Subsidiaries are the entities in which the Group has direct or indirect control. The control of an entity derives from the Group s ability to exercise its power in order to influence the variable returns the Group is exposed to consequently to its relationship with it. In order to verify the existence of control, the Group considers the factors below: the purpose and structure of the investee company in order to identify the objectives of the entity, the activities that determine its returns and how these activities are governed; 111

113 Part A Accounting policies the power, in order to understand whether the Group has contractual rights that give it the ability to govern the relevant activities; to this end, only the substantial rights that give practical governance ability are considered; the exposure towards the investee company in order to assess whether the Group has relationships with the investee company whose returns are subject to changes deriving from changes in the performance of the investee company; existence of potential owner agent relationships. If the relevant activities are governed through voting rights, the factors below give evidence of control: more than half of the voting rights of an entity is held directly or indirectly through the subsidiaries, unless, in exceptional cases, it can be clearly demonstrated that these rights do not equate to the control; half or less of the votes that can be exercised in the meeting is held and there is the practical ability to govern unilaterally the relevant activities through: - the control of more than half of the voting rights by virtue of an agreement with other investors; - the power to determine the financial and operating policies of the entity by virtue of a clause or contract; - the power to appoint or remove the majority of the members of the board of directors or the equivalent corporate governance body, and the management of the company is assigned to that board or body; - the power to exercise the majority of the voting rights in the meetings of the board of directors or the equivalent corporate governance body, and the management of the company is assigned to that board or body; The existence and the effect of potential voting rights, where substantial, are taken into consideration when assessing whether the power to govern the financial and management policies of another entity exists. Subsidiaries also include the structured entities (SPV) in which the voting rights are not significant to assess the control. The structured entities are considered subsidiaries if: the Group has the power by means of contractual rights that allow the governance of the relevant activities; the Group is exposed to the variable returns deriving from these activities. The accounting value of the shareholdings in entities consolidated on a line-by-line basis, held by the Parent Company or other Group companies, is eliminated - after acquiring the assets and liabilities of the investee companies - as a contra-entry to the corresponding portion of the shareholders equity pertaining to the Group. The assets and liabilities, the off-balance sheet transactions, the income and charges and the profits and losses between entities included in the area of consolidation are cancelled out entirely. The costs and revenues of a subsidiary are included in the consolidation starting from the date control is acquired. The costs and revenues of a sold subsidiary are included in the consolidated income statement until the date of sale, i.e. until control over the investee company ceases. The difference between the sales price of the subsidiary and the accounting value of its net assets on the same date is recorded in the Income statement under item 270. Gains (Losses) on sale of investments for the companies subject to consolidation on a line-by-line basis. The portion pertaining to third parties is shown in the Balance sheet under item 210. Minority interests, separately from the liabilities and the Group s equity. The portion pertaining to third parties is shown in the Income statement separately sheet under item 330. Profit (Loss) attributable to minority interests. 112

114 Part A Accounting policies For the companies included in the consolidation area for the first time, the fair value of the cost incurred to gain control of this shareholding, inclusive of the additional charges, is measured on the date of acquisition. The difference between the sales prices of a stake held in a subsidiary and the relevant accounting value of the net assets is recorded as a contra-entry of the Shareholders Equity, if the sale does not imply a loss of control. Joint agreements A joint agreement is a contractual agreement in which two or more counterparties have joint control. The agreement stipulates that the decisions regarding the relevant activities require the unanimous consent of all the parties which share the control. According to IFRS 11 joint ventures must be classified as Joint operation or Joint Venture depending on the contractual rights and obligations held in the Group. A Joint operation is a joint agreement in which the parties have rights on the assets and obligations with respect to the liabilities of the agreement. A Joint Venture is a joint agreement in which the parties have rights on the net assets of the agreement. Investments in joint subsidiaries are measured under the equity method. As at 31 December 2017 the BNL Group does not participate in any joint ventures. Associated companies An associated company is a company in which the investor exercises significant influence and that is neither a subsidiary or a joint venture. Significant influence is presumed when the investor: directly or indirectly holds at least 20% of the capital of another company, or is able, also through corporate agreements, to exercise significant influence through: - the representation of the governance body of the company; - the participation in the process of definition of the policies, including the participation in the decisions regarding dividends or other distributions; - the existence of significant transactions; - the exchange of managers; - the provision of essential technical information. Investments in associated companies are measured under the equity method. 113

115 Part A Accounting policies 3. Investments in companies consolidated on a line-by-line basis with significant minority interests 3.1 Minority interests, availability of the votes of third parties and dividends distributed to third parties N ame Interests of third parties % % of v otes av ailable of third parties (1) Div idends paid to third parties 1 ARTIGIANCASSA SpA 26.14% 26.14% - 2 BUSINESS PARTNER ITALIA SCpA 7.59% 7.59% - (1) Availability of actual votes at the ordinary shareholders meeting 3.2 Investments with significant minority interests: accounting information ARTIGIANCASSA SpA 31/12/ /12/2016 Total assets Cash and cash equivalents - - Financial assets Tangible and intangible assets Financial liabilities - - Shareholders' equity N et interest income Operating income Operating expenses (15.871) (16.098) Operating profit (loss) before taxes Operating profit (loss) net of tax es Profit (Loss) of discontinued operations, net of tax es - - Profit (loss) for the year (1) Other income net of tax (2) (147) 27 C omprehensiv e income (3)=(1)+(2) (104) 439 BNL POSITIVITY Srl 31/12/ /12/2016 Total assets Cash and cash equivalents 1 1 Financial assets 5 5 Tangible and intangible assets Financial liabilities - - Shareholders' equity N et interest income Operating income Operating expenses (26.099) (25.198) Operating profit (loss) before taxes Operating profit (loss) net of tax es Profit (Loss) of discontinued operations, net of tax es - - Profit (loss) for the year (1) Other income net of tax (2) 28 (15) C omprehensiv e income (3)=(1)+(2) BUSINESS PARTNER ITALIA SCPA 31/12/ /12/2016 Total assets Cash and cash equivalents Financial assets - - Tangible and intangible assets Financial liabilities - - Shareholders' equity N et interest income - - Operating income Operating expenses ( ) ( ) Operating profit (loss) before taxes Operating profit (loss) net of tax es - - Profit (Loss) of discontinued operations, net of tax es - - Profit (loss) for the year (1) - - Other income net of tax (2) - - C omprehensiv e income (3)=(1)+(2)

116 Part A Accounting policies 4. Significant restrictions During the year 2017 the BNL Group was not subject to significant restrictions to the ability to start or use assets or cancel the liabilities of the group. 5. Other information N ame Below is a list of the companies consolidated using the equity method as at 31 December Ty pe of % of v otes Registered office relationship Inv estment relation of inv esting bank % of inv estment Book value av ailable (*) 1 GIANSO Srl (in liquidazione) ROMA 1 BANCA NAZIONALE DEL LAVORO SpA 100,00 100, C ORIT-C oncessionaria Riscossione Tributi SpA (in liquidazione) ROMA 8 BANCA NAZIONALE DEL LAVORO SpA 40,00 40,00-3 C O.SE.R. C alabria C onsorzio Serv izi Regionale Scarl (in liquidazione) CATANZARO 8 ARTIGIANCASSA SpA 26,56 26,56-4 EUTIMM Srl (**) ROMA 1 BANCA NAZIONALE DEL LAVORO SpA 100,00 100, PERMICRO SpA TORIN O 8 BANCA NAZIONALE DEL LAVORO SpA 20,39 20, SUD FACTORIN G SpA (in liquidazione) BARI 1 BANCA NAZIONALE DEL LAVORO SpA 100,00 100,00 - (*) Ty pe of relationship: 1 majority of voting in ordinary share holders' meeting 2 dominant influence in ordinary shareholders' meeting 3 agreement with other shareholders 4 other types of control 5 sole management under art. 26,paragraph 1 of "Italian Legislative Decree 87/92" 6 sole management under art. 26,paragraph 2 of "Italian Legislative Decree 87/92" 7 joint control 8 considerable influence (**) companies belonging to the "BNL Banking Group" The BNL Group does not include Consolidated companies whose individual financial statements refer to a date or period other than that of the consolidated financial statements. Section 4 Subsequent events The financial statements have been prepared in the expectation of business continuation, valuating the economic profile, and the current and expected equity and financial structure, no uncertainties emerged linked to events or circumstances which, considered singularly or all together, may make doubts arise about the continuation of the business. In preparing the financial statements as at 31 December 2017, the BNL Group considered all the events occurred after the close of the year and until the date of approval of the Financial Statements by the Board of Directors on 30 March Section 5 Other aspects Risks and uncertainties linked to the use of estimates In compliance with IFRS, Company management must make assessments, estimates and hypotheses that influence the application of the accounting standards and the amounts of assets/liabilities and costs/revenues posted in the accounts. The estimates and the relevant hypotheses are based on past experience and on other factors considered to be reasonable for the case, and were adopted to estimate the book value of those assets and liabilities that cannot be easily inferred from other sources. Estimation processes in particular were adopted to support the book value of some of the most important items in the Financial Statements, in accordance with the accounting standards and the reference regulations described above. These processes are mostly based on estimates regarding the future recovery of the book values posted to the financial statements according to the rules imposed by applicable regulations and were carried out with a view to business continuity, thus excluding any hypothesis of compulsory liquidation of the items being valued. The processes adopted 115

117 Part A Accounting policies confirm the book values. The valuation process is particularly complex in consideration of the elements of uncertainty present in the macroeconomic and market context. Therefore, the parameters and information used to verify the values mentioned above are significantly influenced by these factors, which could incur rapid changes that cannot be currently predicted. Consequently, consequent effects on future book values cannot be excluded. The estimates and hypotheses are reviewed regularly. Any changes that are consequent to such audits are measured in the period when the audit is carried out if this only concerns that period. If the audit concerns more than one period, both current and future, the change is recognised in the period of the audit and in the relevant future periods. Regulatory evolution During 2017, no new accounting standards, interpretations or revisions thereof entered into force. The European Commission validated the following accounting standards, which entered into force starting with 2018 financial statements: IFRS 9 - Financial Instruments (Reg. EU 2016/2067); IFRS 15 - Revenue from Contracts with Customers (Reg. EU 2016/1905). The IASB issued the following accounting standards and interpretations or revisions of standards, whose application is, however, subordinate to the completion of the validation process by the competent bodies of the European Union: IFRS 14 - Regulatory Deferral Accounts (January 2014); IFRS 16 - Leases (January 2016); IFRS 17 - Insurance Contract (May 2017); Amendments to IFRS 10 and IAS 28: Sales or Contributions of Assets Between an Investor and its Associate/Joint Venture (September 2014); Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses (January 2016); Amendments to IAS 7: Disclosure Initiative (January 2016); Clarifications on IFRS 15: Revenue from Contracts with Customers (April 2016); Amendments to IFRS 2: Classification and Measurement of Share-Based Payment Transactions (June 2016); Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (September 2016); Annual Improvements to IFRS Standards Cycle (December 2016); IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration (December 2016); Amendments to IAS 40: Transfers of Investment Property (December 2016); IFRIC Interpretation 23 Uncertainty over Income Tax Treatments (June 2017). With specific regard to accounting standards with future application, the following is illustrated. IFRS 9: introduces significant changes as compared to IAS 39, regarding the rules of classification and measurement of loans and debt securities, which shall be based on the business model and on the characteristics of the cash flows of the financial instrument (SPPI criterion Solely Payments of Principal and Interests); entails the classification of capital instruments at fair value, recognising differences in the income statement or under other income components. In this latter case, different from that set out in IAS 39 for financial assets available for sale, it eliminates the requirement of 116

118 Part A Accounting policies recognising impairment and envisages that, in the event of disposal of the instrument, the gains and losses on disposal shall be classified under other reserves of shareholders equity, not to the income statement; introduces a new impairment accounting model based on: (i) an expected losses approach in place of the current incurred losses approach, and (ii) the concept of lifetime expected loss, which will result in an increase in value adjustments on receivables; intervenes on hedge accounting, rewriting the rules for designating a hedge relationship and for verifying its effectiveness, for the purpose of guaranteeing greater alignment between the accounting representation of hedges and the underlying management logics. Note that this standard provides the option for the entity to continue to apply the provisions of the international accounting standard IAS 39 on hedge accounting until the IASB completes the project of defining the rules for macro-hedging; and amends the accounting for own credit risk, i.e. the changes in fair value of liabilities designated at fair value attributable to the fluctuation of the entity s own credit rating. The new standard requires that these changes be recognised in an equity reserve, instead of in the income statement as envisaged by IAS 39, thereby eliminating a source of volatility in income statement results. In order to adjust the processes of the Group Companies to the new standard IFRS 9 by the set deadline, BNL acted on the basis of a significant three-year plan launched in February 2015 by BNPP for the entire Group, conducted and managed jointly by the Finance Department and the Risk Department of BNL, in close coordination with the same structures of the Parent Company. The roadmap of the plan is organised into the following macro-phases: Feasibility Study (2015): implementation at the local level of the Group methodology and estimates of impacts on the income statement; Implementation (2016): refining the methodology, launching the implementation of actions on the local systems based on the guidelines provided by BNPP and updates to the inflows to the target architecture; Pro-forma (2017): execution of the Parallel Running (IFRS 9 vs. IAS 39) / Double Run (BNPP vs. BNL) to verify the outcome of calculating impairment and impacts on the income statement; Target Operating Model and Business Impacts (2017): consolidation of the target solution, definition of the Target Operating Model and recognition of the business impacts for subsequent adjustments to regulations and applications supporting the network. Concurrently, the analytical allocation policies applicable to non-performing loans were revised and updated in line with the new accounting standard. In line with that framework, the local application of the Group s methodology was subject to a Model Validation independent review by B2C Italy as well as obtaining the opinion of the Risk Monitoring Committee Rating Models Session, held on 14 December Moreover, the results of the independent review by B2C Italy were illustrated to the Board of Directors of BNL SpA through a specific report. An on-going independent review process is also planned, for the purpose of backtesting and monitoring performance. Lastly, as regards hedge accounting, the Group shall avail of the option to continue applying the existing IAS 39 hedge accounting requirements to all hedging relationships until the IASB has completed the accounting rules on macro-hedging. In order to implement the methodological framework and the instruments described above into ordinary operations, BNL SpA, the only Group company impacted, defined the final IT architecture and developed the organisational processes and procedures to integrate the changes required by the standard into them. The Group also plans to apply the transitional relief set out in the standard and, therefore, will not publish comparative data in its 2018 financial statements. 117

119 Part A Accounting policies Estimate of the impacts of First-Time Adoption of IFRS 9 A) Classification & Measurement Even if the definitions introduced by the new IFRS 9 differ from those set out in the current IAS 9, no significant impacts are detected due to the introduction of the new accounting rules on classification and measurement. Almost all of the financial assets will be substantially classified in the new category introduced by IFRS 9, without changing the measurement method. The cases illustrated below constitute exceptions, which show impacts on the Group s shareholders equity on FTA. 1) Classification of debt instruments from the IAS 39 AFS (Available for Sale) portfolio to the HTC portfolio. These securities (almost all BTP), previously measured at fair value with a balancing entry in a shareholders equity reserve (AFS), shall be posted in the new HTC portfolio and measured at only amortised cost. As a result, the net positive valuation reserve recorded at the date of FTA, equal to million euro (gross of taxes of million euro) must be reversed. 2) Classification of debt instruments from the IAS 39 portfolio to the FVTPL portfolio. Several securities currently measured at amortised cost (primarily junior notes from external securitisations) failed the SPPI test and, therefore, must be posted to the new FVTPL portfolio at their fair value. That classification will not generate impacts on FTA, as these are written down securities issued by impaired counterparties. 3) Recognition of capital instruments in the new portfolios Capital instruments, currently recognised in the AFS (Available for Sale) portfolio, shall be classified as follows: - FVOCIE: in line with the indications from the Parent Company, only certain strategic equity investments, such as Bank of Italy, Istituto per il Credito Sportivo, VISA Inc and all AT1 shall be included in that portfolio. On FTA a portion of profit reserves, equal to million euro (taxes are not calculated on reserves) corresponding to the cumulative impairment on securities of Istituto per il Credito Sportivo posted to the income statement over time, will have to be reclassified in the non-recyclable OCI reserve under shareholders equity and, therefore, a simple reclassification of shareholders equity reserves without an impact on future income statements; - FVTPL: all capital instruments will be recorded at fair value with balancing entry in the income statement. Thus, on FTA, the corresponding AFS reserve, equal to 7.02 million euro, gross of taxes of 1.87 million euro, will be reclassified to a profit reserve. 4) Recording of issuer risk on instruments issued, Fair Value Option portfolio As stated above, for financial liabilities, the only change regards instruments measured using the Fair Value Option, for which changes in fair value due to own risk flow into a new equity reserve, called OCA (Own Credit Adjustment, i.e. an adjustment for own credit risk) without transiting through the income statement. Thus, on FTA, a reclassification will be made from profit reserves to the new equity reserve for 2.96 million euro (gross of taxes of 0.98 million euro). B) Impairment As stated above, in relation to the measurement of receivables, IFRS 9 introduces new rules of impairment, moving from an Incurred Loss Model, based on adjusting the provision to events occurring at the reporting date (IAS 39), to an Expected Loss Model, based on a forecast approach that considers the entire life of the loan. In that model loans are classified into three clusters (known as Stages ): Stage 1: performing loans whose credit risk has not increased significantly since disbursement (increase expressed as a change in rating between the reporting date and the recognition date) or which have low credit risk; 118

120 Part A Accounting policies Stage 2: performing loans whose credit risk has increased significantly and loans which have high credit risk; Stage 3: non-performing loans. Following the classification of loans into stages, provisions are calculated at the level of single facility, in line with the regulatory standards and guidelines of the Group: for Stage 1 it is necessary to allocate a 12 month expected credit loss, while for Stages 2 and 3 it is necessary to allocate the lifetime expected credit loss (relating to the residual lifecycle of the exposure). For performing exposures, the ECL (Expected Credit Loss) is calculated using a method defined at Group level, based on the risk measures deriving from regulatory parameters, net of the conservative regulatory margins - as envisaged by the accounting standard - representing the measure of the credit risk at the point in time. In particular, as specified in the Group s methodological policies: the probabilities of default are adjusted to reflect the present economic scenario and its possible future evolution (multi-scenario forward-looking approach); indirect costs and the downturn component are separated out of regulatory LGD values. For non-performing exposures, the IFRS 9 approach developed by BNL is based on: the application of a statistical model to calculate the ECL on a granular portfolio (known as under limit) defined based on the statistical significance and greater operating efficiency of collection processes. In particular, the statistical model is based on the definition of an LGD differentiated by relevant driver (status of the NPLs, product and whether guarantees exist) and integrated by applying forward-looking elements that take account of future actions on the collection process aimed at achieving the targets of the NPL ratio out of total loans assigned by the Regulator and formalised in the NPL Strategy; maintaining a judgmental approach for customers above limit which, in addition to the traditional approach of estimating collection based on expected future cash flows, also takes account of a forward-looking approach based on alternative scenarios to the strategy of internal management of collection formalised in the NPL Strategy That described above resulted in a significant reduction in Group shareholders equity on FTA for 1, million euro (gross of taxes of million euro), broken down as follows: - stage 1 increase in write-downs for million euro (gross of taxes of million euro); - stage 2 increase in write-downs for million euro (gross of taxes of million euro); - stage 3 increase in write-downs for million euro (gross of taxes of million euro); C) Hedge Accounting The Group shall avail of the option to continue applying the existing IAS 39 hedge accounting requirements to all hedging relationships until the IASB has completed the accounting rules on macro-hedging. D) Regulatory Capital Following the entry into force of IFRS 9, Regulation (EU) No. 575/2013 introduced a revision of the prudential rules for calculating capital absorption on expected credit losses. In this regard, financial institutions may adopt a transitional regime to be able to reintegrate the adjustments following the adoption of the impairment model of the new standard into CET1, with a phase-in mechanism over a period of 5 years, starting from There are no relevant impacts on the solvency ratios connected with the first-time application of the new standard. As a result, the Group decided that it will not implement that envisaged by the Regulation and, therefore, the effects of the ECL on capital ratios will be reported in full. 119

121 Part A Accounting policies IFRS 15, applicable from 1 January 2018, was endorsed by the European Union with Regulation EU 2016/1905 of 22 September 2016 (published on 29 October 2016), amends the current set of international accounting standards and interpretations on revenue recognition and, in particular, IAS 18. IFRS15 entails: two approaches to revenue recognition ( at point in time or over time ); a new transaction analysis model ( five steps model ) focused on the transfer of control; and increased disclosure required to be included in the notes to the financial statements. The activities carried out to analyse the effects of adopting the accounting standard and ensure compliance with said standard did not show impacts on the Group financial statements. IFRS 16, applicable from 1 January 2019, was subject to the completion of the endorsement process by the European Union, amends the current set of international accounting standards and interpretations on leases and, in particular, IAS 17. IFRS16 introduces a new definition of leases and confirms the current distinction between the two types of leases (operational and financial) with regard to the accounting method that the lessor must apply. With regard to the accounting model to be applied by the lessor, the new standard requires that, for all types of leases, an asset must be recognised which represents the right of use of the leased assets and, concurrently, the liability relating to the payments envisaged in the lease contract. On initial recognition, said asset is measured based on the cash flows associated with the lease contract including, in addition to the present value of the lease payments, the initial direct costs associated with the lease and any costs necessary to restore the asset on termination of the contract. Following initial recognition, that asset shall be measured based on that set out for property, plant and equipment and, thus, at cost net of depreciation and any impairment, at the restated value or at the fair value according to the provisions of IAS 16 or IAS 40. In order to guarantee compliance with this accounting standard, the Group initiated analyses of the effects deriving from the adoption of the new standard and readied the necessary solutions for implementation. Other aspects Accounting of negative income components on financial assets The decrease in rates driven by the European Central Bank in certain cases led to the recording of negative income components on loans and positive income components on deposits, with the consequent need to define the correct accounting treatment used to book them to the income statement. The Bank of Italy instructions for preparing financial statements (Circular 262/2005) does not provide indications in this regard. As in the previous years, for the purpose of preparing the financial statements, interest was posted in the income statement by nature. In particular, the interest expense calculated at a negative rate on financial liabilities are posted in income statement item 20. Interest expense, while interest income calculated at a negative rate on financial assets are posted in income statement item 10. Interest income. The extent of the phenomenon is described in a note in the details of the Explanatory notes, Part C - Information on the income statement, Section 1 - Interest Items 10 and 20, tables 1.1 Interest income and similar income: breakdown and 1.4 Interest expense and similar charges: breakdown. 120

122 Part A Accounting policies A.2 - Part relating to the main line items in the financial statements The accounting standards applied are set forth below. 1. Financial assets held for trading The financial instruments classified as Financial assets held for trading (item 20) are those held with the intention to generate short-term profits deriving from fluctuations in their prices, as well as derivatives not classified under hedging derivatives, whose fair value is positive at the date of cut-off of the financial statements. Specifically, hedging derivative contracts that are being managed together with financial liabilities carried at fair valued (the so-called fair value option), were entered in item 20. Initial recognition takes place at the trading date for all financial assets. They are initially recognised at fair value. After initial recognition, the trading portfolio is measured at fair value, except for instruments representing capital that are not listed on an active market, and whose fair value cannot be reliably determined. If the fair value of a financial asset becomes negative, it is reclassified as a financial trading liability. The balance from the compensation, pursuant to IAS 32 paragraph 42, between the derivative contracts allocated to the trading portfolio and the hedging derivative contracts is usually posted under financial assets held for trading, in case the absolute value of the fair value of the derivatives allocated to the trading portfolio is higher than the absolute value of the fair value of the hedging derivatives and has a positive sign. This compensation is recorded in the accounts only if the Group: (a) currently has a right that can be exercised to offset the amounts recorded in the accounts; and (b) intends to settle the entries net, or obtain the asset and extinguish the liability at the same time. Interest accrued is entered to item 10 Interest income or 20 Interest expense, with the exception of differentials on derivatives which are not for hedging purposes and are recorded in the Net trading profit (loss). Gains and losses realised on sale or redemption and unrealised gains and losses deriving from changes in the fair value of the trading portfolio are booked to Net trading profit (loss) (item 80), except for the profits and losses on hedging derivative contracts linked to financial instruments measured at fair value. As regards these latter in particular, unrealised fluctuations deriving from changes in the fair value are booked to the Net result of financial assets/liabilities carried at fair value (item 110), and differentials accrued at balance-sheet date were included among interest in sub-item differentials regarding hedging transactions". The fair value of trading assets is based on the prices posted in active markets, prices provided by operators or based on internal valuation models generally used in financial practice. Securities received on loan and securities received as guarantee for a securities loan are not recorded in the financial statements unless the contract provides for control over these securities. Securities given on loan and securities granted as guarantee for a securities loan are not reversed out of the balance sheet until such time that the underlying assets are effectively sold and control over the securities is lost. Commitments to deliver securities that have been sold and not yet bought are classified as trading liabilities. These liabilities consist of money market securities, other debt instruments and equity instruments which the Group has sold to third parties but does not own (technical overdrafts). Securities received as part of a transaction that contractually provides for their subsequent sale and securities delivered as part of a transaction that contractually provides for their repurchase are not recorded or reversed from the financial statements. Consequently, if securities are purchased with an agreement to resell them, the amount paid is recorded in the balance sheet as a receivable from the customer or banks, whereas if securities are sold with an agreement to repurchase them, 121

123 Part A Accounting policies the amount collected is recorded under liabilities as deposits from customers or from banks according to the rules pertaining to these categories. In relation to the provisions of the Bank of Italy/CONSOB/IVASS joint document of 8 March 2013 regarding the accounting treatment of long-term structured repo transactions, it is specified that the BNL Group does not perform transactions of this kind. 2. Financial assets available for sale The instruments to be classified as Financial assets available for sale (item 40) are money market securities, other debt instruments and equities, including investments in private sector shares, which can be sold for whatever reason, such as the need for liquidity or due to changes in interest rates, exchange rates or the price of the shares. Initial recognition takes place at the settlement date for all financial assets whose delivery is regulated on the basis of local market conventions (regular way contracts), and at the trading date for all other financial assets. Initial recognition measurement for them all is at fair value, including transaction costs or revenues directly attributable to the instruments. The BNL Group measures such financial instruments at their fair value, except for investments in capital instruments that are not listed on an active market, with the result that their fair value cannot be reliably determined. The fair value of available-for-sale securities is determined on the basis of prices posted in active markets, prices provided by operators or based on internal valuation models generally used in financial practice. If a security available for sale suffers a permanent loss of value, the unrealised accumulated loss previously booked to equity is charged to the income statement under Net value adjustments for impairment of financial assets available for sale (item 130.b). For investments in instruments that represent capital, a significant or prolonged reduction in the fair value below cost represents objective evidence of accumulated value impairment. This reduction in fair value to below cost, in accordance with the policies of the parent company BNP Paribas, is deemed to be significant if it represents more than 50% of the cost and is deemed to be prolonged if it lasts constantly for more than 2 years. Any decreases in impairment losses on equities, whose fair value can be reliably determined, are not booked to the income statement, but at net equity, whereas recoveries in the value of debt instruments are booked to the income statement. The value of unlisted equity investments is determined by applying recognised valuation techniques, such as the market multiples method for shares in similar companies. The value of listed equity investments is determined on the basis of their market value. Derecognition of financial assets takes place when the asset is sold transferring the substantive risks and rewards of ownership of the asset, or when the contractual rights to cash flows from the asset expire. Following the deletion of an investment in available-for-sale securities, the accumulated, unrealised change in value, booked to equity, is transferred to Gains/losses on sale of financial assets available for sale (item 100.b) in the income statement. Disposal gains and losses are calculated using the average cost method. 3. Financial assets held to maturity No financial assets held to maturity were entered in the Group financial statements. 4. Loans Loans are shown in the balance sheet when the Group becomes party to a contract that gives an unconditional right to payment of the amounts agreed; they are initially recognised at fair 122

124 Part A Accounting policies value, which corresponds to the amount paid over, including directly attributable transaction costs and revenue. In cases where the net amount paid over does not relate to its fair value because of the lower rate of interest applied compared with the reference market or the rate normally applied to loans with similar characteristics, initial recognition is for an amount equal to the present value of the future cash flows discounted at an appropriate rate. After initial recognition, the financial assets classified to the Loans & Receivables portfolio are booked at amortised cost, using the effective interest method. The effective interest method is used to calculate the amortised cost and the interest income for the entire duration of the loan. The effective interest rate is the rate that updates the estimated flow of future payments for the expected term of the loan so as to obtain the net accounting value at the initial entry date. The interest earned on loans is classified as interest income and similar revenue deriving from loans to banks and customers and booked on an accruals basis. Overdue interest is only booked at the time that it is effectively collected. The book value of loans is periodically submitted to an impairment test for possible losses in value that could give rise to a reduction in the loan s estimated recoverable value. A loan is considered to have suffered an impairment of value when it becomes likely that the Group will not be able to recover the full amount due, based on the original contractual conditions. For the classification of impaired exposures in the various categories of risk, reference is made to the sector regulations, supplemented by internal instructions which lay down the rules for classification and transfer in each of the various categories. The measurement of loans in the various risk categories: doubtful loans, probable defaults and substandard loans and impaired past due exposures is carried out analytically for the positions that exceed a certain level of materiality, whereas for the others a general analytical valuation is performed after grouping the loans together in homogeneous categories with similar characteristics in terms of credit risk, such as the type of loan, the sector to which they belong, the geographical location, the type of guarantee or other relevant factors. The recoverable value of loans bears in mind the time value of money and any guarantees backing the positions; the key elements for determining the present value of the flows are the identification of estimated collections, the related due dates and the discounting rate to be applied. For the assessment of the amount and time for recovery of the problem loans referred to above please refer to the analytical calculations and, in their absence, to estimates and lump sums. These estimates are made considering both the specific solvency situation of the debtors who are presenting payment difficulties, and any state of difficulty in debt servicing on the part of individual sections. The write-down of problem loans is subsequently written back only when the credit quality has improved to the point where there is a reasonable certainty for continuing recovery of capital and interest and/or collections have been made which are greater than the value of the credit registered in the previous financial statements. In any case, considering the method used to determine the adjustments, coming closer to the contractual recovery date of the loan gives rise, because of the passing of time, to a write-back to the value of the loan as it decreases the implicit financial charges previously used to reduce the value of loans. Recoveries of part or all of loans previously written down are booked as a reduction of item (130.a) Net value adjustments for impairment of loans. In the case of agreements to convert loan exposure into equity instruments, the valuation of the positions shall take place considering the fair value of the instruments referred to. The difference between the book value of loans and the fair value of equity instruments is entered in the income statement as a value adjustment. Loans are written off once they are considered definitively irrecoverable. Loan losses are booked through the income statement, net of the provisions previously made. Cancelled loans are 123

125 Part A Accounting policies not recorded in the financial statements, even in the tables setting forth values gross of value adjustments. The new category of exposures subject to concession (forborne exposures) introduced in the last update of Bank of Italy s Circular 262 includes forborne exposures towards a debtor that is or is about to experience financial difficulties. According to EBA a concession is: a modification of the previous terms and conditions of a contract the debtor is considered unable to comply with due to financial difficulties ( troubled debt ) to allow for sufficient debt service ability, that would not have been granted had the debtor not been in financial difficulties; a total or partial refinancing of a troubled debt contract that would not have been granted had the debtor not been in financial difficulties. The exposures subject to concession can be classified both under non-performing exposures ) and performing exposures. As regards the valuations and allocations of the exposures subject to concession, accounting policies follow the general standard, in line with IAS 39. Unsecured loans to residents in countries with debt-servicing difficulties are usually evaluated on a general basis by individual country. The only exceptions are certain positions that are valued taking account of the level of hedging of credit risk offered by the underlying guarantees. This category of loans does not include specific positions which show objective elements of loss, which instead are classified in other categories of non- performing loans and treated as explained above. In the country risk valuation process, the Group uses the devaluation rates allocated directly at group level with regard to the individual countries considered at risk and according to the type of relationship existing. The valuation of performing loans concerns portfolios of assets for which there are only objective indications of collective impairment. Estimated realisable value is calculated by applying to the foreseeable cash flows of the assets, grouped together in homogeneous categories with similar characteristics in terms of credit risk, rates of loss suggested by the internal rating system with the support of historical data analysed in the light of the current situation. Value adjustments, up or down, are based on the difference between the book value and the estimated realisable value of the loan. In order to calculate collective impairment, BNL, for both the individuals portfolio and the Corporate and SME Retail portfolios uses an impairment methodology based on the rating system, which uses probability of default (PD) and loss given default (LGD) models. Securitisations involving the transfer of loans to vehicle companies where, even if legal ownership of the loans has formally been transferred, control is maintained over the cash flows deriving from the loans together with the substantive risks and rewards of ownership, do not give rise to derecognition of the loans involved in the securitisation. In the consolidated financial statements, the vehicle companies are considered Group subsidiaries and are thus included in the area of consolidation if they exceed the material thresholds. 5. Financial assets measured carried at fair value No financial assets carried at fair value were entered in the Group financial statements. 6. Hedging transactions The Group uses derivatives to manage interest rate risk, exchange rate risk and credit risk. At accounting level, only hedging of interest rate risk is defined, in the forms of macrohedging, microhedging and cash flow hedging, in addition to hedging through the fair value option, also covered by points 1 and 15 of this Section. The Group s hedging derivatives are initially recognised and subsequently measured at fair value and classified in the balance sheet under asset item 80 or liability item 60 Hedging derivatives. Hedging derivatives, being linked to financial liabilities carried at fair value (the fair value option ), are classified under trading derivatives and, in accordance with their hedging function, the 124

