Annual financial report 2019 Financial Year

Summary data
A Group Supportive, Efficient and Cooperative
Key financial data
STRUCTURAL RATIOS
Loans to customers
 
56.6%
Direct funding
 
77.8%
Equity
 
8.9%
 
Total assets
RISK MANAGEMENT RATIOS
9.3%
NPL RATIO
55%
Coverage NPL
47.5%
Texas ratio
PROFITABILITY RATIOS
3.5%
ROE
0.3%
ROA
68.6%
cost/income

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Income statement e Group equity structure

Reclassified statement

Reclassified income statement
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Reclassified statement of financial position
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Economic results

Reclassified income statement1

(Figures in millions of euro) 31/12/2019

Interest margin

1,179
Net commissions 644
Dividends 3
Net trading revenues 177
Net interest and other banking income 2,003
Net value adjustments/write-backs (313)
Income from financial activities 1,690
Operating charges* (1,575)
Net allocations to provisions for risks and charges (20)
Other income (charges) 222
Value adjustments to goodwill and other intangible assets (27)
Profit (loss) from disposal of investments and equity investments (5)
Gross current result 285
Income tax (60)
Profit (loss) for the year for minority interests (4)
Net result of the Parent Company 221

* This item includes personnel costs, other administrative expenses and operating amortisation/depreciation.

1 In order to provide a better management representation of the results, the reclassified income statement figures differ from the layouts of the financial statements envisaged by Bank of Italy Circular no. 262 of 2005, 6th update.

 

Financial position aggregates

Reclassified statement of financial position1

(Figures in millions of euro) 31/12/2019
ASSETS  
Cash and cash equivalents 555
Exposures to banks 1,166
Exposures to customers 41,230
of which at fair value 286
Financial assets 26,689
Equity investments 89
Tangible and intangible assets 1,353
Tax assets 872
Other asset items 851
Total assets 72,805
LIABILITIES  
Due to banks 7,474
Direct funding 56,669
Due to customers 50,055
Debt securities in issue 6,614
Other financial liabilities 101
Provisions (Risks, charges and personnel) 386
Tax liabilities 80
Other liability items 1,611
Total liabilities 66,321
Third party minority interests 4
Group equity 6,480
Consolidated equity 6,484
Total liabilities and equity 72,805

1 In order to provide a better management representation of the results, the reclassified income statement figures differ from the layouts of the financial statements envisaged by Bank of Italy Circular no. 262 of 2005, 6th update.

Main strategic business areas of the Cassa Centrale Group
 
 
 
 

Affiliated Banks

The affiliated Banks represent the most important part of the Group’s consolidated assets and the strength of the Group’s current and future development. The affiliated Banks traditionally operate with the aim of fostering the development of communities and the local economy. The principles of mutuality, which characterise cooperative credit, allow banks to play a fundamental role in the national banking industry and be an important reference point for households and small and medium-sized enterprises (hereinafter also “SMEs”).

The Group’s strategic plan aims to develop relationships with households and SMEs by making the most of the territorial network and exploiting synergies, the expansion of the commercial offer and economies of scale resulting from belonging to a Group of national importance.

In general, the structure of cooperative credit banks reflects the nature of territorial banks, characterised by high customer funding deriving from historical ties with the territory to which they belong, a prevalence of loans to counterparties represented by households and small companies and a low ratio of loans to deposits, with excess liquidity invested mainly in government securities.

Below is a summary representation of the main income statement and statement of financial position aggregates of the affiliated Banks, with a focus on the individual territorial areas in which the Group operates.

 

(Figures in millions of euro)

LOANS TO CUSTOMERS Trentino-Alto Adige North East North West Central South and the Islands Total

Gross customer loans

10,164

9,161

9,604

9,581

4,043 42,553
- of which performing 9,152 8,400 8,644 8,717 3,574 38,487
- of which non-performing 1,012 761 960 864 469 4,066
Value adjustments 582 498 586 551 303 2,520
Net customer loans 9,582 8,663 9,018 9,030 3,740 40,033

The operations of the affiliated Banks are mainly concentrated in the northern part of Italy, in line with the territorial structure of the branches.

Total gross loans amounted to EUR 42.6 billion at the end of 2019 (approximately EUR 40.0 billion net of adjustment funds) and was allocated on a uniform basis to four of the five geographical areas into which the Group is divided. There is less of a presence in the South and the Islands area which sees a significant number of affiliated Banks, but on average of small size. In a year in which the many activities connected with the launch of the first Italian Cooperative Banking Group have certainly fully engaged the operating structures, the affiliated Banks have seen a constant growth in the volumes of credit, confirming their central role in supporting the growth, including economic growth, of the reference territories. New credit provisions to both households and local SMEs have grown, in a development that has characterised all territorial areas, but more rapidly for the South and the Islands.