126 Part A Accounting policies related differentials or positive and negative margins accruing until the balance sheet date are booked to interest, whereas valuation gains and losses are booked to the net result of financial assets/liabilities carried at fair value. The fair value of derivatives is determined on the basis of prices taken from regulated markets or provided by operators, option valuation models (making assumptions based on market and economic conditions) or DCF models. Positive and negative current values deriving from outstanding transactions with the same counterparty can only be offset if this is contractually foreseen. The balance from the compensation, pursuant to IAS 32 paragraph 42, between the derivative contracts allocated to the trading portfolio and the hedging derivative contracts is usually posted under hedging transaction (depending on the sign), in case the absolute value of the fair value of the derivatives allocated to the trading portfolio is higher than the absolute value of the fair value of the hedging derivatives. This compensation is recorded in the accounts only if the Group: (a) currently has a right that can be exercised to offset the amounts recorded in the accounts; and (b) intends to settle the entries net, or obtain the asset and extinguish the liability at the same time. Macrohedging is used to hedge the interest rate risk on fixed rate resulting from averagelong term operations. As soon as a financial instrument is classified as a hedge, the Group formally documents: 1. The relationship between the hedging instrument and the item being hedged, including the risk management objectives; 2. The hedging strategy, which has to be in line with the official risk management policy; 3. The methods that will be used to verify the effectiveness of the hedge. As a result, the Group checks, both at the beginning of the hedge and at various stages during its life, that the changes in the fair value of the derivative is highly effective in offsetting changes in the fair value of the item being hedged. Hedges are no longer classified as such if: 1. The hedge created by the derivative ceases or is no longer highly effective; 2. The derivative expires, is sold, cancelled or exercised; 3. The element being hedged is sold, expires or is reimbursed; 4. Hedging definition is revoked. In hedging fair value, changes in the fair value of hedging derivative are booked to the income statement in contra-entry to the accounting change of the hedged instrument, whereas changes in the fair value of the element being hedged that are attributable exclusively to the risk being managed are booked to the income statement, in contra-entry to the change in the book value of the hedged item. If the hedging relationship comes to an end for reasons other than the sale of the item being hedged, the difference between the carrying value of the item being hedged at the time that the hedge ceases and what its carrying value would have been if the hedge had never existed is amortised to the income statement over the residual life of the original hedge in the case of interestbearing financial instruments. If the item being hedged is sold or reimbursed, the portion of fair value still to be amortised is charged immediately to income. In cash flow hedging, the change in the value of the hedging instrument due to the hedged risk is recognised to equity for the effective part, and to income for the non-effective part, while the change in the value of the hedged instrument is not recognised. If hedging terminates before the expiration of the derivative, the value booked to equity is transferred to the income statement over the original duration of the hedge. 7. Equity investments In the consolidated financial statements, this item includes the investments in subsidiaries which are measured under the equity method. The Group s share of valuation reserves of said 125

127 Part A Accounting policies companies is booked to a specific reserve. In case of disposal of the equity investment, the related reserve is transferred to the income statement. 8. Property, plant and equipment The item (120) Property, plant and equipment includes land, business properties, investment properties, furniture, plant and other tangible assets. Business properties are those that are owned to provide services or for administrative purposes, or in any event are not occupied by the Bank or its subsidiaries, whereas investment properties are those owned to earn rental income and/or capital gains. Property, plant and equipment are initially booked at cost, including all expenses directly related to the asset s installation prior to being brought into service. In the category of property, land is considered separable asset and is treated differently for accounting purposes, even if it is bought together with buildings. Land usually has an unlimited life and should therefore not be depreciated. After initial recognition, property, plant and equipment are shown in the balance sheet at cost, net of depreciation and any losses for permanent impairment of value; such assets are depreciated each year on a straight-line basis over their residual useful life. The residual value, i.e. the amount that the Group expects to receive for the asset at the end of its useful life after deducting disposal costs, is estimated at the time of purchase. The residual value and useful life of the property, plant and equipment are reviewed at least once a year and if expectations differ from the previous estimates, an adjustment is made to the depreciation charged in the current and future years. Property plant and equipment are eliminated from the balance sheet at the time that they are sold or when the asset has been permanently withdrawn from use and future gains are not foreseen from its disposal. 9. Intangible assets An intangible asset is only booked to the balance sheet if: (a) The Group is likely to obtain future economic benefits thanks to that particular asset; (b) The cost of the asset can be reasonably evaluated. Intangible assets essentially consist of software. Software is booked at cost net of accumulated amortisation and impairment losses. Such assets are amortised over their estimated residual useful life. At balance-sheet date, this residual life is valued to check the adequacy of estimation and, if expectations differ from the previous estimates, an adjustment is made to the amortisation charged in the current and future years. Intangible assets are eliminated from the balance sheet when they are sold or when no future gains are expected from them. Goodwill or other intangible assets with indefinite useful life are not booked in balancesheet assets. 10. Non-Current Assets Held for Sale This item includes single assets and/or groups of assets held for disposal. The related income and charges (net of tax effect) are recognised in the income statement under a separate item. The above-mentioned assets are valued at the lesser between the carrying value and their fair value, net of disposal costs. The entries excluded from the application area of IFRS 5 are an exception. The value registered in the financial statements is calculated according to reference IFRS standards. 126

128 Part A Accounting policies 11. Current and deferred taxation Income taxes are calculated in accordance with current fiscal legislation. The tax charge (or credit) is the total amount of current and deferred taxes. Current taxes are the amount of income taxes due (recoverable) on the taxable income (tax loss) for the year. Deferred tax liabilities are the amounts of income tax due (recoverable) in future years due to (deductible) taxable temporary differences. Current tax assets include advance payments and other tax credits for withholding tax incurred or for tax rebates that have been requested from the Tax Authorities. Any tax credits that have been pledged to guarantee debts remain as part of this item. Tax liabilities, on the other hand, reflect the provisions required to meet the tax charges on the basis of current legislation. Deferred taxation is calculated according to the balance sheet liability method, taking account of the tax effect of temporary differences between the book value of assets and liabilities and their value for tax purposes, which lead to amounts that are taxable or deductible in future years. A temporary difference exists when the book value of an asset or liability shown in the balance sheet is different from its value for tax purposes. Temporary differences can be: (a) Taxable temporary differences, i.e., temporary differences that will translate into taxable amounts when calculating the taxable income (or tax loss) of future years, when the book value of the asset or liability will be realised or extinguished; (b) Deductible temporary differences, i.e. temporary differences that will translate into deductible amounts when calculating the taxable income (or tax loss) of future years, when the book value of the asset or liability will be realised or extinguished; Specifically, deferred tax assets are the amounts of income tax recoverable in future years due to: (a) Deductible temporary differences; (b) Unutilised carry-forward tax losses. Deferred tax assets due to temporary differences that will be deductible in future years are recognised at their estimated realisable value according to the expected trend in future taxable income, against which it will be possible to offset the deductible temporary difference. Deferred tax liabilities are measured for their entire amount. Deferred tax assets and liabilities are calculated at the tax rate that is expected to apply in the periods when the asset will be realised or the liability extinguished; they can be offset when they are owed to the same tax authority and there is a legal right to do so. Current and deferred taxes are charged to the income statement, except for those that relate to items whose value is adjusted through equity and for which the tax effects are also booked to equity reserves. 12. Provisions for risks and contingencies The Group only allocates to Provisions for risks and contingencies (item 120) when: (a) there is a current obligation (legal or implicit) as the result of a past event; (b) resources will probably have to be invested to comply with the obligation; and (c) the amount of the obligation can be reasonably estimated. The provision is represented by the present value of the charges that it is assumed will be incurred to extinguish the obligation. Specifically, Staff severance indemnity (item 110) is booked to liabilities according to the amount to be paid out to each employee, and valued on an actuarial basis as a defined-benefit obligation considering the future date when the bank will have to make the actual financial outlay. Following Law no. 296/2006 (2007 Finance Act), substantially: 127

129 Part A Accounting policies The portion of staff severance indemnity accrued up to beginning of 2007 remain in the company and must be disbursed to employees of Group companies in accordance with the previous civil law regulations, thus constituting a liability to be recorded in the financial statements; The portion of employee leaving, accruing starting from the first months of 2007, must, depending on the employee s choice: a) be allocated to supplementary pension funds; b) be transferred to the Treasury Fund created within INPS. Therefore, the amount recognised to Liabilities for staff severance indemnity refers solely to defined-benefit obligations relating to staff severance indemnity accruing up to a date (different for each employee) included in the first half of 2007, valued by an independent actuary without the application of pro-rata to the service provided. Consequently, for valuation purposes, the costs relating to future services rendered are not considered. The actuarial method for calculating staff severance indemnity starts with detailed information, at the time of recording, for each employee. Said information is developed year by year for each individual, until their definitive termination of employment with the Group, for the purpose of: (i) forecasts for the termination of the employment relationship, resignation, dismissal, death, invalidity and, upon meeting the requirements set forth, retirement due to old age or seniority; (ii) the possibility of requesting advances. 13. Outstanding securities and deposits Deposits from banks (item 10) and Deposits from customers (item 20) include all forms of interbank and customer funding, as well as lessee payables under finance leases. They are initially recognised at fair value, with the addition of transaction costs which are directly attributable to the funding. The subsequent valuation follows the principle of the amortised cost, by using the method of the effective interest rate. Payables are eliminated from the financial statements when they are extinguished. Outstanding securities (item 30) include all funding through the issue of subordinated instruments, certificates of deposit and bonds. This aggregate also includes outstanding cheques. Buy-backs of own bonds are treated as an extinction of the debt. Gains or losses on extinction are booked to Buy-back gains (item 100d) if the repurchase price of the security is lower than its carrying value, or to Buy-back losses (item 100d) if the price is higher than its carrying value. Subsequent sale of own bonds on the market is treated as a new issue of debt. The interest cost of debt instruments is booked to interest on payables represented by securities issued. Structured issues - in other words, compound debt instruments linked to equities, foreign currencies, credit instruments or indices against which the Group has stipulated derivatives operationally linked to the same in order to cover the related changes in fair value, are booked to Financial liabilities carried at fair value (item 50) based on the fair value option. 14. Trading financial liabilities The same description principles described for trading financial assets are applied to financial trading liabilities. The balance from the compensation, pursuant to IAS 32 paragraph 42, between the derivative contracts allocated to the trading portfolio and the hedging derivative contracts, is usually posted under financial liabilities held for trading in case the absolute value of the fair value of the derivatives allocated to the trading portfolio is higher than the absolute value of the fair value of the hedging derivatives and has a negative sign. This compensation is recorded in the accounts only if the Group: (a) currently has a right that can be exercised to offset the amounts recorded in the accounts; and (b) intends to settle the entries net, or obtain the asset and extinguish the liability at the same time. Pursuant to IFRS 13, the BNL Group measures the Debit Value Adjustment (DVA) on payable derivatives. 128

130 Part A Accounting policies 15. Financial liabilities measured at fair value Financial liabilities carried at fair value (item 50) include the Group s own issues of structured bonds against which the Group has stipulated derivative contracts in order to cover the related changes in fair value. They are initially recognised at fair value. The securities are then measured at fair value and the results of this process are booked to Net result of financial assets/liabilities carried at fair value (item 110). Buy-backs are treated as an extinction of the debt, and the gains and losses on extinction are booked to the same item. Subsequent sales are treated as new issues. The interest cost of debt instruments is booked to interest on payables represented by securities issued. 16. Transactions in foreign currency The Financial Statements are stated in euro since it is the functional currency. Assets and liabilities denominated in foreign currency (meaning transactions in currencies different to the euro) are translated using year-end spot rates. Costs and revenues in foreign currencies are recorded using the exchange rates ruling at the date of the underlying transactions. Exchange differences, positive and negative, on financial assets and liabilities in foreign currency, other than those carried at fair value, those covered by fair value, as well as the related hedging derivatives, are booked to the Net trading profit (loss) (item 80). 17. Insurance assets and liabilities No insurance assets and liabilities are booked in the Group financial statements. 18. Other information Segment reporting Segment reporting has been drawn up using the option of early application of IFRS 8 Operating Segments. In accordance with the aforesaid international accounting standard, reporting is provided for the segments whose operating results are periodically reviewed at the highest management levels of BNL SpA and the Parent Company BNP Paribas, for the purpose of adopting decisions regarding the allocation of resources and the valuation of results. Internal management reporting is produced exclusively in a form broken down by segments identified by the activity performed, and which correspond to the areas of managerial responsibility within the BNL Group s organisation. Classification of financial instruments The classification of the various portfolios of the financial instruments is carried out based on the framework resolution which regulates the investment and management policies of the financial instrument portfolios approved by the Board of Directors. In addition, the Group has never resorted to the possibility of reclassifying financial instruments measured at fair value in other portfolios based on exceptional rare circumstances, such as circumstances linked to situations of economic crisis. Impairment tests on assets As regards tests set forth by IAS 36, based on valuations made and taking account of book values and the specificity of assets entered in the financial statements, no impairment indicators were recorded. Operations of business combination of entities under common control 129

131 Part A Accounting policies The operations of business combination of entities under common control are excluded from the application of IFRS 3 which, under paragraph 3, states that the entities must apply the abovementioned IFRS in accounting for the business combinations, except in the following cases: a) business combinations in which separate entities or corporate activities are combined to establish a joint venture; b) business combinations which entities or corporate activities participate in under joint control (case in question); c) business combinations which two or more entities participate in with a mutual purpose; d) business combinations in which separate entities or corporate activities join to establish an entity that prepares the financial statements, only by contract without obtaining stakes in the capital (for example, the aggregations where separate entities join only by contract and establish a duallisted joint-stock company). In the absence of an IFRS standard or interpretation that specifically applies to an operation, IAS 8, paragraph 10, states that the Company management must use its judgement in developing and applying an accounting standard that provides information that is both: 1. relevant for the purposes of the economic decisions by the users; and 2. reliable, so that the financial statements: - fairly represent the equity - financial situation, the economic result and the cash flows of the entity; - reflect the economic substance of the operations, other events and circumstances, and not merely the legal form; - are neutral, i.e. without prejudice; - are prudent; and - are complete with reference to all the relevant aspects. Despite the provisions of IAS 8, the absence of a specific accounting standard concerning the accounting treatment of the business combinations under common control has led to the proliferation of different accounting treatments by companies, with negative effects on the comparability of financial statements of companies. In this context the Association of independent auditors Assirevi intervened with accounting document OPI no. 1 to provide preliminary orientation to support the international accounting standards. According to provisions of this document, adopted for the operations of the type, in searching for an accounting treatment that meets the criteria laid down in IAS 8.10, the critical element is represented by the fact that the accounting standard chosen to represent transactions under common control must reflect the economic substance of the same, regardless of their legal form. In more detail, according to the Assirevi document 1 the economic substance must consist in a generation of added value for all the concerned parties (higher revenues, cost cutting, creation of synergies) that is reflected in significant changes in the cash flows before and after the operation of the transferred assets 2 Therefore, pursuant to OPI n.1, the accounting treatment of business combinations under common control varies, as described below, based on whether the economic substance of these operations is recognised or not: in case it is recognised, the accounting standard is that of business combinations defined by IFRS 3; 1 Preliminary Assirevi orientations on IFRS (OPI N.1); Accounting treatment of acquisitions/contributions of companies/company branches that constitute a business combination transaction of entities under common control 2 The operations which show economic substance must be supported by an in-depth analysis of the cash flows carried out based on the adequate and verifiable evidence provided by the directors which, to not violate the principle of prudence, must have characteristics of: substance, reasonable possibility of (technical, economic, financial) creation, quick implementation. 130

132 Part A Accounting policies in case it is not recognised, the accounting treatment to be adopted is the one of the continuity of values. A.3 - Information on the transfers between portfolios of financial assets The amendments to IAS 39 and IFRS 7 Reclassification of financial assets approved by IASB in 2008 allow, after initial recognition, the reclassification of certain financial assets outside the portfolios held for trading and available for sale. In particular, the following items can be reclassified: the financial assets held for trading or available for sale that would satisfy the definition set by the international accounting standards for the credit portfolio (if these assets had not been classified as held for trading or available for sale upon initial recognition, respectively), if the entity has the intention and ability to hold them in the foreseeable future or until maturity; in rare circumstances only, those financial assets held for trading that, at the time of their recognition, did not satisfy the credit definition. During 2017 the Group did not perform any transfer between portfolios. A.4 - Reporting on Fair Value A.4.1 Fair value levels 2 and 3: valuation techniques and input used Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13; 9). In case of financial instruments quoted in active markets (Fair value level 1), the fair value is determined starting from the official quotations of the most advantageous market the Group has access to (Mark to Market). A financial instrument is considered quoted in an active market if the quoted prices are promptly and regularly available in a price list and these prices represent actual market transactions that are normally conducted in normal negotiations. For the purposes of the classification in Fair value level 2, if the official quotation in an active market does not exist for a financial instrument as a whole, but active markets exist for its components, the fair value is determined on the basis of the pertinent market prices for the parts comprised in it. If market quotations are not available, the Group uses various valuation models (Mark to Model), in line with the methods generally accepted and used by the market. The valuation models include techniques based on the discounting of future cash flows and the estimate of the volatility, and are reviewed both throughout their development and periodically in order to ensure the full consistency with the valuation objectives. These methodologies used inputs based on the prices formed in recent transactions in the instruments being valued and/or prices/quotations of instruments with similar characteristics in terms of risk profile. These prices/quotations are important to determine the significant parameters in terms of credit risk, liquidity risk, price risk and any other relevant risk with regard to the instrument being valued. Reference to such market parameters allows the discretion in the valuation to be limited while guaranteeing the verification of the resulting fair value. Should reference to market data be impossible for one or more risk factors, and the financial instruments be classified under fair value level 3 as a consequence, the valuation models adopted use estimates based on historical data as input. The parameters that cannot be observed on the markets used for the valuation of the equity instruments that result in FV adjustments in the determination of the estimates, refer to the Net Asset Value (with the exclusion of any intangible asset), whose calculation is based on data communicated directly by the Company (Financial Statements, reports, etc.). The financial instruments classified under Fair value level 3 in particular include the Terna bond, indexed to inflation. The low liquidity level of the security (no negotiations for the time being) makes it difficult to find external sources at a reliable market price. Therefore, in consideration of the 131

133 Part A Accounting policies difficulty of finding securities with characteristics that are similar to the market, the correct valorisation of the security is verified periodically by associating a correction spread with a sensitivity analysis. The correction spread is calculated as the sum of the difference between the asset swap spread (ASW) of the security and a market ASW, and a liquidity spread. The analysis above is followed by an adjustment of the security valorisation only if the change to the price implies a variation to the value of the security that is higher than 100,000 euro or 2% of the value of the same security. In order to estimate the fair value of financial instruments booked at amortised cost, indicated in the Explanatory Notes to the Financial Statements, the following methods and assumptions were used: - for cash and cash equivalents, the fair value is represented by the nominal value; - for properties, the fair value was determined on the basis of the analysis of the market value of similar properties. IFRS 13 also assumes that the current use of the asset represents the maximum and best use of it, unless the market or other factors are such to suggest that the market participants may use the asset in a different way, in order to maximise the relevant value ( highest and best use ). For some real estate investments, the determination of the fair value considers the potential requalification of the current use of the property, in case of evidence supporting the fact that the market participants consider such potential and future development in determining the price of the transaction. - for assets and liabilities without a specific expiration, the book value substantially approximates the fair value; - for impaired financial assets, the fair value is assumed as equal to the estimated realisable value for the purposes of the financial statements; - for own issue securities, if quoted on active markets, the fair value is determined with reference to the quotations recorded on the reference date of the financial statements. For the securities not quoted in an active market, the fair value is calculated by using some market curves, to which an issue spread is applied, which takes into account the issuer s creditworthiness; - for other, fixed-rate medium and long-term financial instruments, the fair value was estimated as shown below: MLT receivables of the RETAIL Division were discounted at market rates/spreads applied to customers in the month of valuation, differentiated by maturity. MLT receivables of the CORPORATE Division were discounted at market rates/spreads applied to customers in the month of valuation, differentiated by Segment/Maturity/Rating Class. During 2017 the valuation techniques used to estimate the fair value of Levels 2 and 3 of financial assets and liabilities carried at fair value were not amended. A.4.2 Processes and sensitivity of valuations The unobservable parameters that can influence the valuation of the instruments classified as level 3 mainly include the estimates and the assumptions underlying the models used to measure equity investments and UCI units. For these investments, no quantitative analysis of fair value sensitivity with respect to the changed unobservable inputs was devised, since the fair value was either taken from third-party sources without making any adjustment or is the result of a model in which inputs are specific for the entity being valued (e.g. asset values of the company) and for which alternative values cannot reasonably be hypothesised. As regards the measurement of non-performance risk in determining the fair value of OTC derivatives, this risk includes the changes in the creditworthiness of both the counterparty and the issuer (own credit risk). 132

134 Part A Accounting policies A.4.3 Fair value hierarchy IFRS 13 establishes a fair value hierarchy based on the level of observability of the inputs of the valuation techniques adopted. Three levels are available in particular: Prices (unadjusted) taken from the active markets (level 1); Various inputs of quoted prices under the previous point, that can be directly observed (prices) or indirectly (price derivatives) on the market (level 2); Input that is not based on observable market data (level 3). The classification of financial instruments valued at fair value and of the assets and liabilities not valued at fair value or valued at fair value on a non-recurring basis, is carried out on the basis of the indications above. These parameters are used also for transfers among the various levels that may be necessary during the year. A.4.4 Other information The BNL Group, with the exception of the calculation of CVA and DVA, which is determined on the net positions in derivatives of each counterparty, does not adopt the possibility provided for by IFRS 13, 48 of measuring the fair value of a group of financial assets or liabilities on the basis of the price that would be received to sell a net long position (i.e. an asset) for a particular risk exposure or to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. 133

135 Part A Accounting policies Quantitative information A.4.5 Fair value hierarchy A Assets and liabilities measured at fair value on a recurring basis: breakdown by fair value level Financial Assets/liabilities measured at fair value L1 L2 L3 L1 L2 L3 1. Financial assets held for trading Financial assets measured at fair value Financial assets available for sale Hedging derivatives Tangible assets Intangible assets Total Financial liabilities held for trading Financial liabilities measured at fair value Hedging derivatives Total KEY: L1= Level 1 L2 = Level 2 L3 = Level 3 (1) As at 31 December 2017 the fair value of the financial assets held for trading include a Credit Value Adjustment for 10,373 thousand euro (17,229 thousand euro at the end of 2016). (2) AFS securities valued at cost total 968 thousand euro at the end of 2017 (1,237 thousand euro in 2016), and are conventionally stated in the fair value Level 3 column. In the following table A Annual variations in financial assets valued at fair value on a recurring basis (level 3), the movements of the latter are not provided. (3) As at 31 December 2017 the positive fair value of the hedging derivatives includes a Credit Value Adjustment for 3,132 thousand euro (933 thousand euro at the end of 2016). (4) As at 31 December 2017 the fair value of the financial liabilities held for trading include a Debit Value Adjustment for 465 thousand euro (2,794 thousand euro at the end of 2016). (5) As at 31 December 2017 the fair value of the financial liabilities valued at fair value includes a Debit Value Adjustment for 2,959 thousand euro (10,522 thousand euro at the end of 2016). (6) As at 31 December 2017 the negative fair value of the hedging derivatives includes a Debit Value Adjustment for 2,709 thousand euro (3,220 thousand euro at the end of 2016). According IFRS13, the BNL Group also considers the non-performance risk to determine the fair value. This risk includes the changes in the creditworthiness of both the counterparty and the issuer (own credit risk). For derivatives in particular, the calculation model, called Bilateral Credit Value Adjustment (bcva), fully values also the changes in creditworthiness, in addition to the effects of the changes in the credit risk of the counterparty. The bcva comprises the sum of two addends, calculated by considering the possibility of failure of both counterparties: the CVA (Credit Value Adjustment) is a negative quantity that takes into account the scenarios in which the counterparty fails before the Group and the latter has a positive exposure toward the counterparty. In these scenarios the Group incurs a loss of an amount equal to the cost of replacing the same derivative. the DVA (Debit Value Adjustment) is a positive quantity that takes into account the scenarios in which the Group fails before the counterparty and has a negative exposure toward the counterparty. In these scenarios the Group obtains a gain of an amount equal to the cost of replacing the same derivative. The bcva depends on the exposure, the probability of default and the Loss Given Default of the counterparties. Finally, the bcva must be calculated by taking into account any agreements for the mitigation of the counterparty risk, and particularly the collateral and netting agreement for each individual counterparty. Additional fair value adjustments reflect the valuation uncertainties and the premiums for the credit and market risk, to reflect the costs that could lead to an issue on the primary market. If valuation techniques are adopted to calculate the fair value, the hypotheses on the funding costs of 134

136 Part A Accounting policies the future cash flows expected contribute to assigning a value to the market price, particularly by using suitable discount rates. These assumptions express the Group s predictions about the requests that a market operator would make in terms of actual conditions for refinancing the instrument. They take into account, if necessary, the terms of the collateral agreements. For collateralised or imperfectly collateralised derivatives, these include an explicit trend for the interbank interest rate (Funding Valuation Adjustment FVA). The adjustments shown above (CVA, DVA and FVA) are considered as factors that cannot be observed on the market of the fair value calculation methods and must thus be classified as level 3 of the fair value hierarchy. In any case this is not taken into consideration in the classification of the individual transactions in derivatives within the hierarchy. For the exposure in derivative financial instruments, the sensitivity is measured through the additional adjustment of the fair value for the counterparty risk (CVA), the explicit adjustment of the financing cost (FVA) and the portion of the additional fair value adjustment regarding the uncertainties on the parameters and models regarding level 3 instruments. For the CVA and FVA, the adjustment due to uncertainty was calibrated on the basis of the methods established for the fair value adjustments for prudential purposes as described in the technical standard Prudential Valuation of the European Banking Authority. Two scenarios were considered for the other adjustments: a favourable scenario in which all or part of the fair value prudential adjustment was not taken in consideration by market operators, and a favourable scenario in which market operators would require twice the adjustments considered by the Parent Company BNP Paribas to complete the transaction. A Annual variations in assets valued at fair value on a recurring basis (level 3) Financial assets held for trading Financial assets Financial assets measured at fair available for sale value Hedging Derivatives Tangible assets Intangible assets 1. Opening balance Increases Purchases Profit charged to: Income statement of w hich capital gain Equity X X Transfers to other lev els Other increases Decreases Sales Reimbursements Losses charged to: Income statement of w hich losses Equity X X Transfers to other lev els Other decreases Closing balance

137 Part A Accounting policies A Annual variations in liabilities valued at fair value (level 3) Financial liabilities Held for trading Financial liabilities measured at fair value Hedging Derivatives 1. Opening balance Increases Emissions losses cherged to: income statement in loss Equity x x Transfers to other liv elli Other increases Decreases Reimbursements Repurchases profit cherged to: income statement in gain Equity x x Transfers to other liv elli Other decreases D Closing balance A Assets and liabilities not valued at fair value or valued at fair value on a non-recurring basis: breakdown by fair value level Assets / liabilities not measured at fair value or measured at fair value not recurrently VB L1 L2 L3 VB L1 L2 L3 1. Financial assets held to maturity Loans to banks Loans to customers Tangible assets held for investment purposes Non-current assets and discontinued operations Total Deposits from banks Deposits from customers Outstanding securities (*) Liabilities associated with discontinued operations Total

138 Part A Accounting policies A.5 Information on the so-called day one profit The book value of financial instruments is equal to their fair value on the same date. In case of financial instruments other than those booked at fair value with a balancing entry of the income statement, the fair value on the date of recognition is normally assumed as equal to the amount collected or paid. In case of financial instruments for trading and instruments valued at fair value, any difference compared to the amount collected or paid is posted in the income statement under the relevant items. In particular, the fair value of a financial instrument on the date of initial recognition in the accounts is usually equal to the transaction price ; in other words, to the cost or amount paid for the financial assets or the sum collected for the financial liabilities. This can usually be found in transactions of the so-called level 1 of the fair value hierarchy; in case of level 2, which is based on prices derived indirectly from the market, the initial recognition in many cases also has the fair value coincide with the price. Any difference between the price and the fair value is usually attributable to the so-called commercial margins that are transferred to the income statement at the time of the first measurement of the financial instrument. In the case of level 3, on the other hand, partial discretion is granted when measuring the instrument; therefore, due to the subjective determination of the fair value, a univocal reference term is not available to compare with the price of the transaction. For the same reason, it is difficult to determine with precision also a possible commercial margin to be charged to the income statement. In this case initial recognition must always be at the price. 137

139 Part B Information on the Balance Sheet Part B Information on the consolidated balance sheet 138

140 Part B Information on the Balance Sheet Assets SECTION 1 Cash and cash equivalents - Item Cash and cash equivalents: breakdown 31/12/ /12/2016 a) C ash 676, ,202 b) Sight deposits with Central Banks - - Total 676, ,202 SECTION 2 Financial assets held for trading Item Financial assets held for trading: breakdown by markets Items/Amounts 31/12/ /12/2016 L1 L2 L3 L1 L2 L3 A. Cash assets , Debt securities , Structured Other debt , Equities Mutual funds Loans Repurchase agreements Other Total A , B. Derivatives instruments - 369, ,445, Financial derivatives - 360, ,432, trading - 354, ,424, related to fair value option - 5, , other C redit deriv ativ es - 9, , trading - 9, , related to fair value option other Total B - 369, ,445,284 - Total (A + B) 1 369,796-11,239 2,445,

141 Part B Information on the Balance Sheet 2.2 Financial assets held for trading: breakdown by debtors/issuers Items/Amounts 31/12/ /12/2016 A. Cash Assets - 1. Debt securities 1 11,239 a) Governments and central banks 1 11,239 b) Other public entities - - c) Banks - - d) Other issuers Equities - - a) Banks - - b) Other issuers insurance companies finance companies non finance companies other Mutual funds Loans - - a) Governments and central banks - - b) Other public entities - - c) Banks - - d) Other parties - - Total A 1 11,239 B. Derivatives instruments (*) 369,796 2,445,284 a) Banks 64,168 2,037,504 - fair value 64,168 2,037,504 b) C ustomers 305, ,780 - fair value 305, ,780 Total B Total (A + B) 369,796 2,445, ,797 2,456,523 (*) Of which impaired for 20,859 thousand euro in 2017 and 51,977 thousand euro in SECTION 3 Financial assets carried at fair value Item 30 No amounts are included in this Section. 140

142 Part B Information on the Balance Sheet SECTION 4 Available for sale financial assets Item Available for sale financial assets: breakdown by markets Items/Amounts 31/12/ /12/2016 L1 L2 L3 L1 L2 L3 1 Debt securities 3,969,160-39,385 4,617,587-31, Structured securities Other debt securities 3,969,160-39,385 4,617,587-31,165 2 Equities 76, ,500 57,359 48, ,164 69, Measured at fair value 76, ,500 56,391 48, ,164 68, Measured at cost ,237 3 Mutual funds 9,966 13,016 46, ,031 4 Loans Total 4,055, , ,229 4,665, , ,862 Shares valued at cost, equal to 968 thousand euro, specifically refer to profit-sharing interests linked to the financing of film productions. These assets, which do not have an actual market and will not be subsequently sold, are generally shown in the Level 3 column of fair value. In Part A Section A1 - Reporting on fair value, therefore, does not show the movements of the same Available for sale financial assets: breakdown by debtors/issuers Items/Amounts 31/12/ /12/ Debt securities 4,008,545 4,648,752 a) Governments and central banks 3,956,754 4,549,784 b) Other public entities - - c) Banks 17,359 67,803 d) Other issuers 34,432 31, Equities 346, ,031 a) Banks 303, ,649 b) Other issuers: 43,351 57,382 - insurance companies finance companies 16,451 44,035 - non finance companies 25,932 12,110 - other 968 1, Mutual funds 69,467 39, Loans - - a) Governments and central banks - - b) Other public entities - - c) Banks - - d) Other parties - - Total 4,424,604 5,019,814 Debt Securities included in the sub-item Governments and Central Banks exclusively comprise BTP issued by the Italian Government and account for 89.4% of the total Assets available for sale (90.6% in the year 2016). Equities of banks include the shareholding in the Bank of Italy (212.5 million euro) and in Istituto per il Credito Sportivo (14.4 million euro), in addition to securities issued by regulated institutes, included in their regulatory capital, of which, in particular, we note 76.3 million euro relating to AT1 equity instruments and 17.3 million euro in T2 subordinated bonds. Equities of finance companies include the interest in VISA Inc. USA for 11.1 million euro. 141

143 Part B Information on the Balance Sheet The interest in Istituto per il Credito Sportivo is classified under unlikely to pay and the book value, mentioned above, is the result of accumulated write-downs of 27.4 million euro, none of which made during Lastly, note that the 2016 figure included the contribution to the Voluntary Scheme set up at the FITD, as a result of the intervention in the capital of Cassa di Risparmio di Cesena. The portion pertaining to BNL, recorded at the time as an indirect investment for a net amount of 7.9 million euro, was sold at the end of 2017 following the closing of the complex operation of requalification and support conducted by the Voluntary Scheme on the three banks of Cesena, Rimini and San Miniato. The breakdown of the main categories of funds under item Mutual funds is given hereunder. Ty pe of ex posure 31/12/ /12/2016 Listed U nlisted Listed U nlisted B.1 Mutual funds - Italy harmonised, open not harmonised, open closed reserv ed speculativ e B.2 Mutual funds - Other EU counties harmonised, open not harmonised, open not harmonised, closed Total Available for sale financial assets and subject to specific hedging Items/Amounts 31/12/ /12/ Financial assets subject to specific hedging of fair value a) interest rate risk b) price risk - - c) exchange rate risk - - d) credit risk - - e) various risks Financial assets subject to specific hedging of cash flows a) interest rate risk b) exchange rate risk - - c) other - - Total SECTION 5 Financial assets held to maturity Item 50 No amounts are included in this Section. 142

144 Part B Information on the Balance Sheet SECTION 6 Loans and receivable to banks Item Loans and receivable to banks: breakdown by markets Total 31/12/2017 Total 31/12/2016 Type of transaction/amounts VB FV FV VB Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 A. Loans to Central Banks Time deposits - X X X - X X X 2. Compulsory reserve X X X X X X 3. Repurchase agreements - X X X - X X X 4. Other - X X X - X X X B. Loans to banks Loans Current accounts and sight deposits X X X X X X 1.2 Time deposits X X X X X X 1.3 Other loans: X X X X X X Repurchase agreements - X X X - X X X Financial leasing - X X X - X X X Other X X X X X X 2. Debt securities Structured securities - X X X - X X X 4.2 Other debt securities - X X X - X X X Total Loans and receivable to banks subject to specific hedging The Group did not record loans to banks subject to specific hedging. 6.3 Financial leases The Group does not carry out financial leases with banks. 143

145 Part B Information on the Balance Sheet SECTION 7 Loans and receivable to customers Item Loans and receivable to customers: breakdown by markets Types of transactions/amounts Not impaired 31/12/2017 Impaired Fair value Not Purchased Others L1 L2 L3 impaired Purchased Others (*) L1 L2 L3 Loans C urrent accounts X X X X X X 2. Repurchase agreements X X X X X X 3. Mortgage loans X X X X X X 4. Credit cards, personal loans and assignments of one-fifth of salary X X X X X X 5. Financial lease X X X X X X 6. Factoring X X X X X X 7. Other transactions X X X X X X Debt securities Structured loans X X X X X X 9. Other debt securities X X X X X X Total Loans to customers included 73,827 thousand euro in loans granted by BNL SpA to customers with third-party funds under administration (91,095 thousand euro in 2016). Impaired 31/12/2016 Fair value Detail of Loans and receivable to customers - other operations Other operations 31/12/ /12/2016 Grants 9,900,797 10,130,855 Portfolio 3,334,301 3,715,849 Other loans 728, , Loans and receivable to customers: breakdown by debtors/issuers Ty pes of transactions/amounts 31/12/ /12/2016 Not impaired Impaired Impaired Not impaired Purchased Others Purchased Others 1. Debt securities issued by: 469,749 36, ,940 1,632 a) Gov ernments b) Other public entities 205, ,308 - c) Other issuers 264,096 36, ,632 1,632 - non finance companies 244,615 1,754 76,453 1,632 - finance companies 19,481 34, , insurance companies other Loans: 55,345,534 5,372,983 54,807,272 5,840,761 a) Gov ernments 18, , b) Other public entities 1,388, ,289,609 3,841 c) Other issuers 53,938,846 5,372,460 53,496,068 5,836,853 - non finance companies 25,939,388 3,156,571 25,756,974 3,543,949 - finance companies 2,461,375 53,143 2,935, ,077 - insurance companies 1, other 25,536,482 2,162,746 24,803,013 2,179,827 Total 55,815,283 5,409,404 55,425,212 5,842,393 The grand total of debt securities and loans to Governments and Other public entities accounts for 2.6% of the total net loans to customers (2.5% in 2016). 144

146 Part B Information on the Balance Sheet 7.3 Loans and receivable to customers: assets subject to specific hedging Ty pe of transaction/amounts 31/12/ /12/ Loans subject to speficic hedging of fair value 885, ,485 a) interest rate risk 885, ,485 b) exchange risk - - c) credit risk - - d) sundry risks Loans subject to specific hedging of cash flows - - a) interest rate - - b) exchange rate - - c) other - - Total 885, , Financial leases The Group does not carry out financial leases with customers. 145

147 Part B Information on the Balance Sheet SECTION 8 Hedging derivatives - Item Hedging derivatives: breakdown by type of hedge and by level FV 31/12/2017 VN FV 31/12/2016 VN L1 L2 L L1 L2 L A. Listed derivatives - 301,998-26,987, ,019-21,086,257 1) Fair value - 283,170-25,470, ,368 19,577,994 2) Cash flows - 18,828-1,517,470 50,651 1,508,263 3) Foreign inv estments B. Credit derivatives ) Fair value ) C ash flow s Total - 301,998-26,987, ,019-21,086,257 KEY FV = fair value VN = Nominal value L1 = Level 1 L2 = Level 2 L3 = Level Hedging derivatives: breakdown by hedged portfolios and type of hedge Fair Value Cash flows Transactions/Ty pe of hedge Specific Rate risk Ex change risk C redit risk Price risk Various risk General Specific General Foreign inv estments 1 Financial assets available-for-sale 20, X 67 X X 2 Loans X - X - X X 3 Financial assets held to maturity X - - X - X - X X 4 Portfolio X X X X X 16,028 X 18,761 X 5 Other operations X - X - Total assets 20, , ,761-1 Financial liabilities 5, X - X - X X 2 Portfolio X X X X X 241,382 X - X Total liabilities 5, , Expected transactions X X X X X X - X X 2 Portfolio of assets and liabilities X X X X X - X

148 Part B Information on the Balance Sheet SECTION 9 Change in fair value of portfolio hedged items (+/-) - Item Change in fair value of portfolio hedged items (+/-): breakdown by hedged portfolios Value adjustment of the hedged assets/group components 31/12/ /12/ Positive adjustment of specific portfolios: a) loans b) financial assets available for sale total Negative adjustment (16.304) (1.825) 2.1 of specific portfolios: (16.304) (1.825) a) loans (16.304) (1.825) b) financial assets available for sale total - - Total Assets subject to macrohedging for the interest rate risk Hedged assets 31/12/ /12/2016 Fair Value - Loans Cash flows - Loans Total

149 Part B Information on the Balance Sheet SECTION 10 - Equity investments - Item Equity investments: information on stakes Name Registered office Headquarters Investment relation Participating company % of investment % of v otes av ailable A. Company subject to joint venture n.r. n.r. n.r. n.r. n.r. B. 1 Company subject to considerable influence GIANSO S.r.l. (in liquidazione) Roma Roma Banca Nazionale del Lavoro S.p.A CORIT-COncessionaria RIscossione Tributi S.p.A.(in liquidazione) Roma Roma Banca Nazionale del Lavoro S.p.A CO.SE.R. Consorzio servizi regionali S.c.a.r.l. (in liquidazione) Catanzaro Catanzaro Artigiancassa S.p.A EUTIMM S.r.l. Roma Roma Banca N azionale del Lav oro S.p.A PERMICRO S.p.A. Torino Torino Banca N azionale del Lav oro S.p.A SUD FACTORING S.p.A. (in liquidazione) Bari Bari Banca Nazionale del Lavoro S.p.A Significant equity investments: book value, fair value and dividends received 10.3 Significant equity investments: accounting information The Group has no equity investments of a significant amount Non significant equity investments: accounting information Book v alue of N ame inv estments Total assets Total liabilities Total rev enues Profti (Loss) Operating profit (loss) net of tax es Profit (loss) for Other income C omprehensiv e the y ear (1) net of tax es (2) Income (3)=(1)+(2) A.1 subject to joint venture A.2 subject to considerable influence 2,232 70,555 53,580 7,746 1,217-1,217-1,217 1 GIANSO S.r.l. (in liquidazione) (*) CORIT-COncessionaria RIscossione Tributi S.p.A.(in liquidazione) (*) - 2,791 2, CO.SE.R. Consorzio servizi regionali S.c.a.r.l. (in liquidazione) (*) - n.d. n.d. n.d. n.d. n.d. n.d. n.d. n.d. 4 EUTIMM S.r.l. 1,065 4,113 3, PERMICRO S.p.A ,010 39,784 5, SUD FACTORING S.p.A. (in liquidazione) - 20,139 7,383 1, (*) Not operating company 10.5 Equity investments: changes over the year 31/12/ /12/2016 A. Opening balance 1,295 1,385 B. Increases B.1 Purchases - - B.2 Write-backs - - B.3 Write-ups - - B.4 Other changes C. Decreases C.1 Sales - - C.2 Value adjustments - - C.3 Other changes D. Closing balance 1,519 1,295 E. Total write-backs - - F. Total adjustments

150 Part B Information on the Balance Sheet 10.6 Significant valuations and assessments to establish the existence of joint control or significant influence Reference is made to Part A Accounting policies, Section 3 Area and methods of consolidation, paragraph Valuations and significant assumptions to determine the area of consolidation Commitments referred to shareholdings in joint ventures The Group has no commitments referring to shareholdings in joint ventures Commitments referred to shareholdings in companies subject to considerable influence The Group has no commitments referring to shareholdings in companies subject to considerable influence Significant restrictions The Group has no significant restrictions on its shareholdings Other information Nothing to report. SECTION 11 Technical reserves attributed to reinsurers Item 110 No amounts are included in this Section. 149

151 Part B Information on the Balance Sheet SECTION 12 Property, plant and equipment - Item Functional property, plant and equipment: breakdown of assets carried at cost Assets/Amounts 31/12/ /12/ Assets owned 1,484,352 1,800,639 a) land 519, ,117 b) buildings 774,041 1,028,292 c) furniture 23,520 14,706 d) IT equipment 151,291 91,390 e) other 15,542 17, Assets purchased under finance leases - - a) land - - b) buildings - - c) furniture - - d) IT equipment - - e) other - - Total 1,484,352 1,800, Property, plant and equipment held for investment purposes: breakdown of assets carried at cost 31/12/ /12/2016 Assets/Amount Fair Value Fair Value Book v alue Book v alue L1 L2 L3 L1 L2 L3 1. Assets owned 358, , , ,268 - a) - land 177, ,830-62,097-80,998 - b) - buildings 181, ,732-63, , Assets purchased under finance leases a) - land b) - buildings Total 358, , , , Functional property, plant and equipment: breakdown of revalued assets The Group has no revalued functional property, plant and equipment Property, plant and equipment held for investment purposes: breakdown of assets carried at fair value The Group has no property, plant and equipment held for investment purposes carried at fair value. 150

152 Part B Information on the Balance Sheet 12.5 Functional property, plant and equipment: changes over the year Functional property, plant and equipment of the Group are valued at cost. ( thousands of euro) Land Buildings Furniture IT equipment Other Total A. Gross opening balance A.1 Net reductions in total amounts - ( ) (73.400) ( ) ( ) ( ) A.2 Net opening balance B. Increases B.1 Purchases B.2 Capitalized improvement expenses B.3 Write-backs B.4 Positive fair value changes booked to: a) equity b) income statement B.5 Exchange gains B.6 Transfer from properties held for investment purposes B.7 Other changes C. Decreases C.1 Sales C.2 Depreciation C.3 Impairement charges booked to: a) equity b) income statement C.4 Negative fair value charges booked to: a) equity b) income statement C.5 Exchange losses C.6 Transfer from: a) property, plant and equipment held for investments purposes b) assets related to discontinued operations C.7 Other changes D. Net closing balance D.1 Net reductions in total amounts D.2 Gross closing balance E. Valuation at cost Property, plant and equipment held for investment purposes: changes over the year Property, plant and equipment held for investment purposes of the Group are valued at cost. 31/12/2017 Land Buildings A. Opening balance A.1 Total net value reductions A.2 Opening net balance B. Increases B.1.1 Purchases - - B.1.2 Purchases for business combinations B.2 C apitalized improv ement ex penses - - B.3 Fair value positive changes - - B.4 Write-backs - - B.5 Exchange gains B.6 Transfer from properties for business use B.7 Other changes - - C. Decreases (51.202) (67.782) C.1 Sales (48.230) (61.370) C.2 Depreciation - (2.210) C.3 Negative fair value changes - - C.4 Impairment losses - - C.5 Exchange losses - - C.6 Transfer to other asset portfolios: - - a) properties for business use (270) (560) b) non-current assets held for sale and discontinued operations (2.702) (3.642) C.7 Other changes - - D. Closing balance D.1 Reducing Total net value D.2 Gross closing balance E. Measurement at fair value

153 Part B Information on the Balance Sheet Property, plant and equipment: depreciation rate Categories Depreciation rate Land no depreciation Buildings from 1,25% to 10% Furniture 20% IT equipment from 11,11% to 33,33% Other from 14,29% to 25% Other : works of art no depreciation 12.7 Commitments to purchase property, plant and equipment The Group has no commitments to purchase property, plant and equipment. 152

154 Part B Information on the Balance Sheet SECTION 13 - Intangible Assets - Item Intangible assets: breakdown by type of assets Items/Amounts 31/12/ /12/2016 Definite life Undefinite life Definite life Undefinite life A.1 Goodwill X - X - A.1.1 beloging to the group X - X - A.1.2 pertainining to minority interests X - X - A.2 Other intangible assets 161, ,097 - A.2.1 Assets carried at cost 161, ,097 - a) intangible assets generated internally 27,342-27,169 - b) other assets 133, ,928 - A.2.2 Assets carried at fair value a) intangible assets generated internally b) other assets Total 161, ,097 - Intangible assets are composed of software amortised with annual rates from 12.5% to 33.3%. Amortisation rates reflect the expected useful life of pertaining assets Intangible assets: changes over the year Intangible assets of the Group are all valued at cost. Goodwill Other intangible assets: generated internally Definite life Undefinite life Other intangible assets : other Definite life Undefinite life A. Gross opening balance A.1 Net reductions in total amounts A.2 Net opening balance B. Increases B.1 Purchases B.2 Increases in internally generated intangible assets X B.3 Write backs X B.4 Positive fair value changes booked to: equity X income statement X B.5 Exchange gains B.6 Transfer from other Group companies B.7 Other changes C. Decreases C.1 Sales C.2 Value adjustments Amortization X Write-downs equity X income statement C.3 Negative fair value changes booked to: equity X income statement X C.4 Transfer to non-current assets and discontinued C.5 Exchcnge losses C.6 Other changes D. Net closing balance D.1 Total net value adjustments E. Gross closing balance F. Valuation at cost Key: DEF = definite useful life INDEF = indefinite useful life 13.3 Other information Nothing to report. Total 153

155 Part B Information on the Balance Sheet SECTION 14 - Tax assets and tax liabilities - Item 140 and Item 80 of liabilities 14.1 Deferred tax assets: breakdown IRES IRAP 31/12/ /12/ Loan write-downs in excess of the amount deductible during the year 854,504 74, ,336 1,015, Other loan write-downs not deducted 5, ,909 6, Losses on derivaties Provisions for defined-benefit funds for personnel 6,850-6,850 7, Provisions for contingencies and other charges 172,027 2, , , Losses on investment securities Depreciation and amortization 9, ,057 10, Losses on securities 5,121 1,034 6,155 37, Tax loss 59,930-59,930 28, Other deferred tax assets 33,150 1,469 34,619 25,119 Total 1,146,016 81,012 1,227,028 1,325, Deferred tax liabilities: breakdown IRES IRAP 31/12/ /12/ Gains on investments Gains on securities 21,707 4,381 26,088 22, Gains on properties 1,209-1,209 2, Gains on derivaties 21,094 4,257 25,351 23, Depreciation and amortization 21,641 1,044 22,685 23, Employ ee retirement indemnity 5,191-5,191 4, Other deferred tax liabilities 1, ,454 1,438 Total 72,205 10,543 82,748 79, Changes in prepaid taxes (balancing entry to the income statement) 31/12/ /12/ Opening balance 1,263,547 1,297, Increases 123,107 98, Prepaid tax assets recognized during the year 121,846 98,291 a) related to prev ious y ears b) due to changes in accounting policies - - c) w rite-backs - - d) other 121, , N ew tax es or increases in tax rates Other increases 1, Decreases 200, , Prepaid tax assets eliminated during the year 187, ,040 a) rev ersals 182, ,467 b) written down as now considered unrevocable - - c) change in accounting policies - - d) Other 4, Reduction in tax rates Other decreases 12,885 - a) transformation in tax credits pursuant to Law 214/ ,885 - b) others Closing balance 1,186,401 1,263,

156 Part B Information on the Balance Sheet Changes in prepaid taxes under Law 214/2011 (balancing entry to the income statement) 31/12/ /12/ Opening balance 1,043,775 1,068, Increases 59,930 28, Decreases 114,420 53, Rev ersals 85,327 53, Transformation in tax credits 12,885 - a) for operating loss - - b) for tax loss 12, Other decreases 16, Closing balance 989,285 1,043,775 Tax assets include 989 million euro of prepaid taxes (1,044 million euro in 2016) regarding write-downs on receivables that may be converted into tax credits pursuant to Law 214/2011: consequently there are no doubts as to the future recovery of these tax assets Changes in deferred taxes (balancing entry to the income statement) 31/12/ /12/ Opening balance 31,807 32, Increases Deferred tax assets recognized during the year a) related to previous years - - b) due to changes in accounting policies - - c) other N ew tax es or increases in tax rates Other increases Decreases 1,698 1, Deferred tax assets eliminated during the year 1,698 1,620 a) rev ersals 1,456 1,619 b) due to changes in accounting policies - - c) other Reduction in tax rates Other decreases Closing balance 30,509 31, Changes in prepaid taxes (balancing entry to shareholders' equity) 31/12/ /12/ Opening balance 62,217 39, Increases 13,602 39, Prepaid tax assets recognized during the year 1,118 39,949 a) related to previous years - - b) due to changes in accounting policies - - c) other 1,118 39, N ew tax es or increases in tax rates Other increases 12, Decreases 35,192 17, Prepaid tax assets eliminated during the year 34,989 17,628 a) rev ersals 34,988 7 b) written down as now considered unrevocable - - c) due to changes in accounting policies - - d) other 1 17, Reduction in tax rates Other decreases Closing balance 40,627 62,

157 Part B Information on the Balance Sheet 14.6 Changes in deferred taxes (balancing entry to shareholders' equity) 31/12/ /12/ Opening balance 47,348 81, Increases 16,700 4, Deferred tax assets recognized during the year 4,216 1,668 a) related to previous years - - b) due to changes in accounting policies - - c) other 4,216 1, N ew tax es or increases in tax rates Other increases 12,484 2, Decreases 11,808 38, Deferred tax assets eliminated during the year 11,605 38,627 a) rev ersals 11,605 21,006 b) due to changes in accounting policies - - c) other - 17, Reduction in tax rates Other decreases Closing balance 52,240 47, Other information Prepaid and deferred taxes were reported on the basis of IAS 12 "Income taxes". In compliance with that standard, deferred tax assets were posted on the basis of the probability of their recovery. Deferred taxes were posted for their total value. As at 31 December 2017, current and deferred taxes were calculated with the rate of 27.5% for IRES (Corporate Income Tax) and 5.55% for IRAP (regional business tax). 156

158 Part B Information on the Balance Sheet SECTION 15 - Non-current assets and disposal groups held for sale and related liabilities Item 150 in Assets and Item 90 in Liabilities The amount of item 150 "Discontinued operations ", equal to 6,344 thousand euro and refers to the sale of the following properties: Bologna, via Altabella n. 15 (NBV equal to 585,078 as of 31/12/2017) For this sale, on 26/10/2017 the deed of sale was stipulated, subject to the subsequent verification of the requirements relating to the failure to exercise the right of pre-emption by the Ministry of Cultural and Environmental assets on the portion of property burdened by this constraint. Following this verification, the deed of confirmation of the deed of sale was stipulated on 19/1/2018. Florence, via degli Anselmi n. 2, via Strozzi n. 1 (NBV equal to 5,759,211 as of 12/31/2017) For this sale, on 24/10/2017 the Bank had received and accepted the binding and irrevocable offer from the purchaser. The deed of sale was stipulated on 18/1/2018. SECTION 16 - Other assets - Item Other assets: breakdown 31/12/ /12/2016 Debt items being settled 652, ,927 Other debt balances 401, ,918 Cheques and other instruments on hand 32,756 36,787 Deferred charges on rented properties 86,925 87,825 Charges being billed 8,671 9,553 Debit balances between branches 152,974 98,146 Accrued income and prepayement 8,362 8,002 Payables for securities to be delivered "HFT" Other assets 14,392 12,899 Total 1,358,004 1,120,

159 Part B Information on the Balance Sheet Liabilities SECTION 1 Deposits from banks - Item Deposits from banks: breakdown by markets Types of transactions/group components 31/12/ /12/ Deposits from Central banks 9,943,500 9,183, Deposits from banks 13,572,183 11,927, C urrent accounts and sight deposits 1,154,857 1,007, Time deposits 10,443,399 8,862, Loans 1,878,268 1,960, repurchase agreement Other 1,878,268 1,960, Liabilities from repurchase commitments of ow n equity instruments Other deposits 95,659 96,775 Total Fair value - level 1 23,515,683 21,110,650 Fair value - level 2 11,668,383 9,940,913 Fair value - level 3 11,948,445 11,304,996 Total fair value 23,616,828 21,245,909 Deposits from Central banks include the amount of 10,000 million euro, relating to BNL s direct participation in the second series of Targeted Longer-Term Refinancing Operations (TLTRO II). In 2017, BNL recorded 40 million euro in negative interest expense on that transaction, at the more favourable interest rate of -0.40% (17 million euro in 2016), as the achievement of the benchmark of a net increase in loans envisaged by the ECB was highly expected. This increase was then achieved in January The other relations towards the Parent Company, in addition to the subordinated deposits under item 1.2 below, refer to funding for a total of 12,132 million, while the relations with third party credit institutions include the loans with EIB for 567 million. 1.2 Detail of item 10 Deposits from banks : subordinated deposits Amongst loans is a subordinate deposit, calculated under Tier 2 Capital, granted by the Parent Company BNP Paribas for 524 million euro. 1.3 Detail of item 10 Deposits from banks : structured deposits The Group has no existing structured deposits from banks. 1.4 Deposits from banks subject to specific hedging The Group has no existing payables subject to specific hedging. 1.5 Payables for financial leases The Group has no existing payables for financial leases to banks. 158

160 Part B Information on the Balance Sheet SECTION 2 Deposits from customers - Item Deposits from customers: breakdown by markets Types of transactions/group components 31/12/ /12/ C urrent account and sight deposits 43,210,649 41,879, Time deposits 864,144 1,499, Loans 283,857 58, liabilities on repurchase agreements other 283,857 58, Liabilities for repurchase commitment of ow n equity instruments Other liabilities 379, ,929 Total 44,738,073 43,928,031 Fair value - level Fair value - level 2 43,808,732 43,308,365 Fair value - level 3 989, ,709 Totale fair value 44,797,824 43,942, Detail of item 20 Deposits from customers : subordinated deposits Amongst loans is a subordinate liability, calculated under Tier 2 Capital, disbursed by the SAGIP SA, part of the BNP Paribas Group, for 250 million euro. 2.3 Details of Item 20 Deposits from customers : structured deposits The Group has no existing structured deposits from customers. 2.4 Deposits from customers subject to specific hedging The Group has no existing deposits from customers subject to specific hedging. 2.5 Payables for financial leases The Group has no existing payables for financial leases. 159

161 Part B Information on the Balance Sheet SECTION 3 Debt securities issued- Item Debt securities issued: breakdown by markets 31/12/ /12/2016 Ty pe of securities/values Fair value Fair value Book Value Book Value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 A. Securities 903, , ,819-1,360, ,393 1,084,655 - bonds 873, , ,630-1,162, , , structured other 873, , ,630-1,162, , ,288 - other securities 29,189-29, , , structured other 29,189-29, , ,367 - Total 903, , ,819-1,360, ,393 1,084, Breakdown of item 30 Debt securities issued : subordinated securities The Group has no existing subordinated securities. 3.3 Breakdown of item 30 Debt securities issued : securities subject to specific hedging ( Ty pe of transactions 31/12/ /12/ Securities subject to specific hedging of fair value 31,685 40,044 a) interest rate risk 31,685 40,044 b) exchange risk - - c) sundry risks Securities subject to specific hedging of cash flows - - a) interest rate risk - - b) exchange risk - - c) other - - Total 31,685 40,

162 Part B Information on the Balance Sheet SECTION 4 Financial liabilities held for trading - Item Financial liabilities held for trading: breakdown by markets Type of transactions/group components A. Cash liabilities L 1 L 2 L 3 FV* VN L 1 L 2 L 3 1. Deposits from banks Deposits from customers Debt securities Bonds Structured X X Other bonds X X 3.2 Other bonds B. Derivatives VN 31/12/2017 FV 31/12/ Structured X X Other bonds X X Total A Financial derivatives , ,473, Trading X - 372,955 - X X - 2,465,191 - X 1.2 Fair value option X - 1,869 - X X - 8,606 - X 1.2 Other X X X X 2. C redit deriv ativ es - - 9, , Trading X - 9,272 - X X - 13,089 - X 2.2 Fair value option X X X X 2.2 Other X X X X Total B X - 384,096 - X X - 2,486,886 - X Total (A + B) X - 384,096 - X X - 2,486,886 - X Key FV = fair value FV* = fair value calculated by excluding the changes in value due to the varied creditworthiness of the issuer with respect to the date of issue. VN = nominal or notional value L1 = Level 1 L2 = Level 2 L3 = Level 3 FV FV* As at 31 December 2017, the change in fair value recorded during the year, attributable to the change in the Bank s creditworthiness was negative, equal to -2,329 thousand euro. 4.2 Details of item 40 Financial liabilities held for trading : subordinated liabilities The Group has no subordinated liabilities classed under Financial trading liabilities. 4.3 Details of item 40 Financial liabilities held for trading : structured deposits The Group has no existing structured deposits classed under Financial trading liabilities. 161

163 Part B Information on the Balance Sheet SECTION 5 Financial liabilities at fair value through profit or loss - Item 50 The so-called fair value option is used only for financial hedging purposes. 5.1 Financial liabilities at fair value through profit or loss: breakdown by markets Types of transaction/amounts VN 31/12/2017 FV 31/12/2016 L1 L2 L3 FV* VN L1 L2 L3 1. Deposits from banks Structured X X 1.2 Other X X 2. Deposits from customers Structured X X 2.2 Other X X 3. Debt securities 378, ,780 21, ,210 1,022, ,003 38, ,061 1,022, Structured 378, ,780 21,388 - X 1,022, ,003 38, ,061 X 3.2 Other X X Total 378, ,780 21, ,210 1,022, ,003 38, ,061 1,022,519 KEY FV = fair value FV* = fair value calculated by excluding the changes in value due to the varied creditworthiness of the issuer with respect to the date of issue. L1 = Level 1 L2 = Level 2 L3 = Level 3 FV FV* 5.2 Breakdown of Item 50 Financial liabilities at fair value through profit or loss : subordinated liabilities No subordinated liabilities are included in this category. 162

164 Part B Information on the Balance Sheet SECTION 6 Hedging derivatives - Item Hedging derivatives: breakdown by type of hedge and by level Fair Value 2017 Fair Value 2016 VN 2017 L1 L2 L3 L1 L2 L3 VN 2016 A. Financial derivatives - 477,113-30,507, ,738-30,449,835 1) Fair value 449,691 30,115, ,561-29,929,195 2) Cash flows 27, ,320 39, ,640 3) Foreign investments - 2. Credit derivatives ) Fair v alue ) C ash flow s Total - 477,113-30,507, ,738-30,449,835 Key: VN = nominal value L1 = Fair Value Level 1 L2 = Fair Value Level 2 L3 = Fair Value Level Hedging derivatives: breakdown by hedged portfolios and type of hedge Specific Transactions/Ty pes of hedging interest rate risk ex change risk credit risk price risk v arious risks Fair v alue Cash flow s Macrohedging Specific Macrohedging Foreign Inv estments 1. Financial assets av ailable for sale 51, X - X X 2. Loans 67, X - X - X X 3. Financial assets held to maturity X - - X - X - X X 4. Portfolio X X X X X 272,990 X - X 5. Other transactions X - X - Total assets 119, , Financial liabilities X - X 27,422 X X 2. Portfolio X X X X X 57,644 X - X Total liabilities ,644 27, Expected transaction X X X X X X - X X 2. Portfolio financial assets and liabilities X X X X X - X

165 Part B Information on the Balance Sheet SECTION 7 Change in fair value of portfolio hedged items Item Change in fair value of portfolio hedged items (+/-) Value adjustment of the hedged assets/group components 31/12/ /12/ Adjustment of financial liabilities 238, , N egativ e adjustment of financial liabilities (58,839) (34,207) Total 179, , Liabilities subject to macrohedging of the interest rate risk: breakdown Hedged liabilities 31/12/ /12/2016 Fair Value - Financial liabilities 40,635,000 38,279,000 Total 40,635,000 38,279,000 SECTION 8 Tax liabilities - Item 80 Refer to section 14 in the Assets. SECTION 9 Liabilities connected with discontinued operations Item 90 Refer to section 15 in the Assets. 164

166 Part B Information on the Balance Sheet SECTION 10 Other liabilities - Item Other liabilities: breakdown 31/12/ /12/2016 Credit items being executed 754, ,953 Contractual expenses related to personnel - premiums and other charges 66,741 70,059 Voluntary disposals 50,697 63,369 Funds Guarantees and commitments 45,486 33,671 Charges being credited 98,179 85,768 Creditors for securities to receive "HFT" - 11,884 Other liabilities 73,854 87,783 Due to suppliers 49,511 61,473 Other credit balance 338, ,024 Accrued liabilities and deferred income 44,774 39,004 Staff severance indeminity to be paid to the funds 5,768 5,567 Amounts available to customers Total 1,528,399 1,455,

167 Part B Information on the Balance Sheet SECTION 11 Post employment benefits (TFR) - Item Post employment benefits (TFR): changes over the year 31/12/ /12/2016 A. Opening balance 272, ,620 B. Increases 19,074 8,358 B.1 Allocation for the year 3,422 3,491 B.2 Other increases 15,652 4,867 C. Decreases 18,947 16,730 C.1 Liquidations 13,896 14,499 C.2 Other decreases 5,051 2,232 D. Closing balance 272, , Other information Illustration of the characteristics of the provisions and related risks Staff severance indemnity is paid by the employer to the employee at the time that the employee leaves the company. It is the employee s right and is governed by art of the Italian Civil Code and Laws no. 297/1982 and 296/2006. The provision is accounted for as subsequent benefit with respect to the defined benefit work relationship. The related liability is booked to the financial statements according to the amount to be paid out to each employee, and valued on an actuarial basis as a defined-benefit obligation considering the future date when the bank will have to make the actual financial outlay. Specifically, following Law no. 296/2006 (2007 Finance Act), substantially: the part of staff severance indemnity accrued as at the beginning of 2007 will remain in the company and must be disbursed to employees in accordance with the previous civil law regulations, thus constituting a liability to be recorded in the financial statements; the portion of employee leaving, accruing from the start of 2007, must, depending on the employee s choice: a) be allocated to supplementary pension funds; b) be transferred to the Treasury Fund created within INPS. Therefore, the amount recognised to Staff severance indemnity refers solely to definedbenefit obligations relating to staff severance indemnity accruing until a date within the first half of 2007 and different for every employee, valued by an independent actuary without the application of pro-rata to the service provided. Consequently, for valuation purposes, the costs relating to future services rendered are not considered. The actuarial method for calculating staff severance indemnity starts with detailed information, at the time of recording, for each employee. Said information is developed year by year for each individual, until their definitive termination of employment, for the purpose of: (i) forecasts for the termination of the employment relationship, resignation, dismissal, death, invalidity and, upon meeting the requirements set forth, retirement due to old age or seniority; (ii) for each employee who stays in the company, there is also the possibility of requesting advances. 166

168 Part B Information on the Balance Sheet Change in net defined-benefit liabilities (assets) and reimbursement rights during the year The change in liabilities for staff severance indemnity is shown in Section 11 Liabilities for staff severance indemnity - Item table Liabilities for staff severance indemnity: changes over the year. The allocation for the year represents the change due to time passing, equal to 3,422 thousand euro (3,491 thousand euro in the year 2016). Social security costs of services rendered, as illustrated above, are not allocated to provisions, following the reform of supplementary pension funds, which requires that the staff severance indemnity accrued be specifically allocated to Supplementary Pension Funds or the INPS Treasury Fund (Legislative Decree 252/2005 and Law no. 296/2006). The allocation for the year is disclosed in the income statement, under personnel costs. No reimbursement rights are provided. Actuarial losses booked in the shareholders equity for 2017 were equal to 11,058 euro (actuarial profit of 3,031 thousand euro in 2016). The movements in question are also reported in Table 11.1 (Section 11) among the other increases and decreases in the Staff Severance Indemnity Information on the fair value of the assets that service the plan Staff severance indemnity is paid for entirely by the Companies, and there are no assets that service the plan Main actuarial assumptions The liabilities shown in the financial statements are equal to the present value of the defined-benefit obligations accruing until 31 December 2017 and estimated by an independent actuary. The value of the benefits to be provided by the Companies has been estimated based on assumptions regarding the evolution of the personnel concerned (forecast period of service in the company, probability that they will ask for an advance), as well as using appropriate demographic, economic and financial bases (mortality tables, monetary inflation). The following parameters were used for 2017 in the individual Group companies: Actuarial parameters BNL BPI Artigiancassa BNL Finance BNL POSitiv ity Discount rate 0,80 0,40 0,50 1,80 1,80 Inflaction rate 1,70 1,70 1,60 1,90 1,90 Remuneration increase rate 2,30 2,30 0,90 2,80 2,00 Average residual duration of the liability 7,10 6,70 6,00 15,00 15,00 Expected future working life of active membership 12,00 9,00 8,00 25,00 20, Information on the amount, timing and uncertainty of financial flows Information is provided below as regards the sensitivity analysis on the estimates made to calculate the Staff severance indemnity in the hypothesis of changing some parameters considered critical, and observing the consequences in terms of profit and capital. In establishing these variability margins and developing the consequent results, useful information can be obtained to value the uncertainty and future sustainability, without providing any indication as to the probability of the parameters reaching such critical thresholds. The table below shows the provision variation results in the two years being compared, with reference to 4 hypotheses of change in the calculation parameters. 167

169 Part B Information on the Balance Sheet Sensitivity analisys Recalculation TFR 2016 TFR Balance sheet 31/12/2016 Differences Recalculation TFR 2017 TFR Balance sheet 31/12/2017 Differences 1 Discount rate -1% 282, ,247 10, , ,374 7,327 2 Discount rate +1% 248, ,247-23, , ,374-21,950 3 Applying discount rate of the previous year 263, ,247-8, , ,374-8,415 4 Inflaction rate +1% 276, ,247 4, , ,374 5,000 Moreover, the amount of the liability for staff severance indemnity is not sensitive to changes in the service cost, as the accruing indemnity is paid into the Supplementary Pension Funds or the INPS Treasury Fund. As regards the predicted future payments, the Group assumes uses of the indemnity in the next 5 years equal to about 104 million euro (94 million euro of use predicted at the end of 2016) Plans regarding multiple employers Not applicable to the BNL Group Defined-benefit plans that share risks between entities under join control Not applicable to the BNL Group. 168

170 Part B Information on the Balance Sheet SECTION 12 Provisions for risks and charges - Item Provisions for risks and charges: breakdown Items/Components 31/12/ /12/ Post retirement benefit obligations 71,338 79, Other allowances for risks and contingencies 579, , legal disputes 260, , personnel expenses 142, , other 176, ,568 Total 650, ,006 The following table breaks down item 2. Other provisions for risks and charges other Items/Components 31/12/ /12/ other - frauds and malfunctions future charges on equity investments charges for expenses other allowances with specific destination Total Provisions for risks and charges: changes over the year Items/Components Post retirement Other benefit allowances Total obligations A. Opening balance 79, , ,006 B. Increases 1, , ,563 B.1 Provisions for the year 1, , ,271 B.2 Changes due to the passing of time B.3 Changes due to changes in the discount rate B.4 Other changes 1,180 1,180 C. Decreases 9, , ,866 C.1 Utilizations for the year 4, , ,859 C.2 Changes due to the changes in the discount rate - C.3 Other changes - 17,240 22,006 D. Closing balance 71, , ,704 Items/Components Legal disputes Expenses for staff Other Total A. Opening balance 268, , , ,091 B. Increases 54,542 58,164 76, ,555 B.1 Prov isions for the y ear 54,430 56,984 76, ,263 B.2 C hanges due to the passing of time B.3 C hanges due to changes in the discount rate B.4 Other changes - 1,180-1,180 C. Decreases 62, ,077 89, ,281 C.1 Utilizations for the year 62, ,756 75, ,040 C.2 C hanges due to the changes in the discount rate C.3 Other changes - 3,321 13,920 17,241 D. Closing balance 260, , , ,