The percentage of impaired loans to gross loans, around 9.3% at Group level, is more virtuous in the North-East and progressively higher in the Central, South and the Islands areas. It should be noted that in all areas, during the Group’s first year of operations, there was a marked reduction in the stock of impaired loans, in line with the Group’s guidelines and strategies.

Confirming the Group’s strong focus on risk management and credit risk management in particular, provisions have been further increased and have reached average coverage levels, for the affiliated Banks, among the highest in the national banking system, despite the sharp decline in the stock of impaired loans.

(Figures in millions of euro)

FUNDING Trentino-Alto Adige North East North West Central South and the Islands Total

Overall funding

19,652

17,166

18,395

15,884

6,416

77,513

Direct funding

13,489 11,343 12,633 11,335 5,717 54,517
Indirect funding* 1,822 5,823 5,762 4,549 699 22,996
- of which administrated 1,822 2,131 2,377 1,460 371 8,161
- of which managed 4,341 3,692 3,385 3,089 328 14,835

* Indirect funding is expressed at market values

 

Direct funding also sees a distribution among the territorial areas proportionally in line with that already described for the credit volumes. All areas show a structural surplus of funding resources in the ratio of lending to funding, which results in a high degree of liquidity for the affiliated Banks and therefore for the Group. The prudent approach to the investment of resources funded from depositors (typically households) historically characterises the operations of the BCC-CR-RAIKAs, which allocate these resources mainly to households and small and medium-sized enterprises in the area of reference.

Administrated and managed funding of the affiliated Banks, amounting to approximately EUR 23 billion, accounts for 30% of total funding, with a differentiated situation at the level of individual geographical areas, spanning from 34% in the North-East to 11% in the South and the Islands. In indirect funding volumes, the incidence of managed and insurance funding products prevails, with the exception of the South and the Islands area where volumes are very low.

This operation has always seen affiliated Banks lagging behind the rest of the banking industry, having historically favoured the placement of direct funding products. The trend has changed in recent years; important investments have been made in the specialist training of staff of the affiliated Banks in order to increase their ability to offer shareholders and customers a high level of advisory support. These investments, supported by the careful research of the Industrial Group’s companies for products suitable for BCC-CR-RAIKAs’ shareholders and customers, is gradually closing the gap, while maintaining a high level of attention to the quality of the overall service offered to the savings customer.

(Figures in millions of euro)

MARGINS AND COMMISSIONS Trentino-Alto Adige North East North West Central South and the Islands Total
Interest margin

266

238

229

257

145

1,136

Net commissions 112 125 130 127 53 547
Net interest and other banking income 413 388 389 420 222 1,832

 

The income contribution from the interest margin for the affiliated Banks amounts to approximately EUR 1.1 billion, equal to 62% of net interest and other banking income, with a higher percentage in the South and the Islands and Trentino-Alto Adige.

The contribution of the interest margin to overall profitability is high, confirming the predominantly traditional banking operations that characterise the affiliated Banks and therefore the Group as a whole. The main source of income remains the traditional activity of collection of savings and lending in the territories where the affiliated Banks are located. To this must be added the investment of excess liquidity mainly in securities of government issuers or in relation to the Parent Company.

The prevailing market conditions have for years now seen interest rates at an all-time low. These conditions have contributed to the gradual reduction of the contribution of the interest margin to primary profitability. The ability of the affiliated Banks to offer shareholders and customers services capable of completing the commercial offer and increasing margins from services, is becoming increasingly decisive. This path will continue, but always with a strong focus on the protection of shareholders and customers in compliance with the cooperative principles that are the basis of the operations of the affiliated Banks.

The net commissions of the affiliated Banks totalled EUR 547 million, with a contribution which shows a fairly uniform distribution in the Centre and North of Italy. The percentage of net commissions is increasing for the Group as a whole and for the individual territorial areas, confirming the progressive greater capacity of the affiliated Banks to diversify their sources of income. The average contribution of the net commissions of the territorial areas to net interest and other banking income is 30%, with the territorial incidence spanning from 24% in the South and the Islands to 33% in the North-West.

 

The Industrial Group is represented by the Parent Company and the subsidiaries and associates that operate in different areas of activity, namely:

  • ICT and back office services, with the subsidiary Allitude S.p.A. (hereinafter also “Allitude” and until the subsequent integration into Allitude: CESVE S.p.A. and Bologna Servizi Bancari S.r.l. (hereinafter also “CESVE” and “BSB”);
  • leasing services, with the subsidiary Claris Leasing S.p.A. (hereinafter also “Claris Leasing” or “Claris”);
  • insurance services, with the subsidiaries Assicura Agenzia S.r.l. and Assicura Broker S.r.l. (hereinafter also “Assicura Agenzia” and “Assicura Broker”);
  • collective asset management services, with the subsidiary Nord Est Asset Management S.A. (hereinafter also “NEAM”);
  • other ancillary services, with the subsidiaries Centrale Credit Solutions S.r.l., Centrale Soluzioni Immobiliari S.r.l., Centrale Casa S.r.l. and the associate Centrale Trading S.r.l.