171 Part B Information on the Balance Sheet 12.3 Pension and similar obligations API pension fund for head office executives (periodic supplementary cheques) Illustration of the characteristics of the provisions and related risks The individual contract stipulated by the Parent Company BNL with several head office executives guarantees a periodic cheque that supplements the state pension from INPS and/or any pension payments made by other entities or due under schemes that take the place of the obligatory state social security system or for periods of participation in other corporate pension funds. The overall pension comes to a percentage (maximum 80%) of the last payroll, depending on the reason for termination of the employment relationship, the person s age and their years of service as a head office executive. When a pensioner dies, the Periodic Supplementary Cheque can be transferred to surviving members of the family according to the rules and the quotas laid down in the Obligatory General Insurance agreement Changes in net defined-benefit liabilities (assets) and reimbursement rights during the year The change in the API Fund is indicated in the table no Provisions for risks and contingencies: changes over the year - Post retirement benefit obligations. As at 31 December 2017, the recipients of periodic supplementary cheques were: 59 former head office executive pensioners, 1 active head office executive and 4 deferred former head office executives Information on the fair value of the assets that service the plan The retirement benefits are paid for entirely by the Parent Company BNL and there are no assets that service the plan Main actuarial assumptions The liabilities shown in the financial statements are equal to the present value of the defined-benefit obligations accruing until 31 December 2017 and estimated by an independent actuary. The liability represents the present value of the amounts owed by the Parent Company BNL, based on assumptions regarding the evolution of the groups concerned (mortality rate; likelihood of active and former employees meeting the requirements for a pension; valuation of the average nuclear family for holders of A.P.I. pensions and their mortality rates; payroll trends for active employees based on an estimate of contractual pay increases), analysed in the light of the appropriate demographic and economic-financial bases (inflation, increase in minimum pensions in line with the cost of living index, payment by the company of a periodic supplementary cheque). The following parameters were used for 2017: discounting rate 1.3% (1.3% in 2016); inflation rate 1.8% (1.4% in 2016); rate of wage increases 1.8% (1.05% in 2016); residual life expectancy of the liability estimated at about 10.3 years (about 12.7 years in 2016) Information on the amount, timing and uncertainty of financial flows Information is provided below as regards the sensitivity analysis on the estimates made to calculate the Staff severance indemnity in the hypothesis of change of some parameters considered critical, and observing the consequences in terms of capital. In establishing these variability margins and developing the consequent results, useful information can be obtained to value the uncertainty and future sustainability, without providing any indication as to the probability of the parameters reaching such thresholds. The table below shows the provision variation results in the two years being compared, with reference to 4 hypotheses of change in the calculation parameters. 170

172 Part B Information on the Balance Sheet Sensitivity analisys Recalculation API 2016 API Balance sheet 31/12/2016 Differences Recalculation API 2017 API Balance sheet Differences 31/12/ Discount rate -1% 90,318 79,915 10,403 77,920 71,338 6,582 2 Discount rate +1% 69,496 79,915-10,419 62,732 71,338-8,606 3 Apply ing discount rate of the prev ious y ear 72,968 79,915-6,947 71,228 71, Inflaction rate +1% 85,590 79,915 5,675 74,459 71,338 3,121 As regards the predicted future payments, the Parent Company BNL assumes uses of the Provision in the next 5 years equal to about 22 million euro (estimate of 23 million euro at the end of 2016) Plans regarding multiple employers Not applicable to the Bank Defined-benefit plans that share risks between entities under join control Not applicable to the Bank Provisions for risks and charges - other provisions Legal disputes The allowance for litigation protects the Group from the possible negative outcomes of outstanding lawsuits and claims brought against it, and is related mainly to allocations for actions for revocation and other lawsuits in which the Group is the defendant. Revocation Revocation bankruptcy proceedings are brought to obtain, by reference to the six months or year before the client s subjection to receivership proceedings, a ruling against the Bank or the Group companies for the restitution of sums credited on a current account or a declaration of inapplicability of guarantees acquired. The average times for defining judgments are 10/12 years on average (3/4 years for the first instance; 2/3 years for second instance; 5 years for the Court of Cassation). With regard to hypothetical subjection, on the occurrence of unfavourable events or in any case at regular intervals, specific provisions are set aside for amounts defined with reference to the expected outlay. The related risk provision is equal to 38% (45% in 2016) of the nominal value of the disputes in progress and seems adequate with regard to the subjected outcome noted over the last five years. Rulings declaring the inapplicability of guarantees produce negative impacts upon the expectations of the recovery of loans that are accordingly devalued for amounts that correspond to the amount deemed irrecoverable. At 31 December 2017, there were 136 rulings for revocation bankruptcy against BNL SpA (173 at the end of 2016) and are faced up with a risk provision of 51 million euro (83 million euro in 2016), for overall capital claims of 132 million euro (183 million euro in 2016). Lawsuits against the Bank There is a wide variety of lawsuits against the Bank, deriving from different circumstances. For example, the most frequent lawsuits concern disputes over interest rates (anatocism, even 171

173 Part B Information on the Balance Sheet mortgage usury, rate not agreed, compensation lawsuits, etc.), the offer of investment services (especially as regards securities issued by companies that then failed to meet their obligations to redeem them), the enforcement of guarantees given by the Bank or the other Group companies, the incorrect negotiation and/or payment of cheques, errors in operations (for example in relation to the execution of customer orders). It is difficult to foresee how long such lawsuits are likely to last; very approximately, also because the various courts involved are in different parts of the country, it is possible to estimate approximately 2/4 years for judgements following the ordinary procedure (in first instance) and 1 year for precautionary procedures (applicable to lawsuits regarding the guarantees provided by the Bank). Both the amounts expected to be paid and the possible timing of the outlay for each single lawsuit making up the total amount, have to be considered as purely indicative, especially in actions for revocation, as the judge has a great deal of discretion in assessing the amount of damages. Lawsuits against the Bank relating to performing loans and other lawsuits At the end of 2017, there were 528 judgements of this type with determined claims and the risk of probable outlay (517 at the end of 2016) and are faced up with a risk provision of 106 million euro (99 million euro in 2016), for claims for the lawsuits quantified of 966 million euro (930 million euro in 2016). Lawsuits against the Bank relating to non-performing loans At the end of 2017 the judgements of this type can be divided into lawsuits that may result in a redetermination of the Bank s receivable and lawsuits which, instead, may result in an outlay in favour of the plaintiffs/petitioners. As regards the latter, note that there were 243 lawsuits with the risk of probable outlay (226 at the end of 2016) with claims of 73 million euro (70 million euro at the end of 2016) and are faced up with a risk provision of 29 million euro (26 million euro at the end of 2016) In addition to the above, compensation lawsuits included a lawsuit with the risk of probable outlay and a claim of 178 million euro jointly with an additional 9 banks (the same at the end of 2016) faced up with allocations of 4 million euro (the same at the end of 2016), now settled in the initial days of There are also an additional 3 lawsuits with total claims of 870 million euro jointly with another 9 banks, with remote risk of losing, and an additional lawsuit for 25 million euro (BNL s share - 10 million euro the same at the end of 2016) with a risk of probable outlay of 500 thousand euro, faced up with allocations of around 1 million (the same at the end of 2016). Lawsuits against the Bank relating to personnel Lawsuits against the Bank relating to personnel may be promoted by employees or exemployees of the Bank, and derive from claims of various types, attributable to the employment relationship, either existing or past. It is difficult to foresee how long such lawsuits are likely to last. As an approximation, linked to the different situations of the various local courts involved, in addition to the specific case brought to the cognizance of the Employment Tribunal, it is possible to estimate 2/3 years for judgements following the ordinary procedure (in first instance) and 1 year for those following special procedures (judgments introduced with the Fornero procedure, judgments promoted urgently pursuant to art. 700 of the Italian Code Civil Procedure). For said type of lawsuits against the Bank, specific provisions were set up that measure the risk relating to probable loss of such lawsuits, resulting in the payment of amounts. The amount of the provisions is updated quarterly based on the estimated equity risk and lawsuit-related emergencies. 172

174 Part B Information on the Balance Sheet At the end of 2017, there were 58 judgements of this type with determined claims and the risk of probable outlay (compared to 60 with the same characteristics at the end of 2016) and are faced up with a risk provision of 24,520 million euro (compared to 25,162 million euro allocated in 2016), for total claims in terms of principal, of 47,189 million euro (compared to total claims, in terms of principal, of 49,386 million euro relating to 2016) Personnel expenses "Employee allowances" almost fully refer to benefits paid to employees, based on the provisions of the collective labour agreements and Trade Union agreements, and are allocations in relation to amounts accruing for personnel costs to be paid. In particular, these provisions have been set up to cover the following charges. 31/12/ /12/2016 Personnel allowances of the Parent Company : incentives to leave performance bonus holidays not used other benefits to employees Personnel allowances of Subsidiaries Total Employee allowances of the Parent Company Redundancy incentive The provision includes the residual portion of charges incurred in 2016 for 42.2 million euro, connected with supporting the Redundancy Plan, as part of the BNL-BPI reorganisation plan. Performance bonus These provisions include the company bonus (VAP), to be assigned during 2017, as an assessment of the expected amount of economic outlay to the benefit of all employees, taking account of the intervening trade union negotiations. The amount includes both the variable remuneration paid in cash, and the related pension and social security charges, and takes account of the company results and the status of negotiations with trade unions. In addition to allocating the amounts that the Bank is committed to pay to employees under structured variable remuneration schemes for 2016, the provisions include the Performance bonus referred to the extra-contractual elements to be recognised during the year after the year of accrual only for the personnel employed from 1/11/1999 to 1/1/2001. The total liability recorded in the financial statements amounts to 59 million euro (72 million euro at 31 December 2016). Vacation, holidays, time pool, work reduction and compensatory rest These provisions represent the charges for the Bank of the residual amounts accrued, but not used, as at 31 December 2017, for each employee in relation to the following types of absences: vacation, holidays, time pool, work reduction and compensatory rest. The total amount is obtained by valuating the residual amount for each employee as at 31 December 2017, based on their respective annual gross pay (RAL), and considering pension and social security charges borne by the employer, owing in case such charges should have to be paid. The sum of these elements represents the value of the provisions, amounting to 27 million euro at 31 December 2017 (same amount at the end of 2016). 173

175 Part B Information on the Balance Sheet Other employee benefits The allowance includes allocations for charges which are likely to occur for a number of events provided for in the business additional contracts or agreements for trade unions or law. The allowance of social security in favour of retired personnel, equal to 12 million euro, is included, as well as the former one-off bonus of 7% for 7 million euro, to be paid at the time of termination of employment to the employees from the professional areas or to 1st and 2nd level middle management employed as at 18/3/1992. Up to 2016, employees who had served with the Bank for 25 years were entitled to an additional benefit called a Long-Service Bonus. As a result of the agreements entered into with the trade unions in May 2017, that additional benefit no longer applies. The liabilities shown in the financial statements are equal to the present value of the defined-benefit obligations accruing until 31 December 2017 and estimated by an independent actuary. Personnel allowances of Subsidiaries The item includes the charges of this kind referred to employees of the Group companies, with special reference to the amounts accrued at the consortium company Business Partner Italia p.a. consequently to the resources transferred with transactions for the transfer of the business divisions in October 2014 and those achieved during 2015 and In relation to this, the liabilities posted in the financial statements concern redundancy incentives for 4.6 million euro, the performance bonus accrued for 7.5 million euro; holidays, vacation, time pool, work time reduction and compensatory rest for 4.4 million euro in total and other benefits for 2.7 million euro Other provisions The other provisions mainly refer to: Fraud and malfunctions Allowances for expenses Allowance for expenses refer to the costs for outside professionals above all linked to debt collection. Other specific provisions Other specific provisions refer essentially to the positions included in the other asset items of the Parent Company and other Group companies. SECTION 13 Technical reserves - Items 130 No amounts are included in this Section. SECTION 14 Reimbursable shares - Items 150 No amounts are included in this Section. 174

176 Part B Information on the Balance Sheet SECTION 15 Equity of the Group Items 140, 160, 170, 180, 190, 200 and 220 The shareholders equity of the BNL Group at 31 December 2017 is made up as follows: SHAREHOLDERS' EQUITY 31/12/ /12/ Valuation reserves 11,672 (33,796) 170 Reserv es 1,512,971 1,388,454 a) Income reserves 835, ,594 b) other reserves 677, , Share premium 2,050,240 2,050, Share capital 2,076,940 2,076, Minority interests 3,414 3, Profit (loss) for the year 148, ,690 Total Shareholders' equity 5,803,810 5,610, Share capital and reserves and Treasury shares : breakdown 31/12/ /12/2016 Items amount amount number number Ordinary shares 2,076,940 2,076,940,000 2,076,940 2,076,940,000 Total 2,076,940 2,076,940,000 2,076,940 2,076,940,000 Group companies do not hold shares issued by the Parent Company BNL SpA in their portfolios Share capital - Number of shares of the parent company: changes over the year (number of shares) Item/Types Ordinary shares Other A. Outstanding shares at the beginning of the year 2,076,940, entirely paid up 2,076,940, partially paid up - - A.1 Treasury shares (-) - - A.2 Outstanding shares : opening balance - - B. Increases - - B.1 New share issues for payement on business combinations - on comversion of bonds - on exercise of worrant - other - bonus issues to employees - to directors - other B.2 Sale of treasury shares - - B.3 Other changes - - C. Decreases - - C.1 C ancellation - - C.2 Purchase of treasury shares - - C.3 Disposal of businesses - - C.4 Other changes - - D. Outstanding shares: closing balance 2,076,940,000 - D.1 Treasury shares (+) - - D.2 Issued shares at the end of the year 2,076,940, entirely paid up 2,076,940, partially paid up

177 Part B Information on the Balance Sheet 15.3 Share capital: other information During the course of 2017 no capital transactions on the equity of the Parent Company BNL SpA were carried out Income reserves: other information Item/Values Other reserves A. Opening balance 710,594 B. Increases 124,690 B.1 Allocation of profits 124,690 B.2 Other variations - C. Decreases 1 C.1 Utilizations - - hedging of losses - - distribution - - transfer to capital - C.2 Other variations 1 D. Closing balance 835, Other information Item 170. Reserves b) Other is made up of reserves in the Parent Company BNL SpA of 593 million euro and reserves contributed by other Group Companies in the amount of 85 million euro. SECTION 16 Non-controlling interests (+/-) - Item Detail of item 210 non-controlling interests (+/-) N ame 31/12/ /12/2016 Inv estments in companies consolidated on a line-by -line basis w ith significant minority interests 3,414 3,500 1 ARTIGIANCASSA SpA 3,003 3,030 2 BUSINESS PARTNER ITALIA SCpA Other Investments 0 0 Total 3,414 3, Capital instruments: breakdown and changes over the year The Group has not issued any capital instruments other than ordinary shares. 176

178 Part B Information on the Balance Sheet OTHER INFORMATION 1. Guarantees issued and commitments Transactions 31/12/ /12/ Issued guarantees, of a financial type 1,498,360 1,821,373 a) Banks 278, ,215 b) C ustomers 1,219,599 1,488, Issued guarantees, of a commercial type 8,637,257 8,392,254 a) Banks 1,854,427 1,620,385 b) C ustomers 6,782,830 6,771, Irrevocable commitments to supply provisions 9,582,865 6,010,128 a) Banks i) certain use - - ii) uncertain use b) C ustomers 9,582,582 6,009,744 i) certain use 53,447 23,142 ii) uncertain use 9,529,135 5,986, Commitments underlying derivatives on loans: hedging sales 18,127 15, Assets provided as collateral to cover third-party commitments Other commitments - - Total 19,736,609 16,239, Assets as guarantee to own liabilities and commitments Portfolio 31/12/ /12/ Financial assets held for trading Financial assets carried at fair value Financial assets available for sale (1) 3,433,677 4,320, Financial assets held to maturity Loans to banks Loans to customers (2) 17,941,306 15,782, Tangible assets 0 0 Total 21,374,983 20,103,832 (1) The amount refers mainly to Italian government bonds. (2) The amount includes 13,320,406 thousand euro of securitised loans legally entered in the financial statements according to IAS 39, which are included in the separate equity of vehicles for securitisations (including Vela OBG) and 3,991,418 thousand euro of credits to secure monetary policy transactions of the European Central Bank. Deposits and loans for EIB funding for 595,747 thousand euro are included. 3. Information on operational leasing The Group has no minimum compulsory instalments on the operational leasing. 4. Breakdown of investments regarding unit-linked and index-linked policies The Group has no investments regarding unit-linked and index-linked policies. 177

179 Part B Information on the Balance Sheet 5. Management and brokerage on behalf of third parties Ty pes of serv ice/amounts 31/12/ /12/ Execution of orders on behalf of the customers 1,897,559 1,176,288 a) Purchases 908, , settled 908, , unsettled - - b) Sales 988, , settled 988, , unsettled Equity management 528, ,395 a) Single 528, ,395 b) C ollectiv e Safe custody and administration of securities 24,614,868 20,194,472 a) Third-party security under custody related w ith the performance w ith the custodian bank (excluding equity managements) securities issued by companies included in the scope of consolidation other securities b) Other third-party securities under custody (excluding equity managements) 19,948,113 15,459, securities issued by companies included in the scope of consolidation 509,898 1,068, other securities 19,438,216 14,391,453 c) Third-party securities lodged with third parties (*) 11,421,362 14,644,421 d) Own securities lodged with third parties 4,666,189 4,733, Other transactions - - (*) The sub-item c) third-party securities and securities deposited at third parties represents an of which to sub-items a) and b). 6. Financial assets subject to offsetting in the financial statements, under compensation framework agreements or similar agreements. Items Amount of Gross amount of financial liabilities financial assets offset in the (a) balance sheet (b) N et amount of financial assets reported in the balance sheet (c=a-b) Related amounts not offset in the balance sheet C ash deposits Financial receiv ed as instruments collateral (d) (e) N et amount at 31/12/2017 (f=c-d-e) N et amount at 31/12/ Deriv ativ es 586, , , , , Repurchase agreement Securities lending Others - - Total at 31/12/2017 Total at 31/12/ , , , ,838 X 2,569,531-2,569,531 2,361,428 - X 208, Financial liabilities subject to offsetting in the financial statements, under compensation framework agreements or similar agreements. Items Related amounts not offset in the Amount of N et amount of balance sheet Gross amount of financial assets financial liabilities N et amount at C ash deposits N et amount at financial liabilities offset in the reported in the Financial 31/12/2017 receiv ed as 31/12/2016 (a) balance sheet balance sheet instruments (f=c-d-e) (b) (c=a-b) collateral (d) (e) 1. Deriv ativ es 844, , ,335 79, , , Repurchase agreement Securities lending Others Total at 31/12/ , , ,335 79, ,764 X Total at 31/12/2016 2,838,995-2,838,995 2,361, ,722 X 371,

180 Part B Information on the Balance Sheet The Group has bilateral netting agreements in place for derivative transactions (valued at fair value) through the signing of ISDA and CSA agreements. The financial assets and liabilities regarding the OTC Derivatives managed through Central Counterparties (CCP) are subject to netting when: (i) the CCP settlement processes guarantee the elimination or make the credit and liquidity risk immaterial in the contracts in question and (ii) the entity intends to settle the items net, in accordance with the provisions of IAS 32 Offsetting, in order to improve the representation of the counterparty risk and liquidity profile determined by them. 8. Securities lending transactions. The Group had no existing securities lending transactions as at 31 December Information on joint operations The Group had no joint operations as at 31 December Non-recurrent significant events and operations. According to the CONSOB Communication no. DEM/ of 28 July 2006, the impact of relevant events and significant transactions of the non-recurrent type on the balance sheet is shown hereunder. Structuring of a new securitisation transaction of performing personal loans In the fourth quarter, a new securitisation transaction for personal loans was finalised, as part of which BNL, on 16 October 2017 sold to the vehicle company Vela Consumer 2 Srl a portfolio of performing personal loans for about 589 million euro. 11. Atypical or unusual transactions The Group has not carried out any atypical or unusual transactions during the year as defined by the above CONSOB Communication, which might have had a significant impact upon the asset structure. 179

181 Part C - Information on the income statement Part C INFORMATION ON THE CONSOLIDATED INCOME STATEMENT 180

182 Part C - Information on the income statement SECTION 1 - Interest Items 10 and Interest and similar income: breakdown Items/Technical forms Debt securities Loans Other Total Total operations 31/12/ /12/ Financial assets held for trading Financial assets measured at fair v alue Financial assets av ailable for sale 78, , , Financial assets held to maturity Loans to banks - 11,338-11,338 56, Loans to customers 14,567 1,362,468-1,377,035 1,554, Hedging derivatives X X Other assets X X Interest income on liabilities (*) X - 8, ,224 - Total 92,674 1,365, ,459,011 1,712,225 (*) the item interest income on liabilities includes negative interest due to banks for 8,213 thousand euro and to customers for 11 thousand euro, pertaining to the Parent Company. 1.2 Interest and similar income: differentials related to hedging transactions No amounts are included in this table. 1.3 Interest and similar income: other information Items/Sectors 31/12/ /12/ Interest income on financial assets in currency 13,079 12,009 Interest income on financial lease transactions Interest and similar expenses: breakdown Items/Technical forms Deposits Securities Other operations 31/12/ /12/ Deposits from central banks X Deposits from banks X Deposits from customers X Outstanding securities X Trading financial liabilities Financial liabilities measured at fair value Other liabilities X X Hedging derivatives (*) X X Interest expenses on assets (**) (57.828) (57.828) Total (*) The figure as at 31 December 2017 includes negative net income differentials, equal to 3,587 thousand euro (329 thousand euro at 31/12/2016), on financial hedging derivatives connected with fair value option. (**) the item interest expense on assets includes negative interest due to central banks for 39,782 thousand euro, to third party banks for 18,001 thousand euro and to customers for 44 thousand euro, pertaining to the Parent Company. 181

183 Part C - Information on the income statement 1.5 Interest and similar expenses: differentials related to hedging transactions Items 31/12/ /12/2016 A Positive differentials related to transactions 124, ,720 B Negative differentials related to transactions (129,767) (203,339) C Balance (A+B) (5,325) (84,619) Interest and similar expenses: other information Item/Sector 31/12/ /12/ Interest expense on financial assets in currency Interest expense on financial lease transactions - 0 SECTION 2 Fee and commissions - Items 40 and Fee and commission income: breakdown Ty pe of transactions/values Total Total 31/12/ /12/2016 a) guarantees issued 62,714 67,683 b) derivatives on loans - - c) management, brokerage and consulting services 520, , trading of financial instruments 20,191 13, trading of currency 2,649 3, equity management 22,011 25, single 22,011 25, collectiv e security custody and administration 3,007 3, custodian bank placement of securities 1,228 1, collection of orders consulting activities 5, inv estment 5, on capital structure distribution of third-party services 466, , equity management 183, , single 1,628 1, collectiv e 182, , insurance products 227, , other products 55,150 44,015 d) collection and payment services 148, ,365 e) servicing services for securitisation transactions - - f) factoring transaction services - - g) rate and tax collection - - h) management activities of the multilateral trading system - - i) keeping and management of current accounts 119, ,680 j) other services 316, ,063 Total 1,168,266 1,106,312 Commissions for other services mainly refer to the Parent Company BNL: 111 million euro in commitment fees (111 million euro as at 31 December 2016); 71 million euro (61 million euro as at 182

184 Part C - Information on the income statement 31 December 2016) in total fees on electronic payment systems and credit cards, 69 million euro in expenses recovered on loans and mortgages (62 million euro at the end of 2016), 3 million euro in arrangement and agency fees (5 million euro as at 31 December 2016) and 5 million in safety deposit boxes (3 million euro as at 31 December 2016). 2.2 Fee and commission expense: breakdown Ty pe of transactions/values Total Total 31/12/ /12/2016 a) guarantees received 3,682 4,173 b) derivatives on loans - - c) management and brokerage services 35,520 25, trading of financial instruments 2,303 1, trading of currency equity management own portfolio third-party portfolio security custody and administration 1,423 1, placement of financial instruments 4,420 3, off-premises offer of financial instruments, products and services 27,374 19,210 d) collection and payment services 12,576 10,413 e) other services 63,865 62,304 Total 115, ,281 Commissions for other services as at 31 December 2017 were primarily comprised of components pertaining to the Parent Company, including, among others, 27 million euro of commission expense for electronic payment circuits (23 million euro at the end of 2016), 11 million euro (12 million euro at the end of 2016) for information services and perusals on mortgage loans granted, 12 million euro (13 million euro at the end of 2016) for trust mandates and 3 million euro for structured finance (4 million euro at the end of 2016). SECTION 3 - Dividends and similar income - Item Dividends and similar income: breakdown Total 31/12/2017 Total 31/12/2016 Item/Income Dividends Mutual funds Dividends Mutual funds A. Financial assets held for trading B. Financial assets available for sale 7,641-13,948 - C. Financial assets carried at fair value D. Equity investments 19,707 X - X Total 27,348-13,

185 Part C - Information on the income statement SECTION 4 - Net result for trading - Item Net result for trading: breakdown Transactions/Income components C apital gains (A) Profit on trade (B) C apital losses (C) N et profit (loss) Loss on trade [(A+B) + (D) (C+D)] 1. Trading financial assets (2) (46) Debt securities (2) (46) Share capital Mutual funds Loans Other Trading financial liabilities Debt securities Deposits Other Other financial assets and liabilities: exchange 3. differences X X X X (9,378) 4. Derivative instruments 2,563,078 2,152,893 (2,541,916) (2,161,112) 39, Financial derivatives 2,559,260 2,152,893 (2,538,098) (2,161,112) 39,228 - On debt securities and interest rates 2,559,260 2,152,893 (2,538,098) (2,161,112) 12,943 - On share capital and share indexes On currency and gold X X X X 26,285 - Other Derivatives on loans 3,818 0 (3,818) 0 0 Total 2,563,078 2,153,673 (2,541,918) (2,161,158) 30,582 At 31 December 2017 the effect of the non-performance risk, which includes the changes in the creditworthiness of both the counterparty and the same Bank (own credit risk), was broken down as follows: the CVA (Credit Value Adjustment) recorded a net positive change of 6,878 thousand euro (3,018 thousand euro in 2016). The positive change equals 7,617 thousand euro (5,048 thousand in 2016), partly offset by a negative change of 739 thousand euro (2,030 thousand in 2016); the DVA (Debit Value Adjustment) reached 2,329 thousand euro (245 thousand euro in 2016). SECTION 5 - Net result from hedging - Item Net result from hedging: breakdown Income components/ Amounts 31/12/ /12/2016 A. Income from : A.1 Fair value hedging derivatives 188, ,409 A.2 Hedged financial assets (fair value) 6, ,543 A.3 Hedged financial liabilities (fair value) 141,822 64,530 A.4 Cash flow s hedging financial deriv ativ es A.5 Assets and liabilities in foreign currency Total income from hedging assets (A) 336, ,482 B. Charges from : B.1 Fair value hedging derivatives (151,932) (200,090) B.2 Hedged financial assets (fair value) (179,027) (336,787) B.3 Hedged financial liabilities (fair value) (8,538) (167,682) B.4 Cash flow s hedging financial deriv ativ es B.5 Assets and liabilities in foreign currency Total charges from hedging assets (B) (339,497) (704,559) C. Net result from hedging (A - B) (*) (2,696) (4,077) (*) The amount for 2017 is due to the partial inefficiency in microhedging for 156 thousand euro (-864 thousand euro for 2016) and to the inefficiency of macrohedging for 348 thousand euro (+291 thousand euro in 2016). The net result of hedging activities also includes the component regarding own risk in the fair value measurement models for derivatives (debit valuation adjustment), negative for 511 thousand euro (-2,170 thousand euro in 2016), in addition to the decrease in value on the counterparty risk of the same (credit valuation adjustment) for -2,199 thousand euro (-730 thousand euro in 2016). 184

186 Part C - Information on the income statement SECTION 6 Income/(loss) from disposal or repurchase - Item Income/(loss) from disposal or repurchase: breakdown Items/Income components 31/12/ /12/2016 Profit Loss Net result Profit Loss Net result Financial assets 1. Loans to banks Loans to customers 27,679 (3,791) 23,888 9,043 (12,000) (2,957) 3. Financial assets available for sale 19,397 (20,942) (1,545) 55,441 (623) 54, debt securities 8,207 8,207 10,734 (451) 10, share capital 11,190 (20,942) (9,752) 44,707 (172) 44, mutual funds 3.4 loans 4. Financial assets held to maturity Total Assets 47,076 (24,733) 22,343 64,484 (12,623) 51,861 Financial liabilities 1. Deposits from banks Deposits from customers Outstanding securities 3 (3) 83 (2,932) (2,849) Total Liabilities 3 (3) 83 (2,932) (2,849) SECTION 7 Net result of financial assets/liabilities at fair value through profit or loss Item Net result on financial assets/liabilities at fair value through profit or loss breakdown Transactions/Income components C apital gains (A) Profit on sale (B) C apital losses (C) Net profit Loss on sale (D) (loss) [(A+B) + (C+D)] 1. Financial assets Debt securities Share capital Mutual funds Loans Financial liabilities 1,437 2,930 (556) (15) 3, Debt securities 1,437 2,930 (556) (15) 5, Deposits from banks Deposits from customers Financial assets and liabilities in currency: exchange differences X X X X - 4. Derivative instruments 5,733 4 (2,121) (26) 3,590 Total 7,170 2,934 (2,677) (41) 7,386 Amounts related to derivative instruments refer to financial hedging transactions of liabilities carried at fair value. Book values of derivative instruments are included in trading financial assets or liabilities under the sub-item financial derivatives connected with fair value option. 185

187 Part C - Information on the income statement SECTION 8 - Net impairment losses - Item Net impairment losses of Loans and receivable: breakdown Value adjustments (1) Value w rite-ups (2) Specific Specific Portfolio Transactions/Income components Portfolio Eliminations Other A B A B 31/12/ /12/2016 (3)=(1)-(2) (3)=(1)-(2) A. Loans to banks - - () Loans - - () Debt securities B. Loans to customers (51,090) (1,010,206) (50) 166, ,521-36,955 (539,369) (612,370) Impaired loans purchased Loans - - X - - X X Debt securities - - X - - X X - - Other loans (51,090) (1,010,206) (50) 166, ,521-36,955 (539,369) (612,370) - Loans (51,090) (1,004,306) (50) 166, ,521-36,955 (533,469) (612,370) - Debt securities - (5,900) (5,900) - C. Total (51,090) (1,010,206) (50) 166, ,053-36,955 (538,837) (611,447) 8.2 Net impairment losses of avalaible for sale financial assets : breakdown Value adjustments (1) Value w rite-ups (2) Transactions/Income components Microhedging Microhedging 31/12/2017 (3)=(1)-(2) 31/12/2016 (3)=(1)-(2) Eliminations Other A B A. Debt securities - (97,614) - - (97,614) - B. Share capital - (80) X X (80) (3,829) C. Mutual funds - (914) X - (914) (1,492) D. Loans to banks E. Loans to customers F. Total - (98,608) - - (98,608) (5,321) Key A = From interest B = Other adjustments 8.3 Net impairment losses of held to maturity financial assets : breakdown The Group has no financial assets held to maturity in its portfolio. 186

188 Part C - Information on the income statement 8.4 Net impairment losses of other financial transactions: breakdown Value adjustments (1) Microhedging Value w rite-ups (2) Microhedging Portfolio Transactions/Income components Eliminations Other Portfolio A B A B 31/12/2017 (3)=(1)-(2) 31/12/2016 (3)=(1)-(2) A. Guarantees issued - (5,990) (6,416) - 2, (10,006) 8,130 B. Deriv ativ es on deposits C. Commitments to be called on - - (1,809) (1,809) 120 D. Other transactions (3,903) (4,428) - - 6, (1,493) (3,392) E. Total (3,903) (10,418) (8,226) - 9, (13,309) 4,858 Key A = From interest B = Other adjustments SECTION 9 Net premiums - Item 150 No amounts are included in this Section. SECTION 10 Balance of other income and charges of the insurance management - Item 160 No amounts are included in this Section. 187

189 Part C - Information on the income statement SECTION 11 Administrative expenses - Item Personnel expenses: breakdown Ty pe of ex pense/amounts 31/12/ /12/ Employees 952,436 1,018,483 a) salaries and w ages 662, ,427 b) social security contributions 179, ,582 c) leav ing indemnity - - d) social security costs 27,983 28,654 e) prov ision for personnel retirement indemnities 2,828 3,491 f) allow ance for post-retirement benefits and similar obligations: 1,008 1,505 - defined contribution defined obligations 1,008 1,505 g) pay ments to ex ternal supplementary pension funds: 45,430 45,542 - defined contribution (1) 45,430 45,542 - defined obligations - h) costs deriv ing from pay ment accounts based on ow n equity instruments 10 - i) other benefits in fav our of employ ees 32,951 73, Other personnel 1,816 1, Directors 2,769 2, Staff retirement 153 1, Recovery of expenses for employees placed at other companies (8,614) (10,265) 6. Reimbursement of expenses for third-party employees at the company 5,868 6,110 Total 954,428 1,020,215 (1) The sub-item includes payments for staff severance indemnity paid directly to INPS. (2) The sub-item also conventionally includes the remuneration paid to the Statutory Auditors of the Parent Company for 348 thousand euros (311 thousand euros in 2016) and the expenses reimbursed to directors for 52 thousand euros (28 thousand euros in 2016) 11.2 Average number of employees by category 31/12/ /12/2016 a) Employees 13,064 13,179 1) Managers ) Middle managers 6,027 5,973 3) Remaining employees 6,689 6,845 b) Other personnel Total 13,175 13, Post retirement defined-benefit obligations: costs and revenues See section 12.3 in Liabilities Other benefits in favour of employees See section in Liabilities. 188

190 Part C - Information on the income statement 11.5 Other administrative expenses: breakdown Ty pe of ex pense/sectors 31/12/ /12/2016 a) indirect duties and taxes 26,998 31,563 b) other expenses 590, ,485 - subscriptions, magazines and newspapers transportation 6,860 7,685 - costs for outsourced treatment/processing stationery and prints 4,455 6,432 - cleaning of premises 1,874 2,958 - surveillance expenses and value counting 17,032 18,152 - maintenance and lease of hardware e software 101,781 94,377 - electrical energy, heating and water 19,074 20,848 - insurance premiums 21,653 23,132 - services rendered by third-parties (ICT activities - software) 71,000 71,794 - remunerations to professionals 54,898 49,385 - legal expenses, information and perusals 50,145 40,139 - advertising, entertainment and charity 26,959 33,358 - telephone, post and data transmission expenses 47,387 42,601 - lease and maintenance of furniture, equipment and machinery 24,376 18,049 - maintenance of properties and rent expenses 79,895 82,310 - other administrative expenses 61, ,382 Total 617, ,048 The sub-item other administrative expenses includes 17.8 million euro for the 2017 ordinary portion of contributions to the National Resolution Fund held by the Bank of Italy as the national resolution authority and set up pursuant to Directive 2014/59/EU, and 21.2 million euro for allocations for the costs of mandatory 2017 contributions to the Interbank Deposit Guarantee Fund, which implemented the new ex-ante lending mechanism introduced by Directive 2014/49/EU. With regard to 2016, the contributions in question came to 19.9 million euro (ordinary portion) and 46.8 million euro (two additional portions) for the Single Resolution Fund and 16.0 million euro for the Interbank Deposit Guarantee Fund. The fees for services provided by the independent auditors are detailed in the annexes to the individual BNL SpA Financial Statements. 189

191 Part C - Information on the income statement SECTION 12 Net provisions for risks and charges - Item Net provisions for risks and contingencies: breakdown Items/Sectors 31/12/ /12/2016 Allocations Uses Net result ( ) ( ) (33.358) (27.535) SECTION 13 Net impairment losses on property, plant and equipment Item Net impairment losses on property, plant and equipment: breakdown Assets/Income components Depreciation (A) Value adjustments for impairment (B) Write-ups (C) N et result (A+B)-C A. Tangible assets - A.1 Ow ned (58,898) - - (58,898) - for business use (56,688) - - (56,688) - for investment (2,210) - - (2,210) A.2 Leased for business use for inv estment Total (58,898) - - (58,898) SECTION 14 - Net impairment losses on intangible assets - Item Net impairment losses on intangible assets: breakdown Assets/Income components Amortisation (A) Value adjustments for impairment (B) Write-ups (C ) Net result (A+B)-C A. Intangible assets A.1 Ow ned (37,075) - - (37,075) - Generated inside the company (7,757) - - (7,757) - Other (29,318) - - (29,318) A.2 Leased Total (37,075) - - (37,075) 190

192 Part C - Information on the income statement SECTION 15 - Other net operating income (expenses) - Item Other operating expenses: breakdown Income/Amounts 31/12/ /12/2016 a) Leasing rates (3,781) (3,925) b) Loss due to non-existent assets (8,162) (5,445) c) Loss for various reasons (6,496) (8,153) d) Amortized costs for improvements to third party properties (20,727) (14,590) e) Other charges (5,210) (1,896) Total (44,376) (34,009) Other operating income: breakdown Income/Amounts 31/12/ /12/2016 a) Other income 7,285 5,048 b) Rent income 2,272 4,974 C) Recoveries for non-existent liabilities 4,832 2,342 D) Income for services to other societies 23,374 22,551 Total 37,763 34,915 SECTION 16 - Profit (Loss) on equity investments - Item Profit (Loss) on equity investments: breakdown Income components/sectors 31/12/ /12/ Joint-control companies A. Income Rev aluations Gains on sale Write-ups Other positive changes - - B. C harges Write-dow ns Value adjustments for impairment Loss on sale Other negative changes - - Net result Companies subject to significant influence A. Income Rev aluations 2. Gains on sale Write-ups 4. Other positive changes B. C harges (397) 1. Write-dow ns 2. Value adjustments for impairment (5) 3. Loss on sale 4. Other negative changes (392) Net result 550 (302) Total 550 (302) 191

193 Part C - Information on the income statement SECTION 17 - Net result of valuation at fair value of property plant and equipment and intangible assets - Item 250 No amounts are included in this section. SECTION 18 - Goodwill value adjustments - Item 260 No amounts are included in this section. SECTION 19 - Gains (Losses) on sale of investments - Item Gains (Losses) on sale of investments: breakdown Income components/sectors 31/12/ /12/2016 A. Real estate properties 37,858 18,819 - Gains on sale 38,035 19,235 - Losses on sale (177) (416) B. Other assets (130) 13 - Gains on sale Losses on sale (174) (1) Net result 37,729 18,832 SECTION 20 - Taxes on income for the year from continuing operations - Item Taxes on income for the year from continuing operations: breakdown Income components/sectors 31/12/ /12/ C urrent tax es (-) (23,960) (27,548) 2. C hanges in current tax es of prev ious y ears (+/-) 5,518 10, Reduction in current tax es for the y ear (+) bis Reduction in current tax es for the y ear for tax credit of which for Law n. 214/2011 (+) 12, Changes in prepaid taxes (+/-) (77,145) (33,838) 5. Changes in deferred taxes (+/-) 1, Taxes pertaining to the year (-) (-1+/-2+3/-4+/-5) (81,404) (49,669) 20.2 Reconciliation between theoretical tax charge and balance-sheet actual tax charge 31/12/2017 Ires Irap total Gross taxable income: 229, ,987 X Permanent, undeductible differences 68, , ,422 Permanent, untaxable differences (66,605) (169,826) (236,431) Total taxable income 231, , ,965 Theoretical tax rate 27.5% 5.55% - Theoretical fiscal charge (63,702) (19,443) (83,145) Adjustment of deferred and prepaid taxes for previous years (4,916) 1,270 (3,646) Adjustement in current taxes, previous years 2,555 2,832 5,387 other adjustments N et effect of realignment - X - Balance-sheet fiscal charge (66,063) (15,341) (81,404) 192

194 Part C - Information on the income statement SECTION 21 - Profit (Loss) of discontinued operations, net of taxes - Item 310 No amounts are included in this section. SECTION 22 - (Profit) loss attributable to non-controlling interests - Item Detail of item 330 (profit) loss attributable to non-controlled interests N ame 31/12/ /12/2016 Consolidated investments with significant minority interests Artigiancassa Spa Business Partner Italia Scpa - - Other investments - - Total SECTION 23 - Other information 1. Non-recurrent significant events and operations. According to the Consob communication no. DEM/ of 28 July 2006, the impact of relevant events and significant transactions of the non-recurrent type on the income statement is shown hereunder. Costs for the Bank s reorganisation activities During the year the Bank allocated: for Administrative expenses: other administrative expenses (item 150 b): 9.0 million euro of costs for commercial and logistic transformation (12.9 million euro as at 31 December 2016). 2. Non-typical or unusual transactions No atypical or unusual transactions were recorded in the year. SECTION 24 - Gains per share The information is provided by the Banks with shares listed in regulated markets. 193

195 Part D Consolidated statement of comprehensive Income Part D Consolidated statement of comprehensive Income 194

196 Part D Consolidated statement of comprehensive Income Analytical statement of consolidated comprehensive income ITEMS Gross Income tax Net 10. Profit (loss) for the year (81.404) Other income components without reversal to income statement 20. Tangible assets Intangible assets Defined benefits plans (3.869) (2.805) 50. N on-current assets of dismissinone Share of reserves from evaluation of investment securities valued at equity Other income components with reversal to income statement 70. Hedging of forex investment a) changes in value b) reversals in the income statement c) other changes Exchange differences: a) changes in value b) reversals in the income statement c) other changes Cash flow hedges (21.184) (14.183) a) changes in fair value (20.375) (13.641) b) reversals in the income statement (809) 267 (542) c) other changes Financial assets available for sale: (34.499) a) changes in fair value (19.837) b) reversals in the income statement (14.662) corrections due to impairment (13.816) profit / loss on disposals (846) c) other changes N on-current assets of dismissinone: a) changes in fair value b) reversals in the income statement c) other changes Share of Revaluation reserves investments carried at equity : a) changes in fair value b) reversals in the income statement corrections due to impairment profit / loss on disposals c) other changes Total other income components (26.435) Overall profitability (Item ) ( ) Profitability consolidated total attributable to minority (69) (17) (86) 160. Profitability consolidated total Parent Company's ( )

197 Part E Information on risks and hedging policies Part E Information on risks and hedging policies 196

198 Part E Information on risks and hedging policies SECTION 1 - RISKS OF THE BANKING GROUP Equity is valued according to description in Part A Accounting policies of the Explanatory Notes to the Financial Statements. Specifically, for unlisted financial instruments in active markets, the fair value is defined based on internal models described in the above-mentioned Section. As regards the above-mentioned financial instruments, however, it is deemed that there are no reasons of uncertainty on estimates that would entail a high risk, within the following year, of significant value adjustments on balance-sheet assets and liabilities. BASIC PRINCIPLES OF THE RISK APPETITE FRAMEWORK BNL s Risk Appetite Framework, developed in accordance with the guidelines and principles defined at BNP Paribas Group level and in line with the Principles for an Effective Risk Appetite Framework (Financial Stability Board, November 2013), with Bank of Italy Circular no. 285 of 17 December 2013 and the Single Supervisory Mechanism Supervisory Statement on Governance and Risk Appetite (ECB, June 2016), establishes the level of risk that the Bank, in pursuing its strategic objectives and business plan, is willing to accept in line with its risk profile. The RAF is thus the risk framework within which the Budget and Business Plan are developed, thereby guaranteeing consistency between the strategy and policy for assuming risk and the Planning and Budget process. In 2010 BNP Paribas drew up an initial Risk Profile Statement ( RPS ) in order to define the medium/long-term risk profile deemed acceptable by the Group. By way of resolution of the Board of Directors of 20 December 2013, BNL defined its Risk Profile Statement in line with that defined by BNPP at the time. In December 2014 the EBA, in its publication Guidelines on common procedures and methodologies for the supervisory review and evaluation process ( SREP ), reiterated the importance for banks to set up a strategic guiding instrument such as the Risk Appetite Framework ( RAF ) whose ultimate purpose is to align strategies, the risk profile and capital adequacy. In 2015 BNPP initiated a medium-term project to upgrade its RPS to align with the EBA/ECB/FSB standards. That project entails the definition of the Group Risk Appetite Statement to take account of the Risk Principles already defined within the RPS drawn up in 2014 (Business Mix & Earnings Volatility, Solvency & Profitability, Funding & Liquidity, Credit and Market & Valuation Uncertainty) and those relating to Operational Risks, Interest Rate Risk on the Banking Book and Compliance, Conduct, Cyber Security and Model risk as well as Corporate Social Responsibility. In line with the plan of upgrading the RAF to align with the EBA/ECB/FSB standards and with the principles and guidelines set out by BNPP, by way of Board of Directors resolution in December 2017, BNL approved the updating of its Risk Profile Framework, whose pillars are the Risk Principles, metrics and governance. In more detail: 1) the Risk Principles describe the types of risk that the Bank is willing to accept or undertakes to avoid in conducting its business; 2) the metrics represent the criteria and instruments to control and monitor compliance with the risk profile defined by the Bank. Those metrics are monitored through an alerting system based on the adoption of two tiers of control: a. early warning: first alert threshold, for the purpose of prompt, advance activation of risk mitigation actions b. limit: maximum level of tolerance acceptable for each type of risk, which, when exceeded, triggers processes for immediate escalation to the Board of Directors 197

199 Part E Information on risks and hedging policies 3) control of the Bank s risk profile is guaranteed by a governance structure which sets out roles and responsibilities of the company functions involved in the phases of proposal, agreement, approval and revision of the RAF and the associated operating metrics and escalation processes in the event that a limit is overrun or an early warning given. An early warning or a limit overrun result in the notification to specific company bodies. CREDIT, MARKET, OPERATIONAL AND ALMT RISK The BNL Risk Department, as the risk control function pursuant to the Bank of Italy Circular 285/2013, Supervisory Regulations for Banks, as updated, is integrated in the RISK organisational model of the BNP Paribas Group with a consequent close relationship with and reporting of the Risk Director to the Domestic Markets RISK of BNP Paribas. The Risk Department directly ensures that the level of the credit, counterparty, operational and market risks, as well as the risks managed by the ALM and Treasury (ALMT) function specifically including banking book interest rate risk and liquidity risk undertaken by the Bank is in line with the relevant policies and consistent with the Bank s economic and equity structure. The Risk Department, through specific flows of information and consistently with the structure of the BNPP Group and the second level control activity carried out, has an overview of all the risks as a whole and their mutual interaction, and indirectly controls strategic and reputational risks. More specifically, the Risk Department ensures: - the qualitative and quantitative monitoring of the risk levels through a second tier control system of the credit, counterparty, market, operating and ALMT risks; - the development and implementation of models and methods to measure, manage and control credit risks; - the control of the rating system, through dedicated and independent validation and internal audit structures (second and third level); - the validation and revision of the ALMT risk models and metrics; - the definition of credit policies and processes - in collaboration with the business structures; - the supervision of operational risks of the Bank and the coordination of permanent control activities; - the organisation and coordination of the implementation of the systems needed to prevent, identify, control and monitor the system of protection against internal and internal frauds; - that the corporate and control bodies of the Bank are informed about the integrated exposure to credit, counterparty, market, ALMT and operational risks of the Bank; - the predisposition of the Risk Appetite Framework/Risk Profile Statement (RAF/RPS) and the control of the operating metrics, i.e. the reference framework that defines the limits of the risk indicators, in line with the Holding Company BNPP, to be submitted to the approval of the Bank s governance and control bodies. The Risk Department directly reports to the Managing Director and is independent from the company functions that decide to assume risks and that are in charge of the operational management of risks. However, as the Risk Department takes part in the various Inter-functional Committees, at the same time it is not very distant from the operating context. As regards credit risk, in particular, monitoring by the Risk Department is ensured, not only thorough the participation in the Committees, but also with the provision of a mandatory but not binding opinion (risk opinion) on the credit line proposals to ensure continuous interaction with the business units (Corporate Banking, Commercial and Private Banking, Corporate & Institutional Banking divisions and Special Loans Department), which propose and resolve on the assumption of the credit risk and are directly responsible. 198

200 Part E Information on risks and hedging policies Organisation aspects The organisation of the Risk Management Department includes the following units: Basel 2 Certification Italy, which carries out the functions of internal audit of the internal rating system of BNL established by the prudential regulations and functionally reports to the homologous structure of BNP Paribas, IRC RISK, which guarantees its independence. The main responsibilities are: - to ensure the assessment of risks regularly deriving from an incorrect application of the requirements included in the Basel Accords and concerning the internal rating system; - to make sure, for the aspects linked to the certification activity, that the Bank s Corporate Governance and Control Bodies are informed accordingly. Risk Management, which includes responsibilities relating to: - the development, maintenance and evolution of the credit risk measurement models, in line with the guidelines of the BNP Paribas Group, the first level backtesting of the models and the rating policy definition; - the validation, regardless of the implementation structure, of the credit risk models and the input data, including the second level backtesting; the preparation of periodic information for the company s corporate governance and control bodies on the Validation/Qualification of the Credit Risk Models; - the monitoring of the evolution of the credit risks governing the asset quality, via portfolio analyses at sectorial/territorial level, by customer/product segments, the processing of forecasts relating to the asset quality and the expected trend of the cost of credit risk and the shortfall; the definition and maintenance of the loan impairment methodology; - the monitoring of market, counterparty and ALM Treasury (ALMT) risks, ensuring the implementation of the measurement methodology in compliance with the guidelines defined by the Parent Company and the check of the integrity of the risk data in the systems; - the validation and independent revision of the behavioural models proposed by the ALM Treasury unit and the related risk metrics; - in cooperation with the other Departments/Divisions, the definition, implementation and reporting of the Risk Appetite Framework (RAF) in line with the model approved by the Bank s Board of Directors and the guidelines provided by the Parent Company; Credit Expertise, Policy & RISK COO, for the following activities: - the definition and implementation of the credit processes in compliance with the guidelines of the Parent Company, including the rules for eligibility of guarantees and the processes for the management and revaluation thereof; - the coordination, as part of the Risk Management Department, of the assessment and validation process of new products, services, agreements and activities; - the definition of the delegated powers concerning credit, with the support of the Operations Department to verify organisational impacts; - the creation of portfolio analyses, simulations, forecasts and sector analyses to support the definition of the credit guidelines; - the definition and maintenance of the scoring system on acceptance, where applicable, ensuring oversight of performance and governance in line with the policies of the BNPP Group on the matter; - the review of the assigned ratings through the statistic models, based on the requests from the Network and/or from the Business Divisions/Lines; the governance of the quality of statistical ratings with their periodic review and checking, on a sample basis, of the quality 199

201 Part E Information on risks and hedging policies and homogeneity of the risk measures assigned using judgmental methodology by the enabled roles of the Bank; - the planning and operational coordination of activities and projects most relevant to the Department, including the consolidation, updating and progress of the overall master plan of projects of the Department; - the monitoring of transversal activities with the other companies of the BNPP Group in Italy; Credit Risk Analysis, which works in line with the BNP Paribas Group's organisational structure, and, where envisaged by the Parent Company, has a direct link with the homologous structures of the Parent Company for the specific areas of responsibility. The main responsibilities are: - the independent and autonomous valuation of the credit risk as part of the credit process by formulating risk opinions in line with the policies, procedures and processes of the Bank and the BNP Paribas Group and in line with the risk profile of the pertinent loan portfolio; - the validation of the status reclassification proposals and the relative entry provisions as well as the action plans formulated by the Business Lines; - The verification of the quality of the Rating and the Global Recovery Rate (GRR) relating to counterparties and credit lines being assessed; RISK Operational Risk & Control (ORC), which includes the following responsibilities: - dealing with the process of validating the operational risk management and measurement system and ensuring the distribution and compliance with the regulatory provisions, directives and Group s methodologies pertaining to Operational Risks; - ensuring the mapping of the Bank s operating risks by supervising the activities performed and ensuring methodological support; - ensuring the supervision of the qualification/ quantification of historic and potential cases of operational risks developed by the Departments/Divisions of BNL SpA; - ensuring reporting both internally and to the Parent Company in relation to matters under its responsibility; - ensuring the supervision of the finding and monitoring activities and the recommendations issued by Inspection Générale, the Regulators, the Control Bodies and the relevant permanent control functions, as well as the relevant corrective actions, in relation to matters under its responsibility, in accordance with applicable regulations; - ensuring the implementation of the systems needed to prevent, identify, control and monitor the system of protection against internal and internal frauds, and the coordination and direct management of the investigations for the BNL Group; - ensuring oversight of the risk mitigation strategies relating to the execution, delivery and management of processes, including the risk of third parties and the risk of business interruption and shortcomings in the IT systems (including Compliance ICT risk); - ensuring the distribution of and supervision over the compliance with the regulatory provisions, the directives and the Group s methodologies with regard to Permanent Controls, the assessment of the consequent choices and the instruments used, the relevant assistance/consultancy for the BNL Group; - ensuring that the Bank s control plan is defined, taking care of supervising the activities to define the plan addressing the Departments/Divisions and the Companies of the BNL Group in relation to matters under its responsibility while ensuring the methodological support; - ensuring the monitoring of the actions identified by the Departments/ Divisions/Companies of the BNL Spa Group to mitigate operational risks. 200

202 Part E Information on risks and hedging policies Credit Risk Controls & Monitoring, which includes the following responsibilities: - planning and executing credit controls through the General Credit Controls Plan for the purpose of ensuring compliance with internal and external regulations (including the effective use of the internal rating system in credit processes) and the consistency with the Parent Company guidelines on the matter; - supporting the Department in managing operational risks by identifying and mapping risks, collecting historical events, analysing and quantifying potential events, contributing to the definition and monitoring of mitigation actions; - defining and maintaining the permanent control plan, implementing the controls and monitoring the mitigation actions to minimise operational risks of the Department, in line with the guidelines of the competent Functions of the Bank and the Group; - executing controls on the valuations of assets used as collateral for MLT loans and nonperforming loans, as well as monitoring of real estate collateral; - working with the Business Lines, ensuring the effectiveness of the watchlist management process, to define and implement corrective actions on positions under systematic supervision; defining and updating the stoplight validation process and the management plans and maintenance and updating of the Stoplight early warning engine; - updating and subsequently monitoring the maximum limits of country risk for BNP Paribas, assessing the requests from the Bank s Business Lines, in line with the specific policies of the BNP Paribas Group; The organisational model also includes a set of Management and Network Risk Committees, comprising both the Business functions and the Risk Department, responsible for assessing and assuming credit risk, the credit process and the integrated supervision of credit, counterparty, market, financial and operating risks as well as their outlook development and the adequacy of capital resources to face them. 1.1 BANKING GROUP - CREDIT RISK Qualitative information BNL bases the credit risk management and measurement processes on an Internal Rating System (SIR). As part of the larger Group framework, the latter is subject to continuous monitoring and upgrading in order to ensure the correct implementation of the internal rating models and compliance with regulatory requirements. IRBA validation procedure for the credit risk was completed at the end of 2013 for the Central Governments and Central Banks and Companies portfolios and the process of validation of the Retail exposures and Banks portfolios was completed in Furthermore, the Regulator s authorisation was obtained to use the internal Corporate models within the Eurosystem Credit Assessment Framework (ECAF) for the disbursement of the loans guaranteeing liquidity transactions. Additional specific internal rating models are used to assign risk parameters for counterparties in the Italian Local Authorities (ILA) segment, handled using the Standard approach. Reporting for credit risk measurement follows a consolidated process with the Parent Company through the input of the Credit Risk Global Database. Projects continue in this context, at both Local and Central level, for the purpose of compliance with the requirements, as defined by regulation 239 of the Basel Committee for Banking Supervision, with respect to the principles of reliability, adaptability and completeness of the databases and reports. 201

203 Part E Information on risks and hedging policies Management, measurement and control systems The Bank s risk credit management and measurement processes are based on an Internal Rating System (SIR). The Sovereigns, Banks and Financial Institutions, Large Corporate and Specialized Lending asset classes are applied the global rating models mainly with the judgemental approach at Parent Company level and applied in the process of assigning ratings, transversally by all the Group Entities. The Small Medium Enterprise and Retail customer segments, both Individuals and SME retail, are managed with local rating models developed by BNL depending on the specific local characteristics of the customer segments they are applied to. The Bank s internal rating system was subject to regulatory validation, thus enabling the Bank to calculate the capital requirements based on internal parameters. During 2013 the regulatory validation process was completed with the IRBA authorisation for the credit risk Exposures to companies and Exposures to Central Governments and Central Banks. In 2015 the IRBA adoption process was completed, with the validation of the internal models for Retail exposures and Exposures to Banks. In line with the larger Group framework, the internal rating system is subject to monitoring and upgrading in order to ensure the correct implementation of the internal rating models and compliance with regulatory requirements. In particular, in 2017 the updating of the rating models for the Small Mid Corporate segment was finalised, broadening the historic series to include the most recent years, and adopting additional methodological upgrades. The new Small Mid Corporate models were subject to local and global governance, with an independent review of Validation and Certification, for the subsequent review by the Supervisory Authorities planned for The methodology for estimating probability of default (PD) for companies envisages the assignment of the rating through a quantitative assessment, based on financial information and trends, and a qualitative assessment, with information collected by the relationship s manager. The rating is updated: during review and renewal of credit lines, upon the occurrence of significant events for the purpose of assessing the creditworthiness, as well as periodically, overall for the statistical models. The Internal Rating Agency, operating at the Risk Management Department, is responsible for overriding the rating produced by the statistical models. For Retail customers, in line with the Group framework, the rating models are developed using a statistical approach and include financial, performance, socio-demographic and qualitative variables. With reference to the Probability of Default, all the performing customers are represented on a single master scale characterised by 10 levels of growing risk (rating from 1 to 10), integrated with 2 notches of higher detail for each rating level. Non-performing customers are classified into an additional 2 classes (ratings 11 and 12). This classification, homogeneous at BNPP Group level, facilitates the consolidation of the credit portfolios and the comparability of the measurements of risk with the other Entities of the BNPP Group. The internal rating system also includes Exposure at Default (EAD) and Loss Given Default (LGD) models, differentiated by customer segment, which, based on historical evidence, estimate the changes in exposure and loss observed in the event of default. The internal rating system regards almost all of the Bank s customers with hedging percentages on the reference portfolios above 90% both in terms of standard RWA and customers granted credit. 202

204 Part E Information on risks and hedging policies Internal controls on the rating system The organisation of controls on the internal rating system, within the Risk Department, is spread over several structures. Model Development and Operational Control and Planning are assigned the first tier controls, while second tier controls are assigned: - to Model Validation, for model aspects - to Internal Rating Agency, Risk Controls and Risk Surveillance, for data quality, merit and formal correctness. A specialised internal review structure (Basel 2 Certification Italy) which must check (third tier control) the regulatory requirements of the rating system as a whole. Basel 2 Certification Italy functionally reports to the structure with the same name of the Parent Company BNP Paribas and directly to the Board of Directors and the Internal Auditing Committee. Inspection Générale Hub Italy (IG HI) periodically carries out a quality assurance review on the processes and activities of Basel 2 Certification Italy. During 2017, - the Model Validation structure conducted the annual validation of the local models (Small Mid Corporate, SME Retail and Individuals), the qualification of the Global models (Large Corporate and SL) and conducted the main validation analyses also on non-irba models (Italian Local Authorities). It also supplemented the validation audits with the mapping of the models and application of the risk parameters in the calculation of RWA. As per the plan, it carried out the infra-annual monitoring of the probability of default on the Corporate and Retail portfolios (including the override analysis), with detailed analyses on the PD and LGD backtesting and initial evidence on the EAD applied. Moreover, as part of the Bank s ICAAP, it validated the stress tests of RWA and concentration risk. Evidence of the Model Validation activities was systematically presented to the Bank s governance and control bodies and sent, as per the regulations, to the Bank of Italy. - The Internal Rating Agency, Risk Controls and Risk Surveillance structures conducted ongoing Systematic Surveillance and Monitoring on the processes of assigning risk measures and on the quality of the main underlying data. In particular, as part of Systematic Surveillance, individual risk positions of customers were verified, to guarantee the constant detection and assessment of risk, the resulting classification and prompt, effective application of management strategies aimed at minimising the impact of deriving from increased risk, with a view to preserving the quality of credit assets. Forward-looking management is among the fundamental principles of prudent control, both in the Basel regulations and the supervisory instructions of the Bank of Italy, where the focus is no the need for banks to set up an adequate system of monitoring and reporting on exposures to risk, which also assesses how the changing risk profile of the bank may influence its capital requirements. The main Monitoring activities carried out during the year included the controls of merit and formal correctness, aimed at verifying that: the first tier controls were correctly conducted, i.e. that the activities that comprise the credit process were carried out in compliance and consistency with the internal and/or external regulations (control of formal correctness); the assessments used over the course of the credit process were adopted through an adequate, correct overall examination of the data, events and/or information and that the process conserves efficiency and effectiveness in all of its phases (controls of merit). 203

205 Part E Information on risks and hedging policies The results of the controls carried out as part of Systemic Surveillance and Monitoring were periodically reported to the Risk Monitoring Committee, in order to identify any frequency anomalies in order to implement suitable corrective actions. During the year, Basel 2 Certification Italy carried out the annual review of the BNL internal rating system on the authorised portfolios and, on mandate from the Board of Directors, also conducted audits for the investee BNP Paribas Ifitalia, providing the corporate bodies with specific reports, also sent to the Supervisory Authorities, as required. In this area, it conducted follow up on its recommendations and the action plans drawn up on request of the Supervisor to consolidate the rating system. Credit risk valuation policies The credit risk control uses a systematic and comprehensive Credit Policy system that promotes the currently available tools (rating, scoring, etc.) and enhances them with additional information and an estimate (economic sector forecasts) with a view to a proactive management of the credit position. The overall Credit Policy system consists of: - general guidelines: governance indications for the Bank s credit positioning of comprehensive value that also value the reference micro - macroeconomic vision; - outlook on the economic trend and identification of the priority sectors based on the prospect of risk improvement; - sector credit guidelines: development guidelines depending on the sectorial forecasts and the current risk positioning of the BNL portfolio, also differentiated by reference area; - counterparty indications: credit policies differentiated on the basis of the characteristics of the counterparties, with indications in terms of granting and acquisition of mitigating factors for short and medium/long term loan types. During 2017 the Risk Department, together with the Business Divisions, started a series of actions to maintain the governance of the credit risks high. In more detail: - the portfolio risk analysis continued (both at a local level and within the Group s Risk Policy Committee / Portfolio Review), both for the Bank as a whole and for specific economic activity/product sectors, allowing for the definition specific commercial strategies and the related credit indications; - with reference to the Credit Policy system, the Geo-Sectorial Guidelines were updated for Corporate and Retail customers, in line with the evolution of the economic scenario and the positioning of the Bank s loan portfolio; - a specific Credit Policy was issued on lending to innovative companies (start-ups and SMEs), to define the credit standards and main selectivity factors; - the implementation of the new judgmental rating models of the Parent Company was completed for Large Corporate customers, also by carrying out specific training for the positions involved in the process of assigning risk measures; - the initiatives were continued to develop the top Corporate and Retail customers, as well as prospects, through the use of specific tools defined together with the Risk and Business Department; thus it was possible to preselect and pre-assess prospective and existing customers on which to focus the development actions with a view to rebalancing the portfolio in terms of risk. 204

206 Part E Information on risks and hedging policies Management policies of credit risk As part of the credit risk management policies, the Bank adopted processes for monitoring and systematic surveillance of the performance of credit relationships for the purpose of classifying credit exposures into the various homogeneous risk classes, based on sector regulations, supplemented by internal provisions, which set the rules for classification and transfer. In particular, based on rating and early warning systems, the Bank identified loans with the highest risk among performing loans to customers. Monitoring activities continue to strengthen through risk control and include the definition of a yearly Control Operating Plan, based on the General Plan of controls, which establishes the specific types and operating structures involved. The actions conducted in 2017 concerned the monitoring process and the systematic supervision of the credit risk. In particular, in close cooperation with the Business Lines, concerning the monitoring, the following actions were continued: - holding a committee to communicate with the business lines and the Financial Division, summarising the controls performed by the various DR structures and any remediation plans (Monitoring Committee - Control Session); - assigning targets to the monitoring structures located throughout the country, in the context of the Control Operating Plan, focused on verifying the highest risk positions in terms of colour and rating and Organisational Units with a more critical level; - strengthening the early warning systems of the Bank, both by expanding the predictive indicators of customer risk and acting on the frequency of updating said indicators, bringing it from monthly to daily in most cases; - adjusting the systematic surveillance processes to the organisational changes of the Bank, both by defining processes and rules to identify customers with the highest risk to be managed by specialist structures (special loans) and by creating dedicated Watchlist committees for those structures. Country risk Country risk procedures are consistent with those of BNP Paribas: the risk is managed by setting annual limits of use for each single country, depending on the needs of the business and the Parent Company s risk policies. The use and respect of the limits is monitored by the first and second level business and risk control functions. Credit risk mitigation techniques The credit and counterparty risk mitigation techniques comprise accessory credit guarantee agreements and other instruments and techniques that determine a mitigation of the risk also recognised from a prudential point of view. The acquisition and management of the guarantees by the Bank, in line with the principle of sound and prudent management, represent fundamental elements in the credit processes. In particular, the internal regulations that govern the credit process also govern the guarantee management system by defining the methods to correctly acquire them and treat them according to each type, to ensure legal certainty, validity and enforcement against third parties. The Bank obtains guarantees predominantly as a consequence of the economic and managerial effect of the same in mitigating the risk profile of the counterparties and to consequently use them, if eligible from a prudential point of view, in determining the capital requirements for the credit and counterparty risk. 205

207 Part E Information on risks and hedging policies The guidelines and general principles applied by the Bank to manage and recognise credit and counterparty risk mitigation techniques for prudential purposes were subject to approval by the Board of Directors through the issue of a customised resolution. This resolution illustrates the methods the Bank uses for each type of guarantee, in line with that set out in Regulation EU no. 575/2013 (CRR), states the eligibility requirements for them to be used to reduce capital absorption, and the criteria adopted for Supervision of the value of properties taken as collateral. Specific internal regulations were issued which outline the principles for eligibility of guarantees acquired by the Bank for the purpose of their use in Credit Risk Mitigation, as governed by the CRR and, in particular, define the methods the Bank uses to supervise the value of properties, the criteria used to define properties to be revalued and the methods for granting the assignment to appraisers. Moreover, to monitor the generic and specific eligibility requirements established by prudential regulations, the Bank applies a centralised system of rules, which is automatically able to attest the presence of the regulatory requirements with regard to both the Standard and advanced IRB approach. To calculate the capital requirements for the credit risk, the risk mitigation techniques used by the Bank change according to the approach used. Most of the guaranteed exposure, belonging to portfolios authorised to use the advanced IRB methodology, the effect of the reduction of the risk generated by the guarantees is recognised through the LGD estimate and varies based on the type of credit line and guarantee associated. For the residual portion of the portfolio to which the Standard methodology is applied, the risk ratios envisaged for loans guaranteed by residential and non-residential properties, personal guarantees provided by admitted guarantors and pledges on financial instruments admitted are applied. To optimise counterpart risk management, the Bank also makes use of compensation agreements with financial institutions for derivatives contracts. Impaired financial assets In 2017 in line with the guidelines of the European Central Bank - the Bank further increased its scope of oversight of the NPL and UTP portfolios by defining a new strategy for managing NPLs characterised by 4 main pillars: Q1 2017: Creation of the Crediti Speciali Division" (hereinafter, SLD ) which directly reports to the BNL CEO, for the purpose of concentrating in a single structure the management of nonperforming loans, with a pro-active, forward-looking approach. Based on a forward-looking approach, the scope of operations of that structure includes positions with ratings of 8 10, positions with ratings of 11 and 12 - UTP large corporate / restructuring plans, medium and small UTP and positions with revoked credit lines. SLD brought together in a single integrated and independent structure, the three main areas of NPL management: Special Situations Positions (previously managed by Special Affairs within the Corporate Division); Non-past unlikely do pay positions (previously managed by Corporate and by Retail Irregular Loans Manager"); the entire Workout portfolio. The assignments to CSD and the return flows to the Commercial Divisions are managed through the Watchlist Committees, with clear rules and a key role assigned to the Risk Department for final decisions. In order to guarantee a pro-active approach to recovery, in addition to the above categories of impaired loans, CSD also manages high risk performing positions (Corporate - SMEs 206

208 Part E Information on risks and hedging policies with ratings of 8-10 red stoplight with GBV exceeding 100 thousand euro), for a total of an additional 1.2 billion euro (As at 31 December 2016) in GBV under SLD coverage. To date, the organisational chart of SLD includes: a support function - Planning and Operational Management" - dedicated to support/monitoring overall management and recovery processes, to operational risk management and to preparing periodic reporting on inflows and outflows through a dedicated team (Portfolio Management) responsible for data analysis and reporting; two direct business lines, i.e. Special Situations" and Network", respectively dedicated to: o managing restructuring plans and complex/non-revoked large positions; o pro-active management of credit mitigation actions on high risk positions, mainly to remedy or renegotiate the loan and the concurrent verification of guarantees and pertinent documentation to facilitate the future recovery activities of the Workout Department; a Workout business unit (hierarchically reporting to Business Partner Italia - a BNL service company), dedicated to managing legal and out-of-court activities to maximise the recovery value of doubtful loans and past-due unlikely to pay loans (and the related property collateral). Q2 and Q3 2017: Project of validation of the NPL portfolio, known as the Workout Business Plan project. The project focused on analysing the positions in the portfolio of the Workout Department as at December 2016: 11.3 million euro in GBV, for around 150 thousand debtors; Q4 2017: Definition of an accurate NPL management strategy and the related Operational Plan; Q4 2017: Definition of the SLD and Workout operating model to guarantee the implementation of the NPL Strategy, with implementation starting in In the first year of its activation, the new model of prompt management of the highest risk positions by a specialised structure has already shown significant growth in the deleverage of NPL positions with unrevoked credit lines and on performing high risk positions. In 2017, despite a market that is not favourable yet, characterised by extensive supply, some non-recourse transfer transactions on single loans and a massive disposal of around 930 million euro were posted. In 2017, in line with the FourEyes principle, the Risk Opinion was also introduced by the Risk Department on all transactions, provisions and transfers to higher status to a certain threshold. 207

209 Part E Information on risks and hedging policies Quantitative information A. CREDIT QUALITY A.1 Impaired and performing loan exposures: amounts, value adjustments, changes, economic and geographical distribution A.1.1 Distribution of the financial assets by loan portfolio and quality (book value) Portfolio/quality Doubtful loans Unlikely to pay Past due loans impaired Other loans impaired Loans not impaired Total 1. Financial assets av ailable for sale Financial assets held to maturity Loans to banks Loans to customers Financial assets carried at fair v alue Discontinued operations Total at 31/12/2017 Total at 31/12/ Loans to customers - not Impaired Past due not impaired Ranges of time 31/12/ /12/2016 overdue up to 3 months 1,664,752 1,220,337 past due more than 3 months and up to 6 months 177, ,354 overdue more than 6 months and up to 1 year 101,602 99,051 expired more than one year 13,449 8,485 Total 1,957,435 1,445,227 Other exposures 53,857,848 61,224,686 total 55,815,283 62,669,913 A.1.2 Distribution of loan exposures by loan portfolio and quality (gross and net value) Impaired assets N ot impaired assets Portfolio/quality Gross exposure Specific adjustments Net exposure Gross exposure Portfolio adjustments Net exposure Total (net exposure) 1. Financial assets av ailable for sale 105,593 (97,614) 7,979 4,000,565-4,000,565 4,008, Financial assets held to maturity Loans to banks ,937,586-6,937,586 6,937, Loans to customers 11,266,421 (5,857,017) 5,409,404 55,947,351 (132,069) 55,815,282 61,224, Financial assets measured at fair v alue X X Discontinued operations Totale al 31/12/ ,372,014 (5,954,631) 5,417,383 66,885,502 (132,069) 66,753,433 72,170,816 Totale al 31/12/ ,079,419 (7,237,026) 5,842,393 64,428,258 (169,588) 64,258,670 70,101,

210 Part E Information on risks and hedging policies Low credit quality assets Other assets Portfolio/quality Total loss N et ex posure N et ex posure 1. Financial assets held for trading (26,264) 20, , Hedging derivatives ,998 Total at 31/12/2017 Total at 31/12/2016 (26,264) 20, ,936 (33,582) 51,977 2,858,565 A.1.3 Banking group Cash loans and off-balance sheet exposures to banks: gross and net value and maturity terms Gross exposure Ty pes of ex posures/amounts Within three months Impaired assets From 3 to 6 From 6 months months to 1 y ear After 1 y ear N ot impaired assets Specific adjustments Portfolio adjustments N et ex posure A. a) CASH EXPOSURES Doubtful loans X (94.114) X of which: forborne exposures X - X - b) Ulikely to pay X - X - - of which: forborne exposures X - X - c) Past due impaired loans X - X - - of which: forborne exposures X - X - d) Past due not impaired loans X X X X - X of which: forborne exposures X X X X - X - - e) Other assets not impaired X X X X X of which: forborne exposures X X X X - X - - TOTAL A (94.114) B. a) OFF-BALANCE SHEET EXPOSURES Impaired X - X - b) Other X X X X X (13) TOTAL B (13) TOTAL A+B (94.114) (13) There are no relevant positions among non-performing loans referred to non-guaranteed exposures subject to country risk. A.1.4 Banking group - Cash loans to banks: changes in gross exposure impaired C ause/c ategories Doubtful loans U nlikely to pay Past due impaired loans A. Starting gross exposure - 1, of which: exposures sold but not eliminated B. Increasing changes 99, B.1 collections from performing loans 99, B.2 transfers from other categories of impaired exposures B.3 other increasing changes C. Decreasing changes - (1,941) - C.1 disbursement for performing loans C.2 eliminations - (1,409) - C.3 collections - (532) - C.4 sale proceeds C.5 losses on disposal C.6 transfers from other categories of impaired exposures C.7 other decreasing changes - - D. Gross final exposure 99, of which : exposures sold, but not eliminated

211 Part E Information on risks and hedging policies A.1.4bis Banking group - Cash loans to banks: changes in gross forborne exposures analysed by loan quality Nothing to report. A.1.5 Banking group - Cash loans to impaired banks: changes in total value adjustments C ause/c ategories Doubtful loans U nlikely to pay Past due impaired loans Total of w hich: forborne ex posures Total of w hich: forborne ex posures Total of w hich: forborne ex posures A. Initial total adjustments - - 1, of which : exposures sold, but not eliminated B. Increasing changes 94, B.1 value adjustments 94, B.2 loss on sale B.3 transfers from other categories of impaired B.4 other increasing changes C. Decreasing changes - - (1,941) C.1 write-backs from valuation - - (532) C.2 write-backs from collection C.3 gain on sale C.4 eliminations - - (1,409) C.5 transfers from other categories of impaired C.6 other decreasing changes D. Final total adjustments 94, of which : exposures sold, but not eliminated A.1.6 Banking group Cash loans and off-balance sheet exposures to customers: gross and net value and maturity terms (migliaia di euro) Ty pes of ex posures/amounts Gross exposure Impaired assets N ot impaired assets Specific adjustments Portfolio adjustments N et ex posure Within three months From 3 to 6 months From 6 months to 1 y ear After 1 y ear A. a) CASH EXPOSURES Doubtful loans X ( ) X of which: forborne exposures X ( ) X b) Unlikely to pay X ( ) X of which: forborne exposures X ( ) X c) Past due impaired loans X (28.254) X of which: forborne exposures X - X - d) Past due not impaired loans X X X X X (27.488) of which: forborne exposures X X X X - X - - e) Other assets not impaired X X X X X ( ) of which: forborne exposures X X X X X (7.160) TOTAL A ( ) ( ) B. a) OFF-BALANCE SHEET Impaired X (57.222) X b) Other X X X X X (14.425) TOTAL B (57.222) (14.425) TOTAL A+B ( ) ( ) As at 31 December 2017, the up to 3 months" bracket regarding impaired forborne exposures includes Unlikely-to-Pay for 27,521 thousand euro which did not show past due exposures during the cure period (no past due or non-performing positions). There are no relevant positions among non-performing loans referred to non-guaranteed exposures subject to country risk. 210

212 Part E Information on risks and hedging policies A.1.7 Banking group - Cash loans to customers: changes in gross exposure impaired C ause/c ategories Doubtful loans Unlikely to pay Past due impaired loans A. Starting gross exposure 8,915,176 3,970, ,438 - of w hich: ex posures sold but not eliminated 547, ,858 29,306 B. Increasing changes 1,032, , ,504 B.1 collections from performing loans 78, , ,983 B.2 transfers from other categories of impaired ex posures 784, ,185 2,428 B.3 other increasing changes 170, , C. Decreasing changes (2,204,378) (1,521,645) (177,529) C.1 disbursement for performing loans (770) (375,032) (34,431) C.2 eliminations (1,844,618) (225,010) (1,229) C.3 collections (312,378) (144,198) (6,770) C.4 sale proceeds (35,260) (17,300) - C.5 losses on disposal (2,367) (1,420) - C.6 transfers from other categories of impaired ex posures (8,985) (758,685) (119,612) C.7 other decreasing changes - - (15,487) D. Gross final exposure 7,743,782 3,381, ,413 - of which : exposures sold, but not eliminated 572, ,826 23,700 A.1.7bis Banking Group - Cash loans to customers: changes in gross forborne exposures analysed by loan quality C ause/c ategories of w hich: of w hich: forborne forborne ex posures: ex posures:imp performing aired loans A. Starting gross exposure of w hich: ex posures sold but not eliminated - - B. Increasing changes B.1 collections from performing loans: not forborne B.2 collections from forborne performing loans X B.3 collections from impaired forborne loans X B.4 other increasing changes C. Decreasing changes ( ) ( ) C.1 disbursement for performing loans: not forborne X X C.2 disboursement for forborne performing loans ( ) X C.3 disboursement for impaired forborne loans X X C.4 eliminations - - C.5 collections ( ) (6.946) C.6 sale proceeds - - C.7 losses on disposal - - C.8 other decreasing changes ( ) (99.210) D. Gross final exposure of which : exposures sold, but not eliminated - - A.1.8 Banking group - Cash loans to customers: changes in total value adjustments C ause/c ategories Doubtful loans U nlikely to pay Past due impaired loans Total of w hich: forborne ex posures Total of w hich: forborne ex posures Total of w hich: forborne ex posures A. Initial total adjustments 5,760, ,977 1,436, ,968 38, of which : exposures sold, but not eliminate 217,282-44,485-3,632 - B. Increasing changes 1,030, , , ,512 26,326 - B.1 value adjustments 608,461 65, , ,473 25,364 - B.2 loss on sale 2, , B.3 transfers from other categories of impaired 294,773-25, B.4 other increasing changes 124, ,964 29, , C. Decreasing changes (2,166,730) (172,927) (715,886) (330,592) (36,478) - C.1 write-backs from valuation (195,856) (17,608) (141,274) (32,681) (5,284) - C.2 write-backs from collection (89,713) (1,649) (51,868) (2,733) (1,026) - C.3 gain on sale (20,280) - (7,368) C.4 eliminations (1,844,618) (509) (225,010) (11) (1,229) - C.5 transfers from other categories of impaired (2,809) - (290,366) - (27,954) - C.6 other decreasing changes (13,454) (153,161) - (295,167) (985) - D. Final total adjustments 4,623, ,426 1,208, ,888 28, of which : exposures sold, but not eliminate 205,474-41,667-4,

213 Part E Information on risks and hedging policies A.2 Classification of exposures on the basis of external and internal ratings A.2.1 Banking Group - Breakdown of cash loans and off-balance sheet exposures by class of external rating Esposizioni External rating classes C lass 1 C lass 2 C lass 3 C lass 4 C lass 5 C lass 6 Without rating 31/12/2017 A. Cash exposures 7, ,418 6,200,289 23,690 30,517 52,090 65,505,247 72,180,744 B. Derivatives , ,929 78,433 32,522 16, , ,794 B.1 Financial derivatives , ,929 78,433 32,522 16, , ,522 B.2 C redit deriv ativ es ,272 9,272 C. Guarantees issued 41,502 1,763, , ,433 46,182 44,831 6,870,810 10,135,618 D. Commitments to grant loans - 39,368 3,254, , ,990-5,586,057 9,628,978 E. Other Totale 49,233 2,378,972 10,558, , , ,124 78,180,366 92,617,134 Reconciliation between risk classes and valuation of rating companies Fitch AAA, AA+, AA, AA- A+, A, A- BBB+, BBB, BBB- BB+, BB, BB- B+, B, B- CCC, CC, C, DDD, DD, D Moody's AAA, AA, AA1, AA2, AA3 A, A1, A2, A3 AA, AA1, AA2, AA3 BA, BA1, BA2, BA3 B, B1, B2, B3 CAA, CAA1, CAA2, CAA3, CA, C Standard and Poors AAA, AA, AA+, AA- A, A+, A- BBB, BBB+, BBB- BB, BB+, BB- B, B+, B- CCC, CCC+, CCC-, CC, C, D A.2.2 Breakdown of cash loans and off-balance sheet exposures by class of internal rating Ex posures Internal rating classes Without rating 31/12/ A. Cash exposures 6,502,120 2,201,642 4,377,331 3,898,774 19,420,909 14,907,898 6,514,518 1,225, , ,020 2,326,775 3,090,609 6,026,591 72,180,744 B. Derivatives 367, ,991 27,649 46,961 48,910 87,197 7,897 1,495 7,802 18,343 4, ,794 B.1 Financial derivatives 367, ,991 18,377 46,961 48,910 87,197 7,897 1,495 7,802 18,343 4, ,522 B.2 C redit deriv ativ es , ,272 C. Guarantees issued 1,910, ,717 1,537,079 1,585,449 1,539,732 1,225, , ,378 57, , ,209 83,483 54,985 10,135,618 D. Commitments to grant loans 55,970 1,868,466 3,807,415 1,221,756 1,425, , , ,295 23,338 7, ,128-6,741 9,628,978 E. Other Total 8,836,363 4,770,063 9,774,816 6,733,628 22,432,784 16,832,365 7,764,668 1,522, ,920 1,103,453 2,722,455 3,178,426 6,088,545 92,617,134 As regards the Management policies of the credit risk, management, measurement and control systems, description and management of internal models, refer to the chapter Credit, Market and ALM Risk in these Explanatory notes. 212

214 Part E Information on risks and hedging policies A.3 Breakdown of secured loan exposure by type of guarantee Information on guaranteed exposure by type of guarantee is shown in par. 2.3 Credit risk mitigation techniques A.3.1 Banking Group - Secured loan exposures to banks Nothing to report. A.3.2 Banking Group - Secured loan exposures to customers Real securities Personal guarantees Total Net value of exposure Real estate mortgages Real estate finance leases Securities Other assets C N L Governments C redit deriv ativ es Other derivatives Other public entities Banks Other entities Governments C redit commitments Other public entities Banks Other entities (1)+(2) 2 Secured exposures to banks: Fully secured of which impaired Partially secured of which impaired Guaranteed "off-balance sheet" credit exposures: Fully secured of which impaired Partially secured of which impaired The table shows the amount of the net secured exposures to customers and the distribution by type of values of the guarantees up to the relevant net exposures. 213

215 Part E Information on risks and hedging policies B Distribution and concentration of loan exposures B.1 Banking group - Sectorial distribution of cash loans and off-balance sheet exposures to customers (book value) Governments Other public entities Finance companies Insurance companies N on-finance companies Others Ex posure/c ounterparts Net Exposure Specific value adjustments Portfolio value adjustments Net Exposure Specific value adjustments Portfolio value adjustments Net Exposure Specific value adjustments Portfolio value adjustments Net Exposure Specific value adjustments Portfolio value adjustments Net Exposure Specific value adjustments Portfolio value adjustments Net Exposure Specific value adjustments Portfolio value adjustments A. Cash exposure A.1 Doubtful loans 16 (56) X 59 (641) X 13,139 (51,029) X - - X 1,576,780 (3,519,687) X 1,530,329 (1,052,047) X - of w hich: forborne ex posures - - X - - X 825 (11,991) X - - X 143,676 (436,620) X 128,661 (68,816) X A.2 Unlikely to pay - - X - (2,240) X 31,292 (61,279) X - - X 1,535,863 (891,809) X 605,794 (253,475) X - of w hich: forborne ex posures - - X - - X 28,232 (28,633) X - - X 649,697 (350,891) X 121,873 (34,364) X A.3 Past due impaired loans 52 (9) X 397 (70) X 46,405 (8,189) X - - X 45,681 (8,424) X 26,623 (11,562) X - of w hich: forborne ex posures - - X - - X - - X - - X - - X - - X A.4 Exposures not impaired 4,180,776 X (252) 1,388,320 X (26) 2,512,261 X (6,500) 1,601 X (40) 26,444,782 X (73,019) 25,536,482 X (52,233) - of w hich: forborne ex posures - X - - X - 12 X - - X - 60,270 X (2,685) 134,407 X (4,475) TOTAL A 4,180,844 (65) (252) 1,388,776 (2,951) (26) 2,603,097 (120,497) (6,500) 1,601 - (40) 29,603,106 (4,419,920) (73,019) 27,699,228 (1,317,084) (52,233) B. "Off-balance sheet" exposures B.1 Doubtful loans - - X - - X X - - X 81,363 (19,473) X 857 (165) X B.2 Unlikely to pay - - X 13 - X 21,323 - X - - X 375,070 (25,890) X 855 (14) X B.3 Other impaired assets - - X 10,705 (11,567) X 281 (50) X - - X 4,434 (59) X 571 (5) X B.4 Exposures not impaired 416 X - 3,292,731 X (342) 1,304,229 X (86) 212,375 X - 12,504,560 X (13,804) 108,564 X (193) TOTAL B ,303,449 (11,567) (342) 1,326,111 (50) (86) 212, ,965,427 (45,422) (13,804) 110,847 (184) (193) TOTAL (A+B) ( ) 4,181,260 (65) (252) 4,692,225 (14,518) (368) 3,929,208 (120,547) (6,586) 213,976 - (40) 42,568,533 (4,465,342) (86,823) 27,810,075 (1,317,268) (52,426) TOTAL (A+B) ( ) 4,593,924 (1,641) (1) 4,078,189 (17,609) (104) 3,739,653 (122,129) (5,638) 161,002 (7) - 41,141,076 (5,391,418) (96,473) 27,097,504 (1,763,322) (73,529) B.2 Banking Group - Geographical distribution of cash loans and off-balance sheet exposures to customers (book value) ITALY OTHER EUROPEAN AMERICA ASIA REST OF TH E WORLD Ex posures/region Net exposure total value adjustment Net exposure total value adjustment Net exposure total value adjustment Net exposure total value adjustment Net exposure total value adjustment A. Cash exposure A.1 Doubtful loans 3,114,924 (4,596,632) 4,937 (18,080) 323 (288) 35 (8,271) 104 (189) A.2 Unlikely to pay 2,160,691 (1,203,911) 11,975 (4,064) 141 (66) 105 (737) 37 (25) A.3 Past due impaired loans 118,332 (28,107) 802 (143) 11 (2) 4 (1) 9 (1) A.4 Ex posures not impaired 59,344,014 (132,069) 678,304-29,433-11, (1) TOTAL B. "Off-balance sheet" exposures 64,737,961 (5,960,719) 696,018 (22,287) 29,908 (356) 11,693 (9,009) 1,072 (216) B.1 Doubtful loans 82,495 (19,638) B.2 Unlikely to pay 388,179 (25,904) 9, B.3 Other impaired assets 15,991 (11,681) B.4 Ex posures not impaired 17,070,684 (14,425) 279,825-32,326-11,011-29,029 - TOTAL TOTAL (31/12/2017) TOTAL (31/12/2016) 17,557,349 (71,648) 288,910-32,326-11,011-29,029-82,295,310 (6,032,367) 984,928 (22,287) 62,234 (356) 22,704 (9,009) 30,101 (216) 80,040,020 (7,433,290) 614,006 (28,295) 99,353 (574) 52,743 (9,306) 5,226 (406) 214

216 Part E Information on risks and hedging policies B.2 Banking Group - Geographical distribution of cash loans and off-balance sheet exposures to customers (book value) N orth West Italy North East Italy Central Italy South Italy and Islands Ex posures/region Net exposure total value adjustmen Net exposure total value adjustmen Net exposure total value adjustmen Net exposure total value adjustmen A. Cash exposure A.1 Doubtful loans ( ) ( ) ( ) ( ) A.2 U nlikely to pay ( ) ( ) ( ) ( ) A.3 Past due impaired loans (4.565) (2.361) (12.420) (8.761) A.4 Ex posures not impaired (352) (547) ( ) (1.265) TOTAL ( ) ( ) ( ) ( ) B. "Off-balance sheet" exposures B.1 Doubtful loans (3.601) (6.654) (5.608) (3.775) B.2 U nlikely to pay (9.498) (6.013) (2.413) (7.980) B.3 Other impaired assets (70) (4.980) (4.367) (2.264) B.4 Ex posures not impaired (3.845) (2.492) (5.148) (2.940) TOTAL (17.014) (20.139) (17.536) (16.959) TOTAL (31/12/2017) ( ) ( ) ( ) ( ) TOTAL (A+B) 31/12/ ( ) ( ) ( ) ( ) B.3 Banking Group - Geographical distribution of cash loans and off-balance sheet exposures to banks (book value) ITALY OTHER EUROPEAN AMERICA ASIA REST OF TH E WORLD Ex posures/region Net exposure total value adjustment Net exposure total value adjustment Net exposure total value adjustment Net exposure total value adjustment Net exposure total value adjustment A. Cash exposure A.1 Doubtful loans 4,953 (94,114) A.2 U nlikely to pay A.3 Ex pired loans A.4 Ex posures not impaired 6,348, ,751-19,897-54,703-10,431 - TOTAL 6,353,312 (94,114) 265,751-19,897-54,703-10,431 - B. "Off-balance sheet" exposures B.1 Doubtful loans B.2 U nlikely to pay B.3 Other impaired assets B.4 Ex posures not impaired 92,247 (13) 2,254,519-38,328-90,400-42,271 - TOTAL 92,247 (13) 2,254,519-38,328-90,400-42,271 - TOTAL (31/12/2017) 6,445,559 (94,127) 2,520,270-58, ,103-52,702 - TOTAL (31/12/2016) 3,337,744 (54) 4,676,089-32, ,105 (1,941) 55,

217 Part E Information on risks and hedging policies B.3 Banking Group - Geographical distribution of cash loans and off-balance sheet exposures to banks domiciled in Italy (book value) N orth West Italy N orth East Italy Central Italy South Italy and Islands Ex posures/region Net exposure total value adjustment Net exposure total value adjustment Net exposure total value adjustment Net exposure total value adjustment A. Cash exposure A.1 Doubtful loans (94.114) A.2 U nlikely to pay A.3 Ex pired loans A.4 Ex posures not impaired TOTAL (94.114) B. "Off-balance sheet" exposures B.1 Doubtful loans B.2 U nlikely to pay B.3 Other impaired assets B.4 Ex posures not impaired (13) - - TOTAL (13) - - TOTAL (31/12/2017) (94.114) (13) - - TOTAL (A+B) 31/12/ (54) B.4 High exposures High exposures Book value Weighted v alue (*) a Amonts 18,858,773 4,019,168 b Number 8 8 (*) Weighted amount according to superv isory regulations in force 216

218 Part E Information on risks and hedging policies C. SECURITISATIONS AND SALES OF ASSETS C.1 Securitisation transactions Securitisation transactions in which the bank has not subscribed the total liabilities issued by the vehicle company in the deed of issue. Qualitative information. Balances of loans receivable outstanding as at 31 December 2017 show 940 million euro in outstanding positions deriving from securitisation transactions in which the Bank has not subscribed the full amount of the liabilities issued by the vehicle company in the deed of issue which, on the basis of the international accounting standards, are not subject to de-recognition and are therefore represented among assets matching securities under liabilities issued by the vehicles used for the transactions. Early closure of the securitisation transactions regarding residential mortgages called Vela Home, Series 3 At the end of April 2018, the early closure of the securitisation transactions regarding residential mortgages called Vela Home, Series 3, finalised in 2005, is planned. By exercising the contractually agreed call option, the residual portfolio will be repurchased for about 168 million euro and the Series 3 securities issued by the vehicle company Vela Home Srl will be fully repaid. POSITIONS IN PORTFOLIO ARISING FROM SECURITISATION TRANSACTIONS Vela RMBS securitisation of residential mortgages The transaction was finalised in 2014, through the sale of a portfolio of performing residential mortgage loans to the vehicle company Vela RMBS Srl, established pursuant to Law no. 130/ 99. The following table shows the tranching of ABS securities: (euro) Class S&P/DBRS ABS S&P/DBRS ABS Existing amount Spread (bps) Issued amount rating at issue existing rating as at 31/12/2017 Class A AA/AA high AA*/AAA ,600, ,716,542 Class J U nrated U nrated 113,491, ,471,149 Total 618,091, ,187,691 (*) In November 2017 the Rating Agency Standard & Poor s increased the rating of the Class A securities. 217

219 Part E Information on risks and hedging policies Securities held in the portfolio as at 31/12/2017 (euro) Securities Type Rating Issued amount Subscribed Existing amount Book value as Equivalent amount as at 31/12/2017 at 31/12/2017 value IAS Category Class A Senior AA/AAA % available for sale Class J Junior unrated % loans and receivable Total The Cash Reserve, initially formed in the amount of EUR 10,092, (2,0% of rated notes), is entirely funded by Junior Class J. Since the outstanding amount of the Rated notes dropped below half of the original amount issued, the redemption of the Junior began on the payment date of 27 October As at 31 December 2016, the above mentioned reserve amount to Euro 6,069, Vela Home 3 securitisation of residential mortgages The transaction was finalised in 2005, through the sale of a portfolio of performing residential mortgage loans to the vehicle company Vela Home Srl, established pursuant to Law no. 130/ 99. The following table shows the tranching of ABS securities: (euro) Class S&P/Moody's ABS rating Spread (bps) Issued amount Existing amount as at 31/12/2017 Class A AA*/Aa2 13 1,751,200,000 67,592,958 Class B A+*/Aa ,800,000 53,800,000 Class C A+*/Aa ,200,000 18,200,000 Class D U nrated 2,447,000 2,447,000 Total 1,825,647, ,039,958 (*) In November 2017 the Rating Agency Standard & Poor s increased the rating of the Class A-B-C securities. Securities held in the portfolio as at 31/12/2017 (euro) Securities Type Rating Issued amount Subscribed amount Existing amount as at 31/12/2017 Book value as at 31/12/2017 Equivalent value * IAS Category Class C Mezzanine A+/Baa2 18,200,000 18,200,000 18,200, % 18,200,000 available for sale Class D Junior U nrated 2,447,000 2,447,000 2,447, % 2,447,000 loans and receivable Total 20,647,000 20,647,000 20,647,000 20,647,000 Other forms of C redit Enhancement Amount Cash reserve * 9,116,000 * The Cash Reserve was initially formed of a sum of Euro 18,232,000 through the granting of a subordinated loan to the vehicle company on the part of BNL SpA. Since the outstanding amount of the Rated notes dropped below half of the original amount issued, the redemption of the subordinated began on the payment date of 30 April As at 31 December 2017, Euro 9,116, of the abovementioned subordinated loan had been redeemed. Vela ABS securitisation of residential mortgages The transaction was finalised in 2006, through the sale of a portfolio of performing residential mortgage loans to the vehicle company Vela ABS Srl, established pursuant to Law no. 130/ 99. The following table shows the tranching of ABS securities: 218

220 Part E Information on risks and hedging policies (euro) Class S&P/Moody's ABS rating Spread (bps) Issued amount Existing amount as at 31/12/2017 Class A AA*/Aa ,900,000 37,134,579 Class B A+*/Aa ,900,000 21,900,000 Class C A+*/A ,800,000 11,800,000 Class D U nrated 886, ,000 Total 675,486,000 71,720,579 (*) In November 2017 the Rating Agency Standard & Poor s increased the rating of the Class A-B-C securities. Securities held in the portfolio as at 31/12/2017 (euro) Securities Type Rating Issued amount Subscribed Existing amount Book value as Equivalent amount as at 31/12/2017 at 31/12/2017 value IAS Category Class B Mezzanine A+/Aa2 21,900,000 16,900,000 16,900, % 16,900,000 available for sale Class C Mezzanine A+/A3 11,800,000 11,800,000 11,800, % 11,800,000 available for sale Class D Junior U nrated 886, , , % 886,000 loans and receivable Total 34,586,000 29,586,000 29,586,000 29,586,000 Other forms of C redit Enhancement Amount Cash reserve * 6,746, * The Cash Reserve was initially formed of a sum of Euro 13,492,000 through the granting of a subordinated loan to the vehicle company on the part of BNL SpA. Since the outstanding amount of the Rated notes dropped below half of the original amount issued, the redemption of the subordinated began on the payment date of 28 April As at 31 December 2017, Euro 6,746,000,00 of the abovementioned ordinated loan had been redeemed. Vela Home 4 securitisation of residential mortgages The transaction was finalised in 2006, through the sale of a portfolio of performing residential mortgage loans to the vehicle company Vela Home Srl, established pursuant to Law no. 130/ 99. The following table shows the tranching of ABS securities: (euro) Class S&P/Moody's ABS rating Spread (bps) *** Issued amount Existing amount as at 31/12/2017 Class A1-12 1,581,650,000 - Class A2 AA*/Aa ,850, ,134,306 Class B A+*/Aa ,800,000 82,800,000 Class C A+*/A ,650,000 23,650,000 Class D U nrated 1,730,000 1,730,000 Total 2,367,680, ,314,306 (*) In November 2017 the Rating Agency Standard & Poor s increased the rating of the Class A-B-C securities. 219

221 Part E Information on risks and hedging policies Securities held in the portfolio as at 31/12/2017 (euro) Securities Type Rating Issued amount Subscribed Existing amount Book value as Equivalent amount as at 31/12/2017 at 31/12/2017 value IAS Category Class A2 Senior AA/Aa % available for sale Class B Mezzanine A+/Aa % available for sale Class C Mezzanine A+/A % available for sale Class D Junior U nrated % loans and receivable Total Other forms of C redit Enhancement Amount Cash reserve * ,00 * The Cash Reserve was initially formed through the granting of a subordinated loan to the vehicle company on the part of BNL SpA. Composed initially of Euro 26,025,450.00, the Cash reserve was increased on 20/05/2009 by Euro 12,968, so as to increase the credit enhancement of the transaction. Since the outstanding amount of the Rated notes dropped below half of the original amount issued, the redemption of the subordinated began on the payment date of 27 October As at 31 December 2017, Euro 13,012, of the above-mentioned subordinated loan had been redeemed. Concerning the performance of this transaction, on 31 December 2008, the Annual Default level exceeded the threshold of 2.20%, enabling the Class D trigger event. Following this event, BNL will no longer have the right to receive any remuneration from the subordinated loan granted to the vehicle company for the creation of the Cash Reserve and, as holder of Junior securities, it will not cash the excess spread until the Rated Notes are entirely repaid. Quantitative information C.1 Banking group - Exposures deriving by the main own securitisation transactions analysed by type of securitised assets and type of exposure Cash exposure Guarantees issued Liquidity facilities Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior Ty pe of securitised assets/ex posures Book value Value adjustment/writeback Book value Value adjustment/writeback Book value Value adjustment/writeback Net exposure Value adjustment/writeback Net exposure Value adjustment/writeback Net exposure Value adjustment/writeback Net exposure Value adjustment/writeback Net exposure Value adjustment/writeback Net exposure Value adjustment/writeback A. Subject to full elimination from balance-sheet B. Subject to partial elimination from balance-sheet C. Not eliminated from balance-sheet 36, , ,399 9, , C. 1 Vela RMBS Residential mortgage loans 15, ,719 (286) C. 2 Vela H ome Residential mortgage loans C. 3 Vela H ome Mutui Residenziali ,209-39,817 3, , C. 4 Vela H ome Residential mortgage loans 21, , ,525 4, , C. 5 Vela ABS Residential mortgage loans ,707-18,338 2, ,

222 Part E Information on risks and hedging policies C.2 Banking Group - Exposures deriving by the main third party securitisation transactions analysed by type of securitised assets and type of exposure Senior Exposure cash Guarantees issued Credit lines Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior Book value Impairment/Write- backs Book value Impairment/Write- backs Book value Impairment/Write- backs Book value Impairment/Write- backs Book value Impairment/Write- backs Book value Impairment/Write- backs Book value Impairment/Write- backs Book value Impairment/Write- backs Book value Impairment/Write- backs Type of underlying assets / Exhibitions A.1 Crediarc SPV srl - other loans 19,481 8,006 (5,200) A.2 Arcobaleno Finance srl - other loans 26,544 (896) A. 3 FITD Schema v olontario - other loans 461 2,566 (3,500) C.3 Banking group - Stakes in the vehicle companies for the securitisation Securitization name/ Assets Liabilities Registered office C onsolidation v ehicle company Loans Securities Othes Senior Mazzanine Junior Vela RMBS Srl Via V. Alfieri, C onegliano (TV) YES 227, , ,471 Vela Home 3/Vela Home srl Via V. Alfieri, Conegliano (TV) YES 157, ,593 72,000 2,447 Vela Home 4/Vela Home srl Via V. Alfieri, Conegliano (TV) YES 473, , ,450 1,730 Vela ABS Srl Via V. Alfieri, C onegliano (TV) YES 81, ,135 33, C.4 Banking group - Unconsolidated vehicle companies for the securitisation Credifarma third party securitisation transaction Credifarma SpA, a financial company enrolled in the Single Register pursuant to art. 106 of the Consolidated Banking Act, 66% held by the syndicate of pharmacists, and BNL and Unicredit in the amount of 17%, performs factoring of receivables from pharmacies towards the National Health Service. The economic-financial crisis of recent years produced significant effects on Credifarma s profitability, also due to the deterioration of the loans granted to pharmacies. In line with the indications of the Bank of Italy, the two shareholding banks, in agreement with the other member Federfarma, it decided to tackle the situation by implementing the conditions to re-launch the company and avoid a costly liquidation of the same. Despite the fact that in the last two years the company outperformed its targets for net income, the main results of the new plan show significant critical issues: even though operating expenses were under control, in line with the cuts and streamlining planned, the expected growth in revenues was much more difficult to achieve. Faced with a scenario of a declining outlook for income and limited room to reduce the cost base, the Risk Divisions of BNL and UniCredit reduced their respective expectations regarding the company, pushing both to reduce the amount of credit lines and to increase the financing cost, while strongly supporting an exit strategy from the company. In April 2017, a leading national bank submitted to the shareholders of Credifarma a nonbinding offer, which was developed over the subsequent months, with due diligence on the company and the formalisation of a binding offer in September 2017, which was finalised by the 221

223 Part E Information on risks and hedging policies parties at the end of January The transaction is subject to the authorisation from the Bank of Italy and should be completed (execution date) following said authorisation, presumably in the third quarter of For the purpose of consolidating these two bodies, the international accounting standards require that the consolidation takes place in full for all the subsidiary companies (IFRS 10 B86) although, for a company to be defined as so, the control needs to be performed individually (IFRS10 9). Without holding a shareholding, BNL invested in the two vehicles together with another leading bank (Unicredit Spa) in equal amounts; both banks actually have the same exposure to and rights towards the same. Moreover, as there are no management agreements between the parties, it is not a situation of joint control. This situation of parity does not allow BNL to conduct control activities without the involvement of the other participant and, as a consequence, the requirement relating to the individual control requested by the accounting standards does not apply to proceed to the full consolidation. Following the conclusion of the requalification process illustrated above, in 2015 BNL intervened twice with two separate securitisation vehicles, Crediarc and Arcobaleno. Those actions are classified, in these financial statements, as third party securitisation transactions (table C.2 above), carried out with unconsolidated vehicle companies for securitisation. As at 31 December 2017, BNL owns the following investments through two separate securitisation vehicles: a) Crediarc vehicle: book value of 8.0 million euro, net of write-downs of 5.2 million euro relating to the investment in junior notes and 19.5 million euro pertaining to the portion of senior notes; b) Arcobaleno vehicle: book value of 26.5 million euro, net of write-downs of 0.9 million euro pertaining to the investment in junior notes. Voluntary Scheme third party securitisation transaction of the Interbank Deposit Guarantee Fund On 28 July 2017 the Management Board of the Voluntary Scheme approved a resolution to support the recovery of the three banks Caricesena, Carim and Carismi, as part of the overall transaction of acquisition of those banks by Crédit Agricole Cariparma. The measures approved by the Management Board involved the use of Scheme resources to recapitalise the banks and to subscribe junior tranches of the securitisation of NPLs of those banks. The finalisation of the transaction, on 21 December 2017, resulted in the recapitalisation of the three banks 1 as well as the subscription of 12 million euro in mezzanine notes and 158 million euro in junior notes of the securitisation of NPLs of the three banks. The portion subscribed by BNL at that date came to 6.1 million euro on the junior notes (subsequently written down by 3.5 million euro as at 31 December 2017) and 0.5 million euro on the mezzanine notes. Those actions are classified, in these financial statements, as third party securitisation 1 Capital increase of Carim for 194 million euro and of Carismi for 200 million euro, shareholders payment to Caricesena of 70 million euro. 222

224 Part E Information on risks and hedging policies transactions (table C.2 above), carried out with unconsolidated vehicle companies for securitisation. C.5 Banking group - Servicer business own securitisations: collection of securitised loans and reimbursement of the securities issued by vehicle company for the securitisation (euro and % ) Securitised assets (y ear-end C ollection of loans granted in the figure) y ear Percentage of reimbursed securities (year-end figures) Servicer Vehicle company Senior Mezzanine Junior Impaired Performing Impaired Performing Impaired assets Performing assets Impaired assets Performing assets Impaired assets Performing assets Vela RMBS Vela RMBS srl 2, , ,600-73% Vela H ome 3 Vela H ome srl 29, ,268 3,549 51,602-96% Vela H ome 4 Vela H ome srl 83, ,478 7,093 97,323-88% Vela ABS Vela ABS srl 15,306 66,113 1,368 26,374-94% , ,408 12, , C.6 Banking group - Consolidated vehicle companies for the securitisation Regarding the information, separate for each vehicle company and transaction, on the type and quality of the transactions and the tranching of the securities issued, reference is made to the details as part of the qualitative information of this paragraph. D. Information on the structured entities (other than companies for securitisation) Nothing to report. 223

225 Part E Information on risks and hedging policies E. Disposal transactions In 2017, BNL SpA concluded 7 non-recourse disposals of non-performing loans (of these 5 assignments concerned "non-performing" loans and 2 sales related to "unlikely to pay") regarding 22,180 positions for a total gross value of 946 million euro. A ( massive ) disposal transaction regarded a portfolio of exhausted unsecured loans - composed of 22,161 debtors - almost completely allocated for a total gross asset value of around 892,3 million euro. The other 4 transactions - which regarded 5 positions for a total gross asset value of around 27,8 million euro - are part of the Single Names disposals which, accompanied by traditional recovery strategies, aim to maximise the value of non-performing loans by enhancing the property or business component linked to the receivable as much as possible through competitive auction mechanisms and by anticipating cash flow with respect to ordinary operations. Said concerned doubtful mortgage loans and unsecured loans. In 2017 BNL took part, together with the other main creditor banks, in the transfer to the IDeA Corporate Credit Recovery II fund (DeA Group) of receivables for a nominal amount of 21.3 million to 13 client companies (6 industrial groups). The transaction, like the one carried out with the IDeA Corporate Credit Recovery I Fund in 2016, is aimed at achieving alternative management of non-performing loans to medium-sized Italian companies experiencing temporary financial difficulties, but with good industrial prospects, and concerning a total of approximately 330 million in loans transferred to 9 industrial groups. The turnaround is carried out with the uniqueness of governance and the contribution of new finance by the Fund. The operation involved the subscription of shares in the Fund by BNL SpA, with the achievement of a significant capital gain and treatment of derecognition of the loans sold. Lastly, note is the sale of a single credit not due to non-performing loans carried out in connection with the reorganization of the company's debt for Euro 4.5 million. Cessioni pro-soluto al # Tipo cessione Periodo Posizioni cedute Patrimoniale Lordo (*) Cessioni crediti a sofferenze 1 Massiva gennaio Subtot Single name marzo Single name aprile Single name ottobre Single name ottobre Subtot Cessioni altri NPL 6 Single name agosto Single name dicembre Subtot Totale (]) dati alla predisposizione dell'operazione Key: Non-recourse disposals as at Type disposal Period Positions transferred Gross asset value A. Financial assets disposed of but not entirely eliminated The Group did not perform transactions on financial assets disposed but not entirely eliminated. Quantitative information E.1 Banking group - Financial assets disposed of but not eliminated: book value and full value. 224

226 Part E Information on risks and hedging policies Technical forms/portfolio Financial assets held for trading Financial assets measured at fair v alue Financial assets av ailable for sale Financial assets held to maturity Loans to banks Loans to customers Total A B C A B C A B C A B C A B C A B C 31/12/ /12/2016 A. Cash assets , ,960 1,177,226 1 Debt securities Share capital X X X X X X X X X Mutual funds X X X X X X X X X Loans , ,960 1,177,226 B. Derivative instruments X X X X X X X X X X X X X X X - - Total (31/12/2017) , ,960 X of wich impaired , ,553 X Total (31/12/2016) ,177, X 1,177,226 of wich impaired , X 135,191 Key : A = B = C = sold financial assets entirely detected (book value) sold financial assets partially detected (book value) sold financial assets partially detected (entire v alue) E.2 Banking group - Financial liabilities for financial assets disposed of but not eliminated: book value Liabilities/ Asset portfolio Financial assets held for trading Financial assets measured at fair v alue Financial assets av ailable for sale Financial assets held to maturity Loans to banks Loans to customers Total 1. Deposits from customers a) against fully recognised assets b) against partially recognised assets Deposits from banks a) against fully recognised assets b) against partially recognised assets Outstanding securities a) against fully recognised assets b) against partially recognised assets Total (31/12/2017) Total (31/12/2016) E.3 Banking group - Disposal transactions with liabilities with recourse on the sold assets only: fair value Technical forms/portfolio Financial assets held for trading Financial assets measured carried at fair v alue Financial assets Financial assets held to av ailable for sale maturity Loans to banks Loans to customers Total A B A B A B A B A B A B 31/12/ /12/2016 A. Cash assets , ,825 1,099,057 1 Debt securities Share capital X X X X X X Mutual funds X X X X X X Loans , ,825 1,099,057 B. Derivative instruments - - X X X X X X X X - X - - Total assets , ,825 1,099,057 C. Related liabilities ,710 - X X 1 Debt from C ustomers ,710 - X X 2 Debt from Banks X X 3 Securities issued X X Total liabilities , , ,039 Net Value (31/12/2017) , ,115 X Net Value (31/12/2016) ,018 - X 354,018 Key : A = B = sold financial assets entirely detected (book value) sold financial assets partially detected (book value) The table excludes any self-securitisation as this type of transactions does not include any liability for the assets sold. The delta between the fair value of the transferred loans and that of the securities issued is covered by derivative contracts (IRS). 225

227 Part E Information on risks and hedging policies B. Financial assets disposed of and entirely eliminated with indication of their continuous involvement The Group has no Financial assets disposed of and entirely eliminated with indication of their continuous involvement. E.4 Banking Group - covered bond transactions. In 2012 a programme was started for the issue of Covered Bonds pursuant to Law no. 130 of 1999 for 12 billion, using BNL s issuer rating. In 2014, the maximum amount of this programme was increased to 22 billion euro. The objectives pursued and the risks connected, also legal and reputational, were approved by the competent committees and the Board of Directors after obtaining the favourable opinion of the Board of Statutory Auditors on the compliance of the activities described in the programme with legislative provisions as well as on the impact of the activity on the Bank s economic and equity balance. In compliance with the supervisory provisions of the Bank of Italy, BNL has implemented suitable control procedures. This programme is part of BNL deposits strategy for the medium to long term, aimed at improving liquidity by using own assets as collateral. Specifically, as part of the programme, ten series of bonds were issued: 1) the first amortising series of 6,500 million euro in July 2012 (repaid in July 2015); 2) the second amortising series of 3,000 million euro in November 2012 (repaid in January 2016); 3) the third bullet series of 1,000 million euro in October ) the fourth amortising series of 1,200 million euro in October ) the fifth amortising series of 830 million euro in November ) the sixth amortising series of 5,500 million euro in July ) the seventh amortising series of 600 million euro in January ) the eighth amortising series of 2,700 million euro in July ) the ninth amortising series of 450 million euro in January ) the tenth amortising series of 2,500 million euro in July 2017 The portfolio of assets to guarantee the above-mentioned issues, mainly consisting of residential mortgage loans, was segregated in the vehicle company Vela OBG Srl (Special Purpose Vehicle) through six sales, of which the last finalised in May 2017 for an amount of about 3,015 million euro. The purchase by the vehicle company of the asset portfolio was funded by subordinated loans granted by BNL for an amount equal to the portfolios sold. BNL also serves the roles of Servicer (continuing to manage loans on behalf of Vela OBG) and swap counterparty, having concluded an interest rate swap transaction with the vehicle company in order to harmonise the cash flows of the mortgage loan agreements with those of the subordinated loans. The role of Asset Monitor was entrusted to the independent auditors Reconta Ernst & Young Spa. As at 31 December 2017 the global outstanding residue of the existing seven Covered Bonds was equal to about 9,175 million euro. 226

228 Part E Information on risks and hedging policies F. CREDIT RISK MEASUREMENT MODELS Comparison of the losses in the model with the actual losses. As is known, Italian and European regulations (Circular 285/2014 of the Bank of Italy and EU Regulation no. 575/2013) provide for the banks that adopted the AIRB models to compare the expected losses with the corresponding net value adjustments made in the accounts. Therefore, the Bank adopted a process that checks two possible situations on a quarterly basis: First case: if the losses expected are higher than the relevant overall net value adjustments, a shortfall is generated; Second case: if the losses expected are lower than the relevant overall net value adjustments, an excess is generated. That calculation is carried out in line with regulatory provisions. A description of credit risk measurement models is set forth in Section 1 - Credit Risk: Qualitative information, paragraph Management, measurement and control systems. G. BANKING GROUP - COUNTERPARTY RISK Qualitative information A. General aspects Counterparty risk is a special type of credit risk connected with Over-The-Counter (OTC) derivative positions and other Securities Financing Transactions (essentially repos). It refers to the possibility of the counterparty becoming insolvent before the expiry of the contract. This risk refers to the hypothesis that the mark-to-market of the position has assumed a positive value that the solvent party is forced to replace on the market, thus suffering a loss (replacement risk). B. Management processes and measuring methods Management processes The management of the counterparty risk is based on credit processes and operating limits that, in line with the methodology adopted by the BNP Paribas Group, use the calculation of the maximum future value of the exposure, determined by simulating the current value of the derivative until the expiry of the contract. The above-mentioned limits are controlled and monitored within internal procedures that, in an integrated manner, refer to the credit risk and counterparty risk management applications of both BNP Paribas and BNL, in line with the Group procedures based on the credit risk macro activities: Corporate RISK and International Retail Banking RISK (i.e. Corporate and Retail counterparties) and Institutionals & Securities Services RISK (i.e. Financial Institutions and Sovereigns counterparties). Measurement methods To measure the counterparty risk the Bank adopts the so-called standard methodology for the calculation of the asset requirements due to the exposure to risk (market value method) and the additional component linked to the CVA risk or credit value adjustment (standardised method). In addition, for management purposes, it uses the Group counterparty risk system (called Risk 227

229 Part E Information on risks and hedging policies Navigator), which applies the method based on EPE (Expected Positive Exposure) type internal models in line with the prudential supervisory regulations adopted at European level. The estimate of the future exposure value or the measure called Maximum (or Max) Exposure is obtained through the Monte Carlo Multistep simulation method (with 1,000 market scenarios and 364 future time steps up to 50 years) and represents the maximum value (with a certain confidence level set as basis at 90%) that a contract or counterparty may present during the life of the derivative. This method takes into account the possible effects of correlation between the market risks factors, the joint treatment of short and medium-long term transactions and risks mitigation techniques such as ISDA and ISMA/PSA type offsetting agreements and CSA (Credit Support Annex) type collateralisation ones. Quantitative information The table below highlights the counterparty risk generated by the Bank s operations for OTC financial derivatives only. At the end of 2017, total exposure - measured for management purposes in terms of Max Exposure - was about 500 million euro, with 56% to Corporate, 38% to the Public Administration, 6% to Retail and the remaining 1% referring to Financial Institutions. In terms of products, this exposure is mainly attributable to derivative contracts on interest rates. Counterparty risk on financial derivatives as at 31 December 2017 (euro) Financial Derivatives Max Exposure Interest rate derivatives Foreign exchange derivatives Total The Max Exposure takes into account the netting agreements applied separately by risk factor (interest rate or exchange rate) and not at overall portfolio level. The total does not include the exposures to the Parent Company. As regards the credit market, the exposure measured as described above mainly focuses towards the counterparties considered as investment grade, corresponding to internal rating classes from 1 to 5, as shown in the graph below. Distribution of the Max Exposure as at 31 December 2017 (values in %) (max exposure by internal rating class) Represented in the graph are the rating classes from 1 to 10 corresponding to performing counterparties. Class 5 includes the positions with a rating attributed by convention as shortcut. The exposures to the Parent Company are not included. 228

230 Part E Information on risks and hedging policies 1.2 BANKING GROUP - MARKET RISKS Introduction Organisation structure The BNPP-BNL CIB (Corporate and Institutional Banking) Division ensures the management and monitoring of risk positions, in compliance with the assigned limits and objectives for the owned portfolio, connected with trading on Global Markets products (securities, exchange rates, interest rates and relative derivatives). Note that, starting on 2016 there were organisational and operational changes which completed the process of centralising all trading desks within the structures of the Parent Company BNP Paribas, on the one hand, and the performance of all operations with customers in back-to-back mode for complete hedging of the related market risk. Control and supervision of market risks is ensured by the BNL Risk Department and the Risk Management Division in particular, which monitors trends in overall exposure and promptly notifies the Inter-functional Committees in charge, the Central functions concerned and the reference departments of the Parent Company on changes in the risk profile, the results of analyses carried out on the various portfolios and any cases of non-compliance with delegated authorisation limits and regulatory ceilings or restrictions. Within Risk Management, the local structure - which functionally works with the equivalent Risk structures of BNP Paribas - ensures the implementation of the market risk assessment methods in compliance with the guidelines of the Group and supports the relevant structures in defining the mitigation actions by checking their relevant implementation. Management method Trading portfolio The management model pivots on the use of the VaR (Value-at-Risk) based internal model that measures, in an integrated manner, all the risk factors of the trading portfolio, taking into account the diversification effects that are generated among the risk factors (interest rate, price and exchange rate risk). A. General aspects During 2017, the trading portfolio positions increasingly became increasingly residual and substantially neutral to market risk. As regards transactions in interest rate derivatives and in other currencies carried out with ordinary customers, as above, for several years all the new transactions in these instruments have been conducted in back-to-back mode with the Parent Company BNPP and do not generate a market risk in the Bank s trading portfolio. At year end there are only residual risk positions linked to the mechanism for managing hedging of the derivatives in Euro and other currencies, carried out in the years prior to the operational change. Lastly, all new transactions in exchange rate derivatives carried out with ordinary customers are also conducted in back-to-back mode with the Parent Company BNPP and do not generate a market risk in the Bank s trading portfolio. B. Management processes and methods of measuring risk Management procedures, limit structure and control Market risk management and control incorporates a credit limit system that generally provides for the attribution of maximum risk limits expressed in terms of Value at Risk (VaR). For the purposes of consistency with the BNP Paribas model, the Bank s limit and delegation structure was arranged to reflect the Group s Risk Function limit layout and the integrated vertical organisation of the business lines of the BNPP-BNL CIB Division, as in place in previous years. In short two categories were defined: 1) Central Limits, which are delegated by the Managing Director of BNL to the Director of the BNPP-BNL CIB Division and the manager of Global Markets, and defined in terms of VaR; 2) 229

231 Part E Information on risks and hedging policies Local Limits, which are conferred to the manager of the business line in agreement with the respective Group structures concerned, and are more intricate and feature lower values (in terms of VaR, sensitivities and position). Control of the abovementioned limits is fully integrated into the Group s market risk management system named Market Risk explorer (MRX) and the results, obtained using specific monitoring spreadsheets, are included in the daily reports sent to the business lines. Two attention levels are highlighted in the ordinary control process aimed at signalling the uses of the limits: a) reaching of 85% of the assigned limits, which activates a specific communication addressed to the business line concerned; b) exceeding of the assigned limits, which triggers a formal escalation process that differs based on the two categories of limits mentioned above. The control activity is complemented by extensive reports produced at different intervals (also upon request) based on the varying purposes and needs of the users (Board of Directors and Internal Control and Risk Committee, Risk Monitoring Committee - Market Session, local and Group RISK structures and operating structures of the Métier of the CIB Hub). In addition to the delegated VaR limits, a warning mechanism is in place on the results produced by the Stress Testing Programme in order to assess the need for managerial actions by Management. Alerting thresholds in particular were set on the Stress Testing results of the Global Markets portfolio. Risk measurement methods The model of measurement, monitoring and management of the market risk exposure of the BNP Paribas Group (MRX) is used by BNL. This model covers the entire trading activity, though with the recent characteristics of residual risk described above. It is note that, given this integration, the French Supervisory Authority (ACPR) and the Bank of Italy, with joint ruling effective as at 31 December 2011, authorised BNL to use MRX also for the purposes of the VaR based internal model to calculate the capital requirements: a) for the generic and specific position risk of the trading portfolio; b) and the additional requirements set for the Stressed VaR, determined on the trading portfolio compared to the performance of financial markets in a period of acute stress, and the Incremental Risk Charge (IRC), determined on debt securities as the risk of loss attributable to default or to rating migration of the issuer. In the proprietary model (MRX), the VaR is calculated through the Monte Carlo simulation method based on different assumptions (number of scenarios: 30,000; holding period: 1 day; confidence interval: 99%). This calculation model takes a full valuation approach, which means that for each scenario the individual financial instruments are revalued by applying the shocks generated randomly on the individual risk factors to the pricing formulae. With the above approach, options in the Bank s portfolio are revalued at any scenario, while taking account of all risk sources and the measurements known as Greek (delta, gamma, vega, rho, theta factors). The Bank s VaR is calculated on a separate basis as regards the general risk components, in order to measure the potential loss due to market factors (interest rates of deposits and swap, treasury curve rates, exchange rates, implicit volatility on interest rates) and for specific risk components that measures the so-called idiosyncratic risk (changes in credit spreads and in the values of the single bonds). The risk factors on which random shocks are generated are split into the following macro-categories: interest rates and credit spreads (loans indices and individual bonds), exchange rates, implicit volatility (on indices, interest rates and exchange rates). Stressed VaR is calculated with the same general method as VaR but with reference to the historical period of one year that was characterised by significant stress conditions for the trading portfolio. As of the date of preparation, the period used in MRX is that of the time window of 1 year expiring in December IRC is calculated on the basis of the same structure present in MRX for the Credit (issuer s 230

232 Part E Information on risks and hedging policies risk) component and uses the Merton-KMV correlation model for the mitigation of the rating together with a full revaluation of most positions. Backtesting and Stress Testing provided for by the use of internal models are included within the framework of procedures used at Group level. These activities have been adopted also for the Bank with the methods and purposes of use at local level and prudential regulation on an individual basis. Backtesting Backtesting compares the VaR, calculated according to the internal model and with a daily time horizon, with the daily change in the portfolio value in order to assess whether the risk measurements processed at the 99th percentile actually cover 99% of the trading results. The test is considered passed with a model that, on a sample of 250 working days, produces maximum 4 cases in which the trading results are not covered by the risk measurement ("gaps"). Backtesting activities carried out by the Bank are based in particular on the comparison of VaR with two types of daily Profit&Loss: a) Real P&L, which is the official daily Profit&Loss net of commissions; b) Hypothetical P&L, which is calculated on a frozen portfolio and defined as the difference between the value of the portfolio at the end of the day and the value of the same position at the end of the next day, revalued by using updated market parameters. It practically considers the effect of new deals, the P&L of intraday trading and any form of counterparty risk. Stress Testing Stress Tests are carried out to estimate: the impact of an exceptional though possible event in terms of losses suffered by the Bank; the effects of a possible business contraction; the impact on the capital and income. The Stress Test programme is defined at Group Risk level in terms of policy, organisational divisions concerned, scenarios used and review methods. These scenarios are arranged into two types: a) Global Scenarios: hypothetical scenario inspired by past crisis situations, adjusted to the current market conditions or some events (such as recession correlated to a financial crisis, long lasting recession with prolonged negative impact on the economy and the markets, unexpected increase in interest rates, geo-political events); b) Other Scenarios: additional specific scenarios aimed at capturing the impact on the current risk positions. As stated above, the Bank has a warning mechanism on the Stress Testing results in order to assess possible managerial actions by Management, identifying alerting thresholds for the Global Markets portfolio. Management model Regulatory trading portfolio During 2017, the management VaR fluctuated around an average value of 29 thousand euro, posting a low of 2 thousand euro and a high of 354 thousand euro, net of the benefit of diversification. Especially starting at the end of April, the portfolio positions increasingly became increasingly residual and substantially neutral to market risk. The following table summarises the value at risk broken down into its components (IR - interest rate; FX - exchange rate; CR - credit, specific risk), while the chart shows the trend in VaR for the whole of

233 Part E Information on risks and hedging policies VaR of the trading portfolio year 2017 Risk factors Period End Average Maximum Minimum IR FX CR Total value Total VaR takes account of correlations between the different risk factors. VaR of the trading portfolio year 2017 (in euros) VaR Trading Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec Interest rate risk and pricing risk - Regulatory trading portfolio Qualitative information A. General aspects See the section entitled Management model - Regulatory trading portfolio for an explanation of the characteristics of residual risk deriving from trading activity in B. Management processes and methods of measuring interest rate risk and pricing risk See the section entitled Management model - Regulatory trading portfolio for a discussion of management processes and risk measurement methods. Quantitative information 1. Regulatory trading portfolio - internal models and other methods used for sensitivity analyses Generic interest rate VaR (IR component) In 2017, the VaR on interest rate risk fluctuated around an average value of about 29 thousand euro, with a high of about 354 thousand euro and a low of about 2 thousand euro, respectively. Especially starting at the end of April, the IR component was residual and substantially neutral to market risk. 232

234 Part E Information on risks and hedging policies Generic VaR (IR component) year 2017 (in euros) IR Total Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Specific VaR (Credit component) In 2017, the VaR on Specific Risk of the Credit Component was fully eliminated following the closing of several marginal positions in the owned portfolio. Stressed VaR and IRC Stressed VaR, that is VaR calculated in a period of stressful conditions for the trading portfolio as at 29 December 2017 equals about 1.5 thousand euro (with holding period of 1 day). On the same date and for the same portfolio, the IRC value deriving from default and rating migration events equalled practically nil. Backtesting In the observation period, coinciding with the year 2017, the Backtesting conducted by comparing the VaR with the Real P&L (real changes in the value of the portfolio) showed no deviations. Backtesting conducted by comparing the VaR with the Hypothetical PNL (hypothetical changes in the value of the portfolio, considering on the market effect component up to September and the market effect and time effect since October) showed no deviations (see chart below). 200, , , , , ,000 gen-17 feb-17 mar-17 apr-17 mag-17 giu-17 lug-17 ago-17 set-17 ott-17 nov-17 dic-17 Hypothetical PNL VaR Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec

235 Part E Information on risks and hedging policies Interest rate risk and price risk Banking portfolio Qualitative information A. General aspects, management processes and methods of measuring interest rate risk and pricing risk Banks are subject to the interest rate risk deriving from the misalignment with the market parameters used to index loans and deposits. The interest that the bank receives on loans and pays on deposits may be set or indexed to various benchmark rates (Eonia, Euribor, Libor, etc.) and at varying deadlines. Therefore, when the market rates change, the interest paid on deposits and that received on loans and other assets changes, in general, in the same manner, generating changes in the expected margin. This risk is called interest rate risk on the banking book (IRRBB). The main objective in managing IRRBB is to stabilise the results at a sustainable level over time, keeping exposure to interest rate risk within certain limits (for a general description of the organisation structure governing the internal control procedures, reference is made to descriptions made in Section 1.2 Market Risks). The interest rate risk position of ALMT is periodically presented to the ALCO Committee, charged with guidance and government on the matter. Considering the main objective of stabilising the net interest income, the primary metric of IRRBB is the sensitivity of net interest income to changes in interest rates of +/- 50 bps (0.5%) in the first 3 years of the simulation. Specific exposure limits have been defined for this metric. In line with regulatory provisions, the ALMT also uses secondary economic value risk metrics, such as the duration of structural elements or the duration of the actual investment of unremunerated deposits and the capital deriving from the interest rate gap, and the Standard Outlier Test (SOT), based on the change in the economic value of capital as a result of interest rate shocks of +/- 200bps (±2%) in relation to regulatory capital. As regards the banking portfolio, measurement criteria of interest rate risk were harmonised with criteria of the Parent Company. Specific limits for the fixed interest rate gap expressed by time buckets were therefore adopted. In the overall recognition process of interest rate risk, the proprietary models such as early repayment of Retail loans and products with no contract maturity, such as current accounts, were applied. B. Fair value hedging Hedging relationships adopted are aimed at managing interest rate risk. Financial derivatives are used for this process. Interest rate risk for medium/long-term commercial lending and funding operations in particular is limited through the hedging of generic fair value, meaning portfolio value (macrohedging), with micro-hedging transactions and with cash flow hedge transactions for hedging highly likely future fixed rate transactions. The Bank formally documents hedging reporting. The documentation describes the relevant strategies, identifies the financial instruments hedged and used for hedging, the nature of the risk and outlines the methods used to verify the effectiveness of the hedge. Within the harmonisation process, BNL s method of verifying macrohedging effectiveness was adopted. This consists, firstly, in ensuring that, for each maturity bracket of trade assets and liabilities, the outstanding amount of the instruments hedged is greater than the outstanding amount of the designated hedging instruments. C. Cash flow hedging 234

236 Part E Information on risks and hedging policies Financial flow hedging strategies are defined by ALMT and are aimed at hedging interest rate risk. IRS - Interest Rate Swaps, OIS - Overnight Index Swaps, and other types of financial derivatives are used to hedge interest rate risk of the banking book. The Bank formally documents hedging reporting. The documentation describes hedging strategies, identifies the financial instruments, the nature of the risk hedged and the relative IAS category (including FBL-compliant documentation). D. Foreign investment hedging As at 31 December 2016 the BNL Group has no transactions of this kind in place. Quantitative information 1. Banking portfolio: breakdown by residual duration (repricing date) of financial assets and liabilities C urrency : Euro On demand Within 3 months From 3 to 6 From 6 months Fomr 1 to 5 From 5 to 10 months to 1 y ear y ears y ears After 10 y ears U nspecified life 1. Cash assets 14,436,548 21,958,007 6,299,374 1,769,462 10,986,930 8,990,967 6,897, Debt securities 0 81,750 35,419 10, ,869 3,615,092 77,366 - _ w ith adv ance reimbursement option _ other 0 81,750 35,419 10, ,869 3,615,092 77, Loans to banks 492,820 5,684,519 36,354 8,685 48, Loans to customers 13,943,728 16,191,737 6,227,601 1,749,805 10,276,562 5,375,875 6,820, current accounts 3,051, ,316 23,507 40, ,003 19, other loans 10,892,624 16,075,421 6,204,094 1,708,951 9,801,559 5,355,932 6,820, with advance reimbursement option 158,624 9,187,748 2,232,820 1,134,181 5,122,106 4,519,039 6,820, other 10,734,000 6,887,673 3,971, ,770 4,679, , Cash liabilities 44,012,785 9,265,205 3,960, ,888 10,948, ,702 98, Deposits from customers 42,874,836 1,514,137 30,835 33,872 3,518 2, current accounts 42,468, other loans 406,183 1,514,137 30,835 33,872 3,518 2, w ith adv ance reimbursement option other 406,183 1,514,137 30,835 33,872 3,518 2, Deposits from banks 1,123,159 7,154,528 3,896, ,264 10,925, ,216 41, current accounts 1,084, other loans 38,407 7,154,528 3,896, ,264 10,925, ,216 41, Debt securities 2, ,539 33,506 7,752 20,423 36,005 57, w ith adv ance reimbursement option other 2, ,539 33,506 7,752 20,423 36,005 57, Other liabilities 12, w ith adv ance reimbursement option other 12, Financial derivatives 26,959,853 13,487,942 9,345,049 14,707,000 37,649,920 10,983,350 1,455, With underlying security _ Options Long positions Short positions _ Other Long positions Short positions Without underly ing security 26,959,853 13,487,942 9,345,049 14,707,000 37,649,920 10,983,350 1,455,974 _ Options Long positions Short positions _ Other 26,959,853 13,487,942 9,345,049 14,707,000 37,649,920 10,983,350 1,455,974 + Long positions 6,470,853 6,639,642 3,140,049 7,803,000 28,455,000 4,751,000 35, Short positions 20,489,000 6,848,300 6,205,000 6,904,000 9,194,920 6,232,350 1,420,974-4 Others off balance Long positions Short positions

237 Part E Information on risks and hedging policies 1. Banking portfolio: breakdown by residual duration (repricing date) of financial assets and liabilities C urrency : other currencies On demand Within 3 months From 3 to 6 months From 6 months to 1 y ear Fomr 1 to 5 y ears From 5 to 10 y ears After 10 y ears U nspecified life 1. Cash assets 693, ,292 20,482 2,594 15,771 1, Debt securities _ w ith adv ance reimbursement option _ other Loans to banks 326,025 87, ,046 1, Loans to customers 367,880 30,248 20,453 1,549 14,058 1, current accounts 185, other loans 181,954 30,248 20,453 1,549 14,058 1, w ith adv ance reimbursement option other 181,954 30,248 20,453 1,549 14,058 1, Cash liabilities 899,221 26, Deposits from customers 820, current accounts 793, other loans 26, w ith adv ance reimbursement option other 26, Deposits from banks 79,147 26, current accounts 70, other loans 9,042 26, Debt securities w ith adv ance reimbursement option other Other liabilities w ith adv ance reimbursement option other Financial derivatives With underlying security _ Options Long positions Short positions _ Other Long positions Short positions Without underly ing security _ Options Long positions Short positions _ Other Long positions Short positions Others off balance + Long positions Short positions Banking portfolio: internal models and other methods of sensitivity analysis The information is reported under Qualitative information of this paragraph. 236

238 Part E Information on risks and hedging policies Exchange rate risk Qualitative information A. General aspects, management processes and methods of measuring exchange rate risk See the Introduction and the Management Model - Trading portfolio, chapter 1.2 Banking Group - Market Risks for an explanation of the objectives and strategies underlying the trading activity in exchange rates and a discussion of management processes and measurement methods in general. In addition to the exchange risk of the trading portfolio, which is substantially nil, there is also residual operational risk managed by ALM Treasury. Operating exchange risk refers to the risk of a fluctuation in the equivalent value in euro of the margin achieved on sales transactions denominated in foreign currencies. That margin in foreign currency is automatically transferred to ALM Treasury, which negotiates it against the euro. B. Assets hedging exchange risk As regarding the trading portfolio, as stated in the paragraph on general aspects, all the new transactions in interest rate derivatives carried out with ordinary customers are conducted in backto-back mode with the Parent Company and do not generate risk. Quantitative information 1. Breakdown by currency of assets, liabilities and derivatives C urrencies Items C anadian Other US Dollars Pounds Yen Swiss Francs Dollars currencies A. Financial assets 696,259 64,154 8,493 13,979 9, ,928 A.1 Debt securities A.2 Share capital A.3 Loans to banks 289,231 38,982 6,345 13,828 5,047 61,993 A.4 Loans to customers 407,028 25,172 2, ,011 39,935 A.5 Other financial assets B. Other assets 32,068 5,764 1,017 1,785 7,671 7,744 C. Financial liabilities 717,155 61,559 9,177 14,919 15, ,388 C.1 Deposits from banks 58,604 2,790 44,437 C.2 Deposits from customers 658,551 58,769 9,177 14,919 15,744 62,951 C.3 Debt securities C.4 Other financial liabilities D. Other liabilities 9,889 8, ,185 E. Financial derivatives 2,459, ,647 52,834 7,856 38, ,208 - Options: 2, Long positions 1, Short positions 1, Other derivatives 2,456, ,637 52,748 7,856 38, ,197 + Long positions 1,223, ,567 26,339 3,914 19, ,916 + Short positions 1,233, ,070 26,410 3,942 19, ,281 Total assets 1,953, ,491 35,892 19,679 35, ,594 Total liabilities 1,961, ,087 35,796 19,520 35, ,860 Imbalance (+/-) (8,525) (7,596) (266) 237

239 Part E Information on risks and hedging policies 2. Internal models and other methods of sensitivity analysis In 2017, the VaR on exchange risk in relation to the financial assets in the trading portfolio was fully eliminated following the closing of several residual positions. The average value during the year was about 1,000 euro, with a peak of 15 thousand euro. In 2017, the VaR linked to exchange rates in relation to the financial assets in the trading portfolio fluctuated around an average value of about 20 thousand euro (with a minimum of 14 thousand euro and a maximum of 27 thousand euro), thus confirming the very marginal nature of this risk component (FX Total) as shown in the graph below, linked to the management of several residual transactions nearing maturity. 238

240 Part E Information on risks and hedging policies DERIVATIVE INSTRUMENTS A. FINANCIAL DERIVATIVES A.1 Regulatory trading portfolio: notional values at the end of period and averages Total 2017 Total 2016 Underlying assets / Type of derivative Over the counter Central counterparts Over the counter Central counterparts 1 Debt securities and interest rates 56,246, ,923,808 - a) Options 3,307,730-40,538,418 - b) Swaps 52,938,871-90,385,390 - c) Forward d) Futures e) Other Ttitoli capital and equity indices a) Options b) Swaps c) Forward d) Futures e) Other Currency and gold 4,812,734-6,315,807 - a) Options 2,618,950-3,798,644 - b) Swaps 157, ,921 - c) Forward 2,036,391-2,267,242 - d) Futures e) Other Goods More below Total 61,059, ,239,615 - Average values 99,149, ,555,379 - A.2 Banking portfolio: notional values at the end of period and averages A.2.1 Hedging Underlying assets / Type of derivative Over the counter Total 2017 Total 2016 Central counterparts Over the counter Central counterparts 1 Debt securities and interest rates 57,494,544-51,536,092 - a) Options b) Swaps 57,494,544-51,536,092 - c) Forward d) Futures e) Other Ttitoli capital and equity indices a) Options b) Swaps c) Forward d) Futures e) Other C urrency and gold a) Options b) Swaps c) Forward d) Futures e) Other Goods More below Total 57,494,544-51,536,092 - Average values 54,515,318-41,666,

241 Part E Information on risks and hedging policies A.2.2 Other derivatives Total 2017 Total 2016 Underlying assets / Type of derivative Over the counter Central counterparts Over the counter Central counterparts 1 Debt securities and interest rates 68,200-68,200 - a) Options ,200 - b) Swaps 68, c) Forward d) Futures e) Other Ttitoli capital and equity indices 378,943-1,022,376 - a) Options b) Swaps 378,943-1,022,376 - c) Forward d) Futures e) Other C urrency and gold a) Options b) Swaps c) Forward d) Futures e) Other Goods More below Total 447,143-1,090,576 - Average values 768,860-1,202,415 - A.3 Financial derivatives: positive gross fair value breakdown by product Wallets / Type of derivative Over the counter Total 2017 Positive fair value Central counterparts Over the counter Total 2016 Central counterparts A. Portfolio Regulatory trading 354,784-2,424,496 - a) Options 85, ,530 - b) Interest rate swap 236,097-1,724,478 - c) Cross currency swaps 2,840-8,958 - d) Equity sw ap e) Forw ard 30,137-39,254 - f) Futures g) Other B. Banking book - cover 301, ,019 - a) Options b) Interest rate swap 301, ,019 - c) Cross currency swaps d) Equity sw ap e) Forw ard f) Futures g) Other C. Banking book - other derivatives 5,740-7,699 - a) Options b) Interest rate swap c) Cross currency swaps d) Equity swap 5,740-7,699 - e) Forw ard f) Futures g) Other Total 662,522-2,886,

242 Part E Information on risks and hedging policies A.4 Financial derivatives: negative gross fair value - breakdown by product Wallets / Type of derivative Total 2017 Over the Central counter Positive fair value counterparts Total 2016 Over the Central counter counterparts A. Portfolio Regulatory trading a) Options b) Interest rate swap c) Cross currency swaps d) Equity sw ap e) Forw ard f) Futures g) Other B. Banking book - cover a) Options b) Interest rate swap c) Cross currency swaps d) Equity sw ap e) Forw ard f) Futures g) Other C. Banking book - other derivatives a) Options b) Interest rate swap c) Cross currency swaps d) Equity swap e) Forw ard f) Futures g) Other Total A.5 OTC Financial Derivatives: regulatory trading portfolio notional values, and gross positive and negative fair values for counterparties contracts that do not form part of offset agreements Contracts not covered by netting agreements Governments and central banks Other public entities Banks Financial companies Insurance companies Non- Financial Other entities 1) Debt and interest rates - N otional - 153,903-2, ,071 19,213 - Positive fair value - 25, , Negative fair value - 2, , Future exposure - 1, , ) Equity and equity indices - N otional Positiv e fair v alue N egativ e fair v alue Future ex posure ) Currency and gold - N otional , ,913 5,421 - Positive fair value - - 8, , Negative fair value , Future exposure , ) Other values N otional Positiv e fair v alue N egativ e fair v alue Future ex posure

243 Part E Information on risks and hedging policies A.6 OTC Financial Derivatives: regulatory trading portfolio - notional values, and gross positive and negative fair values for counterparties contracts that form part of offset agreements Contracts covered by netting agreements Governments and central banks Other public entities Banks Financial companies Insurance companies Non- Financial Other entities 1) Debt and interest rates - N otional - 412,927 51,455, ,151-3,130,630 29,245 - Positive fair value - 73,242 28,051 11, ,098 3,741 - Negative fair value - 17, ,996 5,805-1, ) Equity and equity indices - N otional Positiv e fair v alue N egativ e fair v alue ) Currency and gold - N otional - - 2,400,132 53,867-1,554, Positive fair value ,110 1,014-28, Negative fair value , ,316-4) Other values - N otional Positiv e fair v alue N egativ e fair v alue A.7 OTC Financial Derivatives: banking portfolio - notional values, and gross positive and negative fair values for counterparties contracts that do not form part of offset agreements No amounts are included in this table. A.8 OTC Financial Derivatives: banking portfolio - notional values, and gross positive and negative fair values for counterparties contracts that form part of offset agreements Contracts covered by netting agreements Governments and central banks Other public entities Banks Financial companies Insurance companies Non- Financial Other entities 1) Debt and interest rates - N otional ,537,744 25, Positive fair value , Negative fair value ,922 1, ) Equity and equity indices - N otional , Positiv e fair v alue - - 5, N egativ e fair v alue - - 1, ) Currency and gold - N otional Positiv e fair v alue N egativ e fair v alue ) Other values - N otional Positiv e fair v alue N egativ e fair v alue

244 Part E Information on risks and hedging policies A.9 Residual life of OTC financial derivatives: notional values Underly ings/residual life Within 1 y ear From 1 to 5 y ears After 5 y ears 31/12/2017 A. Regulatory trading portfolio 48,175,819 7,799,661 5,083,855 61,059,335 A.1 Financial deriv ativ es on debt securities and interest rates 44,244,477 6,918,269 5,083,855 56,246,601 A.2 Financial deriv ativ es on equity securities and share index es A.3 Financial deriv ativ es on ex change rates and gold 3,931, ,392-4,812,734 A.4 Financial deriv ativ es on other v alues B. Banking portfolio 18,233,773 27,780,890 11,927,024 57,941,687 B.1 Financial deriv ativ es on debt securities and interest rates 17,990,300 27,664,920 11,907,524 57,562,744 B.2 Financial deriv ativ es on equity securities and share index es 243, ,970 19, ,943 B.3 Financial deriv ativ es on ex change rates and gold B.4 Financial deriv ativ es on other v alues Total al ,409,592 35,580,551 17,010, ,001,022 Total al ,771,749 84,099,520 35,995, ,866,

245 Part E Information on risks and hedging policies B. Credit derivatives B.1 Credit derivatives: notional values at the end of period Regulatory trading portfolio Banking Categories operations on a single on most subjects on a single on most subjects subject (basketball) subject (basketball) 1. Buying protection a) C redit default products 18, b) Credit spread products c) Total rate of return swap d) Other TOTAL , TOTAL , Sales of protection a) C redit default products 18, b) Credit spread products c) Total rate of return swap d) Other TOTAL , TOTAL , The average notional values of credit derivatives (calculated as the simple average of the daily notional values) is equal to 33,586 thousand euro (29,222 thousand euro in 2016). B.2 OTC Credit derivatives: positive gross fair value breakdown by product Portafolio/Derivatives Types A Regulatory trading portafolio a) C redit default products b) C redit spread products c) Total rate of return sw ap d) Other B. Banking Portafolio a) C redit default products b) C redit spread products c) Total rate of return sw ap d) Other Positive fair value Total 2017 Total ,272 13,089 9,272 13, Total 9,272 13,089 B.3 OTC Credit derivatives: negative gross fair value - breakdown by product Portafolio/Derivatives Types Negative fair value Total 2017 Total 2016 A. Regulatory trading portafolio 9,272 13,089 a) C redit default products 9,272 13,089 b) C redit spread products - - c) Total rate of return sw ap - - d) Other - - B. Banking Portafolio - - a) C redit default sw ap products - - b) C redit spread option products - - c) Total rate of return sw ap - - d) Other - - Total 9,272 13,

246 Part E Information on risks and hedging policies B.4 OTC Credit derivatives: gross fair values (positive and negative) for counterparties contracts that do not form part of offsetting agreements No amounts are included in this table. B.5 OTC Credit derivatives: gross fair values (positive and negative) for counterparties contracts that form part of offsetting agreements Contracts covered by netting agreements Governments and central banks Other public entities Banks Financial companies Insurance companies Non- Financial Other entities Trading Surveillance 1) Purchase Protection - N otional - 18, Positive fair value - 9, Negative fair value ) Protection for Sale - N otional , Positiv e fair v alue N egativ e fair v alue , Banking 1) Purchase Protective - N otional Positiv e fair v alue N egativ e fair v alue ) Protection for Sale - N otional Positiv e fair v alue N egativ e fair v alue B.6 Residual life of credit derivative contracts: notional values Ov er 1 y ear Underlying / residual life U p to 1 y ear and up to 5 Over 5 year Total y ear A. Regulatory trading portfolio ,254 36,254 A.1. Credit derivatives with "reference obligation" "qualified" ,254 36,254 A.2 Credit derivatives with "reference obligation" not qualified " B. Banking B.1. Credit derivatives with "reference obligation" "qualified" B.2 Credit derivatives with "reference obligation" not qualified " Total 31/12/ ,254 36,254 Total 31/12/ ,713 31,

247 Part E Information on risks and hedging policies C. Financial and credit derivatives C.1 OTC Financial and credit derivatives: net fair value and future counterparty exposure Governments and central banks Other public entities Banks Financial companies Insurance companies Non-Financial Other entities 1) Bilateral financial derivatives - Positive fair value - 73, ,901 12, ,749 3,741 - Negative fair value - 17, ,864 7,216-20, Future exposure - 1, ,448 1,873-18, C C R net ) Bilateral credit derivatives - Positiv e fair v alue - 9, N egativ e fair v alue - - 9, Future ex posure C C R net ) Grants "cross product" - Positiv e fair v alue N egativ e fair v alue Future ex posure C C R net

248 Part E Information on risks and hedging policies 1.3 BANKING GROUP - LIQUIDITY RISK Qualitative information General aspects, management processes and methods of measuring liquidity risk Introduction The liquidity risk is defined as the current or expected risk deriving from a circumstance where the Bank is unable, in normal and stress situations, to fulfil its payment commitments due to its inability to obtain funds on the market or liquidate its assets in relation to their maturity restrictions. The overall capacity to offset this risk is essentially represented by the Bank s capacity to generate cash flows. This is to be understood not only as the possibility to have liquidity (cash or readily-liquidable assets-cash reserves), but also to have a consistent set of maturities of balance sheet assets and liabilities. In particular, the management of liquidity risk has two purposes: 1) The first refers to liquidity requirements, managed by monitoring incoming and outgoing cash flows to ensure exact fulfilment of own payment obligations. 2) The second consists of the need to maintain adequate liquidity reserves, that is, a portfolio of Eurozone government bonds and other liquid assets that may be promptly and easily liquidated also under situations of stress, in order to ensure that the Bank is able to handle all of its payment obligations over a set time horizon, including intra-day obligations. At the end of 2017 the liquidity reserve mainly amounted to about 6.3 billion euro, and consisted of Italian government bonds for about 3.4 billion euro. BNL s organisational model to manage the liquidity risk: strategic supervision, management and control For optimal management of business risks, banks formalise liquidity risk governance policies and define an efficient managerial process, in line with their characteristic operations, dimensions and complexity of the activities carried out. Based on the individual responsibilities, the corporate bodies are in charge of those processes, and, in the case of groups, the same are placed under the respective responsibilities of the Parent Company. Prudential supervisory regulations include, within the framework of the tasks of the corporate bodies, the strategic supervision, the managerial and the control functions. Role of the Board of Directors. BNL s Board of Directors approves the liquidity strategies and associated risk management policies, according to the developments of the ALCO in implementing the general policies of the Group. The Board ensures full compliance with the external reference regulations, the rules set by the European Central Bank and the Bank of Italy and overall consistency of the local strategy with the Group s guidelines and policies, establishing the maximum risk thresholds tolerable by approving the Risk Appetite Statement (RAS). Organisation and role of the ALCO The ALCO is assigned all the powers needed to take decisions regarding ALMT activities, within the limits of and based on the guidelines specified by the ALMT Head Office (HO) of BNP Paribas and the Board of Directors. The financial requirements of BNL subsidiaries are addressed almost exclusively via inter-group funding. These companies are not allowed any liquidity risk as mismatch between the maturities of assets and liabilities. 247

249 Part E Information on risks and hedging policies The ALCO is an analysis body that resolves on asset & liability management issues for the Bank and the portfolio companies. With special reference to the liquidity risk, the following topics are inserted in the ALCO agenda: evolution of the bank s liquidity situation; assessment and approval of the Financial Plan of the Bank, of the funding strategies and of the impact on the liquidity risk as well as the relevant monitoring and approval of any corrective actions; respect of the various liquidity limits and their compliance with the prudent regulations and the guidelines of the Group; results of stress tests; any review of the stress scenarios and relevant parameters according to the indications provided by the Parent Company; TIT system application and review; The Committee meets monthly and may be called by the Chairman any time deemed necessary. ALMT organisation in BNL ALMT reports functionally to the ALMT HO and is organised on the basis of the same principles adopted by the Group. In particular it is independent from the business lines. Regarding the global liquidity risk management of BNP PARIBAS and the limits defined at Group level, the local management is assigned all the powers needed to take decisions regarding the liquidity risk, in any case in full compliance with the rules set by the Supervisory Authority. BNL s ALMT Manager hierarchically reports to the CFO Acting Deputy General Manager of BNL. ALMT formulates management proposals to the ALCO on asset & liability management and is in charge of the operational organisation of the related decisions taken by the ALCO. Role of BNL Risk Management Department BNL Risk Management Division (DR) presides over the governance of risks and the compliance with Group methods and culture, also because of the functional link to BNP Paribas Group Risk Management. More in detail, DR works on the basis of the guidelines defined by the Parent Company in close cooperation with the business lines, which propose the assumption of risks and are the first and main responsible parties. The DR includes the Risk Management structure that operates in line with the GRM organisation of BNP Paribas also through the functional relation with the Group Risk Portfolio (GRP), Credit Risk Control (CRC) and Risk-Investment & Markets (R-IM) units. Regarding the subject in question, it also has the following responsibilities, which it exercises through the specific structure (see next paragraph), on the following activity: monitoring market risks, counterparty risks and ALMT risks, ensuring the implementation of the assessment methods in compliance with the guidelines of the Parent Company and supporting the relevant structures in defining the mitigation actions by checking their relevant implementation. The Risk Management Department division in charge of monitoring ALMT risks (as second level checking activity) is called Credit Risk Control & Risk-Capital Markets (CRC&RCM) and carries out, at local level, the tasks assigned to the same R-IM divisions of the Parent Company s GRM through specific functional relations. 248

250 Part E Information on risks and hedging policies BNL liquidity risk management process The liquidity risk management process is based on the identification of funding and liquidity risks through the definition of the evolutionary scenarios of on and off balance sheet items and the implementation of stress tests that measure the impact of any situations of crisis. Special attention is given to the diversification of financing sources by market (Retail, Corporate), both intercompany and to the Central Bank, type (current accounts, issue of BNL bonds and certificates of deposit on its commercial network, etc.) and maturity, as no special requirements exist for currencies other than the euro, given the nature of BNL s business. The funding of the BNL Group at 31 December 2017 is shown in the following table: BNL GROUP 31/12/2017 % deposits from BNP Paribas ,45% deposits from BNP Paribas - subordinated loans 514 0,74% BCE - TLTROII ,38% third Banks 303 0,44% BEI 567 0,82% Customers ,18% Total deposits ,00% The overall ability to neutralise the liquidity risk is essentially given by the Bank s ability to manage its cash and cash equivalents while consistently balancing assets and liabilities by maturity. In assessing this balancing condition, BNL currently uses some behavioural models borrowed from the Parent Company BNP Paribas, adjusted to the Italian situation and approved by BNL Risk Management Division and the Group Risk Management (GRM) of the French Parent Company and expressing the strategy defined by the same Parent Company, based essentially on centralised liquidity management for all the Group companies. According to BNP Paribas guidelines, BNL adopted a Liquidity Contingency Plan to tackle stress situations as a consequence of the possible liquidity drainage induced by the market trend or specific internal situations. This plan supplements the Contingency Funding Plan (CFP) of the Parent Company, which has the purpose of optimising the management of sources without putting the normal performance of the business at risk and limiting the funding costs. The responsibility for managing any crisis, in light of defining a streamlined and immediately implementable process, will fall to a Liquidity Crisis Committee. With the purpose of facing these situations, a liquidity reserve is also established, consisting of assets that can be allocated at the Central Bank (in line with the previsions of the BNP Paribas Group Stress Test). The BNPP Group encourages customers to make deposits, incentivising this type of resource through the internal transfer pricing system. The latter are influenced by a management model that envisages the transfer of the interest rate and liquidity risk to the relevant structures. For every transaction performed by market segments with external counterparties (customers), an internal one is activated with ALM Treasury in order to neutralise these risks, at a price which includes the hedging rate risk increased by a liquidity premium. This means that the market segments do not show a liquidity mismatch and ensure the stability of commercial margins thanks to the immunisation from the interest rate trends and any fluctuations of the cost of funding; the credit risk management remains their responsibility. Quantitative information 249

251 Part E Information on risks and hedging policies 1. Distribution by remaining contractual duration of financial assets and liabilities Currency: Euro Items/Maturity terms On demand From 1 to 7 day s From 7 to 15 day s From 15 day s to 1 month From 1 to 3 months From 3 mesi to 6 months From 6 months to 1 y ear From 1 y ear to 5 y ears Ov er 5 y ears U nspecified life A. Cash assets A.1 Gov ernment bonds A.2 Listed debts securities A.3 Mutual funds A.4 Loans Banks C ustomers B. Cash liabilities B.1 Deposits Banks C ustomers B.2 Debt securities B.3 Other liabilities C "Off-balance sheet" transactions C.1 FInancial derivatives with exchange of capital Long positions Short positions C.2 FInancial derivatives without exchange of capital Long positions Short positions C.3 Deposits and loans to be receiv ed Long positions Short positions C.4 Irrev ocable commitments to grant loans Long positions Short positions C.5. Financial guarantees issued C.6. Garanzie finanziarie ricev ute C.7. Credit derivatives with exchange of capital Long positions Short positions C.8. C redit deriv ativ es w ithout ex change of capital Long positions Short positions

252 Part E Information on risks and hedging policies 1. Distribution by remaining contractual duration of financial assets and liabilities Currency: other currencies Items/Maturity terms On demand From 1 to 7 day s From 7 to 15 day s From 15 day s to 1 month From 1 to 3 months From 3 mesi to 6 months From 6 months to 1 y ear From 1 y ear to 5 y ears Ov er 5 y ears U nspecified life A. Cash assets A.1 Gov ernment bonds A.2 Other debt securities A.3 Mutual funds A.4 Loans Banks C ustomers B. Cash liabilities B.1 Deposits Banks C ustomers B.2 Debt securities B.3 Other liabilities C "Off-balance sheet" transactions C.1 FInancial derivatives with exchange of capital Long positions Short positions C.2 FInancial derivatives without exchange of capital Long positions Short positions C.3 Deposits and loans to be receiv ed Long positions Short positions C.4 Irrev ocable commitments to grant loans Long positions Short positions C.5. Financial guarantees issued C.6. Garanzie finanziarie ricev ute C.7. Credit derivatives with exchange of capital Long positions Short positions C.8. C redit deriv ativ es w ithout ex change of capital Long positions Short positions

253 Part E Information on risks and hedging policies Securitisation transactions in which the bank has not subscribed to the total liabilities issued by the vehicle company in the deed of issue (so-called self-securitisation). Balances of loans receivable outstanding as at 31 December 2017 show 2.3 billion euro in outstanding positions deriving from securitisation transactions in which the Bank or Group Companies have subscribed the full amount of the liabilities issued by the vehicle company in the deed of emission (so-called self-securitisation) which, on the basis of international accounting standards, are not subject to de-recognition and are therefore represented among assets matching securities under liabilities issued by the vehicles used for the transactions. The aforementioned results also include credits borne by the securitisation vehicle EMF-IT Srl, which became part of the BNL Group during In the period between 1 January and 31 December 2017, within the securitisation program of the Bank s credit assets, a new transaction was finalised, pursuant to Law no. 130/99, called Vela CONSUMER 2, whose main features are set out below. POSITIONS IN PORTFOLIO ARISING FROM SECURITISATION TRANSACTIONS Vela CONSUMER 2 securitisation of personal loans This transaction was finalised on 6 December 2017, with the issue of ABS securities by the vehicle company Vela CONSUMER 2 Srl. On 16 October 2017, the sale of a portfolio of performing personal loans, granted to physical persons, to the vehicle company Vela CONSUMER 2 Srl was concluded for a total residual deposit of 587,383, euro. The transaction is part of the Group strategy aimed at improving liquidity by using own assets as collateral. In particular, the senior notes, with double ratings (Fitch and DBRS), were subscribed by BNL to be used as collateral for loan transactions. The sale price was equal to the residual amount of loans transferred at the sale date, added with the accrued income of interest accrued of 1,767, euro, for a total amount of 589,150, euro. The portfolio is composed of fixed-rate performing personal loans with monthly frequency, granted to physical persons. The loans of the securitised portfolio were finalised by reason of 28% in Northern Italy, 36% in Central Italy and the remaining 36% in Southern Italy. On 6 December 2017, the vehicle Vela CONSUMER 2 Srl financed the transaction through the issue of 2 classes of ABS securities (Asset Backed Securities) with legal maturity in Class A securities, with a fixed-rate coupon of 0.70% are listed on the Luxembourg Stock Exchange; they were assigned a rating from Fitch equal to A+ and from DBRS equal to A high : Whereas Class J, Junior, has no rating. The following table shows the tranching of ABS securities: (euro) Class Fitch/DBRS ABS rating at issue Fitch/DBRS ABS rating Fixed rate Issued amount Existing amount as at Class A A+/A high A+/A high 0,70% Class J U nrated U nrated Total

254 Part E Information on risks and hedging policies General features: Maturity of notes 26 October 2035 Remuneration of Class A securities 0.70% Portfolio sold regarding principal 587,383, Accrued income on interest on sale 1,767, Price of sale 589,150, Portfolio average seasoning months Portfolio average maturity on sale months Cash Reserve, entirely created on issue 9,544, Interest Reserve, entirely created on issue 2,000, At the date of issue of the notes, no cash reserves were set up. In particular, a Cash Reserve equal to 2.0% of the rated notes, in the amount of 9,544, euro and an Interest Reserve in the amount of 2,000, euro were established. The Cash Reserve cannot be reduced until the relation between the cash reserve itself and the outstanding amount of securities with rating is equal to at least the double of the same percentage calculated upon issue, under the condition that a series of conditions, set forth by the contract, occur. As regards the portion exceeding the above-mentioned percentage, the funds of the Cash Reserve will be destined to the partial reimbursement of the Class J junior securities. In any case the Cash Reserve must drop below 2,386, euro The Interest Reserve cannot be decreased and may be used only to guarantee payment of the coupons of the Class A notes. Collections related to the securitised loan portfolio are managed by BNL SpA, as Servicer, which credits them to a Collection Account, held by the vehicle company and opened at BNL. Every quarter, above-mentioned collections are transferred to the Payment Account, held by the vehicle company at BNP Paribas Securities Services, Milan branch. The rated Class A notes, equal to 477,200, euro and the unrated Class J notes, equal to 123,525, were fully subscribed by BNL. Securities held in the portfolio as at (euro) Securities Type Rating Issued amount Subscribed amount Existing amount as at Book value as at Equivalent value IAS Category Class A Senior A+/A high % available for sale Class J Junior U nrated % loans and receivables Total The Cash Reserve, initially equal to euro 9,544,000,00 (2% of the rated notes) and the Interest Reserve, equal to euro ,00, are entirely financed by the Class Junior security. As part of the servicing activity aimed at management, recovery of loans and monitoring of the total performance of securitisation, BNL SpA issues monthly and quarterly reports. Loans sold were segregated through IT in order to ensure their accounting division as well. Pursuant to commitments 253

255 Part E Information on risks and hedging policies taken by the servicing contract, BNL undertakes to manage the loans sold according to internal Collection Procedures. BNL, as Sole Arranger, structured the transaction. The service of placement of ABS securities was provided by BNP Paribas Securities Services, Luxembourg branch as Listing Agent. Vela CONSUMER securitisation of personal loans The transaction was finalised in 2015, through the sale of a portfolio of performing personal loans granted to individuals to the vehicle company Vela CONSUMER Srl, established pursuant to Law no. 130/99. The following table shows the tranching of ABS securities: (euro) Class Fitch/DBRS ABS rating at issue Fitch/DBRS ABS rating Fixed rate Issued amount Existing amount as at Class A AA/AA A+*/AAA 0,70% Class J U nrated U nrated Total (*) On 31 May 2017, the rating agency Fitch downgraded the rating of class A. Securities held in the portfolio as at (euro) Securities Type Rating Issued amount Subscribed amount Existing amount as at Book value as at Equivalent value IAS Category Class A Senior A+/AAA % available for sale Class J Junior U nrated % loans and receivables Total The Cash Reserve, initially formed in the amount of EUR 16,756, (2,0% of rated notes) and the Interest Reserve, equal to EUR 4,000,000.00, are entirely funded by Junior Class J. Since the outstanding amount of the Rated notes dropped below half of the original amount issued, the redemption of the Junior began on the payment date of 28 July As at 31 December 2017, the above mentioned reserve amount to EUR 11,458, Vela Mortgages securitisation of residential mortgages The transaction was finalised in 2008, through the sale of a portfolio of performing residential mortgage loans to the vehicle company Vela Mortgages Srl, established pursuant to Law no. 130/99. The following table shows the tranching of ABS securities: 254

256 Part E Information on risks and hedging policies (euro) Class S&P/Fitch ABS rating at issue S&P(*)/Fitch ABS rating Spread (bps) Issued amount Existing amount as at Class A AAA/AAA AA*/AA Class B AA/AA A+*/AA Class C A/BBB A+*/A** Class D U nrated U nrated Total (*) In November 2017 the Rating Agency Standard & Poor s increased the rating of the Class A-B-C securities. (*) In July 2017, the rating agency Fitch upgraded the rating of class C. Securities held in the portfolio as at (euro) Securities Type Rating Issued amount Subscribed amount Existing amount as at Book value as at Equivalent value IAS Category Class A Senior AA/AA % available for sale Class B Mazzanine A+/AA % available for sale Class C Mazzanine A+/A % available for sale Class D Junior U nrated % loans and receivables Total Other forms of C redit Enhancement Amount Cash reserve * (*) The Cash Reserve was initially formed through the granting of a subordinated loan to the vehicle company on the part of BNL SpA, by euro 112,750,000,00. BNL SpA on 23/10/2009 granted a further subordinated loan by euro 55,908,545,32 as to increase the credit enhancement of the transaction. Vela Mortgages 2 securitisation of residential mortgages The transaction was finalised in 2009, through the sale of a portfolio of performing residential mortgage loans to the vehicle company Vela Mortgages Srl, established pursuant to Law no. 130/99. The following table shows the tranching of ABS securities: (euro) Class S&P/Fitch ABS rating at issue S&P(*)/Fitch ABS rating Spread (bps) Issued amount Existing amount as at Class A AAA/AAA AA*/AA Class B AA/AA A+*/AA Class C AA+/BBB+ A+*/A** Class D U nrated U nrated Total (*) In November 2017 the Rating Agency Standard & Poor s increased the rating of the Class A-B-C securities. 255

257 Part E Information on risks and hedging policies Securities held in the portfolio as at (euro) Securities Type Rating Issued amount Subscribed amount Existing amount as at Book value as at Equivalent value IAS Category Class A Senior AA/AA % available for sale Class B Mazzanine A+/AA % available for sale Class C Mazzanine A+/A % available for sale Class D Junior U nrated % loans and receivables Total The Cash Reserve, initially formed in the amount of EUR 53,467, (2,0% of rated notes), is entirely funded by Junior Class D. Since the outstanding amount of the Rated notes dropped below half of the original amount issued, the redemption of the Junior began on the payment date of 28 April As at 31 December 2017, the above mentioned reserve amount to EUR 26,733, EMF-IT Srl The Company EMF-IT Srl is a vehicle company established on 2 December 2005, in accordance with article 3, paragraph 1 of Law no. 130 of 30 April 1999, registered in the General List of financial intermediaries as per article 106 of the Consolidated Banking Act with no The Company's operations began in September 2006, with the purchase of five residential mortgage loan portfolios originated by Meliorbanca SpA, whose equivalent value was paid by the Company by subscribing a bridge loan granted by Lehman Brothers; this loan was subsequently entirely repaid in June 2008 using the income generated by an issue of securities fully subscribed by BNP Paribas Personal Finance. The Company purchased additional residential mortgage loan portfolios originated by Meliorbanca SpA, generated by the commercial agreement between PFI and a credit intermediary company, stipulated in 2008, which involved the periodic purchase through the Company of new mortgage portfolios that it manages. At the end of the aforementioned transactions, the Company's portfolio included 590 million euro of residential mortgage credits, net of premiums paid by the Company to the originator and to the broker, coming out at 23 million euro, accounted for together with the credit portfolio, as set forth by IAS accounting standards. The bonds issued are variable funding notes (VFN) with a maximum nominal value of 1.5 billion euro. Their yield is linked to 6-month Euribor. At the beginning of 2011, the sale of securitised portfolio by the vehicle company UCB Service Srl was finalised in favour of the vehicle EMF-IT (both 100% owned by PFI), as part of a company rationalisation programme, with economic effect from 1 May The transaction took place at the book values of the portfolio and did not affect the result in any way. After the aforesaid transaction, the loans of the vehicle EMF-IT Srl equalled 449 million euro as at 31 December

258 Part E Information on risks and hedging policies 1.4 BANKING GROUP - OPERATIONAL RISKS Qualitative information A. General aspects, management processes and methods of measuring operational risk In compliance with the policy adopted by BNP Paribas, the "Operational Risks" and "Permanent Controls" areas were made complementary by the BNL Group to guarantee, as summarised in the figure below, economies in light of the transversal nature of operational risks, with a tendency to maximise efficiency in managing this risk in order to reduce losses and the amount of capital necessary to face it. Key: Reporting Risk measurement Organisational procedures Checks Monitoring Risk identification and assessment The area of application of the management tool regards the Parent Company BNL SpA, including the BNPP-BNL CIB Division, and the Subsidiaries which are consolidated line-by-line. Thus for the purpose of calculating the asset requirements and related fulfilments the following calculation methodologies were used: the adoption, from 1 July 2011, of the AMA (Advanced Measurement Approach) method for BNL SpA, in accordance with the Group approach, which envisages the combined use of the TSA (Standardised Approach) method and the BIA (Basic Indicator Approach) for some segments of operations; the application of the TSA method from 2011 for Artigiancassa and from 2013 for BNL Finance. As part of the overall operational risk management system, the BNL Group has begun communication mechanisms among corporate structures, which intend to make the risk management system an integral part of decision-making processes and a basis for the choices to be made. Complementarity between the operational risk management system and the decisionmaking processes complies with the principles of (Italian and European) Supervisory regulations. One of the principles is based on the awareness that company management and managers have gained about the risk involved in their respective operating areas. There are two fundamental elements: the awareness of the entire staff and the taking of informed decisions by management. The Group also has a reporting system in place for specific, strictly operational, short/medium-term disclosures. 257

259 Part E Information on risks and hedging policies Organisation structure In harmony with Group policy and in compliance with the supervisory regulation on this topic, the Bank formalises the policies to govern operational risk, periodically revises them and monitors the concrete functioning of the management and risk control processes. In addition to the corporate bodies with strategic supervision, management and control functions, which are the Board of Directors, the Internal Control and Risk Committee and the Board of Statutory Auditors, the following are included: Risk Monitoring Committee - Operational Risks session, with the participation of the Managing Director; the Committee meets on a quarterly basis; Inspection Générale Hub Italy, which periodically carries out an independent assessment of the adequacy of the operational risk management system and the internal approval process; The Operational Risk and Control RISK structure of BNL, in the Risk Department, also identified by the Group name Risk ORC (Risk Operational Risk & Control), which ensures second l control as well as coordination and animation of the entire structure. A network of Operational Risk Correspondents and Permanent Controls Coordinators at the General Management level and structures/roles at the Network level (OPC - Operational Permanent Controllers). The following are also part of the governance tool and operational risk management and control mechanisms: The Products, Activities and Exceptional Transactions Committee, with the goal of validating and authorising the sale and distribution of new products, services, agreements, assets and exceptional transactions; The Finance Department with responsibility connected to the calculation of asset absorption and the ICAAP process (Internal Capital Adequacy Assessment Process). Approach The analysis of the cause (internal process or outside event), of the occurrence (incident) and of the effect (risk of economic loss) are the fundamental levers for the management of operational risk in the definition adopted by BNP Paribas. In particular, the Group has defined an incident as a real or potential event deriving from the inadequacy or malfunctioning of internal processes or external events which could have generated or could generate a loss, a revenue or a lack of profit. The analysis of historic incidents, integrated with the analysis of potential events, allows the development of the mapping of risks and the identification of gaps in control or procedures as well as defects in process or organisation that could determine financial impact that might even be serious. The process of managing historic incidents unfolds in the following phases: collection and reporting, definition of immediate (corrective) and follow up actions (as a prevention phase for mitigation), quality review to guarantee the completeness of the information, operational information. Potential incidents constitute the main data of the risk forecast analysis in the AMA method of the Group. The stages of managing potential incidents include: analysis and data entry, for potential incidents included within the area of functions and potential incidents that the Group deems to be of a transversal, systemic, extreme or compliance type (called Greater Risk ); validation of the incident by the owner of the associated process; 258

260 Part E Information on risks and hedging policies check of the quality of analyses and quantifications of potential incidents by the Operational Risk and Permanent Control Coordination Department and on the part of the Operational Risk & Control RISK Department of the Parent Company; definition of immediate (corrective) actions and action plans, which represent the core of risk mitigation. In the AMA model adopted, quantitative data is used as primary source to calculate the capital requirements against operational risks. The analysis of potential incidents allows regulatory requirements to be addresses simultaneously in terms of scenario analysis, context factors and internal control system. Quantitative information Assessment of the main sources of manifestation and nature of risk In losses deriving from external and internal frauds decreased, accounting as a whole for 5.4% of total overall losses, amounting to 3.8 million euro. Internal frauds had an impact of 402 thousand euro, broken down as follows: 50% (203 thousand euro) is comprised of unrecognised/unauthorised transactions on Customer accounts; 26% (106 thousand euro) of cash shortfalls; 23% (93 thousand euro) of lawsuits against the Bank relating to investment services for alleged illegal activities of BNL employees or financial promoters. External frauds came to 3.4 million euro and their main impacts are broken down as follows: 30% (1.0 million euro) of monetics frauds; 21% (708 thousand euro) ATM break-ins/thefts; 11% (362 thousand euro) for unrecognised/unauthorised transactions; 8% (275 thousand euro) for credit fraud. Losses and allocations for events related to cases regarding social security and safety at work amount to 4.2 million euro and account for 5.9% of the total. Those losses decreased slightly on the previous year (-3%). This category is fully comprised of labour law disputes: as regards the disputes giving rise to the lawsuits, the main type remain claims made by employees on the economic treatment received for work abroad carried out prior to 2006 (77%; 3.2 million euro). 61.5% of the total economic impact concerns incidents of the Customers, products and commercial practices category, which are increasing compared to the previous year (43.6 million euro; +24%). The year was negatively impacted by the charges deriving from the Bank of Italy inspection on Transparency (15 million euro for returns and Remediation Plan costs) and the provision made for a fine from the Italian Antitrust Authority (2.0 million euro) for which an appeal is being prepared to the Regional Administrative Court. Conversely, there was a decrease in the impacts deriving from disputes for anatocism (lawsuits against the Bank and settlements; -3.7 million euro), losses for bankruptcy petitions (-3.2 million euro) and for disputes on investment services (- 1.3 million euro). Damage to property represents 0.4% and did not show any relevant incidents. Business interruptions and shortcomings in systems (IT incidents) comprised around 1% of the total, without any relevant incidents. Errors in executing and managing processes concern 25.9% of total losses (18.3 million euro) and increased sharply on 2016 (+70%). In particular, it is worth noting losses deriving from errors in managing guarantees (4.5 million euro) and provisions for legal disputes (2.5 million euro), promoted by employees and suppliers claiming the existence of a permanent subordinate employment relationship with BNL and expecting to be hired by the Bank pursuant to labour law. 1 Forecast data source: extraction at 31 December

261 Part E Information on risks and hedging policies Percentage distribution of net losses by Event Type Year Esecuzione, consegna e gestione dei processi 25,9% 1 - Frode interna 0,6% 2 - Frode esterna 4,8% 3 - Pratiche in materia di impiego e sicurezza sul luogo di lavoro 5,9% 6 - Interruzioni di attività e carenze dei sistemi 1,0% 5 - Danni ai beni materiali 0,4% 4 - Clienti Prodotti e Pratiche commerciali 61,5% Key: 1 - Internal fraud, 2- External fraud; 3 - Practice concerning employment and safety at work; 4 - Product Customers and Commercial Practice; 5 - Damage to tangible assets; 6 - Interruption of activities and system shortages; 7- Start, execution and control of transactions Potential liabilities As regards potential liabilities, based on the assessments made, the Group is exposed to disputes where the probability of losing is judged to be merely possible, and thus, not such as to require specific provisions under correct accounting principles, and where the potential risk is estimated at approximately 77 million euro. 260