Below are the main figures for the Industrial Group as at 31 December 2019.

(Figures in millions of euro)

LOANS TO CUSTOMERS* 31/12/2019

Gross customer loans

1,294

- of which performing 1,169
- of which non-performing 125
Value adjustments 97
Net customer loans 1,197

* Management data including all intra-group eliminations.

With regard to loans to customers, the contribution of the Industrial Group to the Cassa Centrale Group’s statement of financial position is mainly due to the activities of the Parent Company and the subsidiary Claris Leasing. Gross loans to customers, amounting to approximately EUR 1.3 billion, are in fact concentrated on these structures and provisions for adjustment funds of approximately EUR 95 million have been set aside with net loans amounting to EUR 1.2 billion.

 

(Figures in millions of euro)

FUNDING* 31/12/2019

Overall funding

6,776

Direct funding 2,152
Indirect funding** 4,623
-of which administrated 2,657
- of which managed 1,966

* Management data including all intra-group eliminations.
** Indirect funding is expressed at market values.

Funding from customers of the Industrial Group amounted to EUR 6.8 billion and was attributable to the Parent Company. EUR 2,2 billion is composed of direct funding which is mainly represented by transactions with the counterparty Cassa di Compensazione e Garanzia. Indirect funding 7, on the other hand, amounted to approximately EUR 4.6 billion, of which EUR 2.0 billion, or 43%, related to assets under management, with operations mainly related to asset management products, while assets under administration amounted to EUR 2.6 billion and represented 57% of indirect funding, with operations mainly in the bond market.

*** The indirect funding represented refers to the component placed by Cassa Centrale Banca directly with customers and does not include the component placed through banks.

Significant events
The main events of the year ended 31 December 2019
 
Business outlook

In a global macroeconomic scenario that presents uncertain prospects also conditioned by the risks associated with geopolitical tensions, the tariff disputes initiated by the U.S. administration and the slowdown in economic activity in a number of major countries in the euro zone, the dramatic spread of the Covid-19 epidemic, starting from China, became apparent in the first quarter of 2020.

The explosion of the Virus and its rapid spread, resulting in its status as a pandemic, have generated significant impacts from a health, social, economic and financial aspect, for vast areas of the world.

 

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Business outlook

In a global macroeconomic scenario that presents uncertain prospects also conditioned by the risks associated with geopolitical tensions, the tariff disputes initiated by the U.S. administration and the slowdown in economic activity in a number of major countries in the euro zone, the dramatic spread of the Covid-19 epidemic, starting from China, became apparent in the first quarter of 2020. The explosion of the Virus and its rapid spread, resulting in its status as a pandemic, have generated significant impacts from a health, social, economic and financial aspect, for vast areas of the world.

In order to stem its spread and contain the health emergency, the governments of the countries affected, starting with China, have implemented restrictive measures such as restricting the movement of people, closing shops and suspending production or certain production chains, causing immediate collateral damage to global supply chains, a drop in consumption and a collapse in confidence. In order to contain the effects of these dynamics, the authorities have intervened with economic stimulus plans that include expansionary fiscal and monetary policy measures and regulatory loosening. The effects of these manoeuvres have generated high uncertainty on the outlook for the global economy with a scenario for 2020 expected to be recessive.

The Virus has also spread very rapidly in Europe and the deterioration of the economic situation, also due to policies employed to contain the contagion, is pushing the economies of the area into a state of deep recession, forcing the authorities to find strong, coordinated, timely and innovative solutions to face the emergency and relaunch economic growth. In this sense, a discussion is underway among government authorities on the advisability of introducing forms of Community support for fiscal interventions aimed at sustaining families and businesses in difficulty.

Italy, one of the first countries in Europe to be affected by the development of the contagion, has adopted progressive and severe social distancing measures to contain the health emergency, both in terms of territorial extension, starting from the northern regions, and in terms of production blocks that mainly affect the tourism chain, the macro-sectors transport and logistics, distribution and in general non-essential service and manufacturing activities. The Government, within limits deriving from public finance balances and in order to mitigate a predicted severely recessionary dynamic, has intervened with measures to support the loss of household income, to prevent liquidity crises in businesses and to mitigate the reduction in consumption and investments.

As a result of this epidemic, the banking sector is also facing a complicated situation, having to manage the repercussions of the expected effects of the recessionary scenario. In this context, the measures announced by the European authorities together with the measures provided for in the socalled “Cura Italia Decree” will help to contain the recessionary effects, limit the credit contraction and, at least initially, reduce the growth of impaired exposures by containing the increase in the cost of risk.

Impaired credit reduction strategies aimed at a progressive improvement in asset quality will remain an option pursued by the banking industry, but will essentially have to take into account the changed economic environment and its impact on banks’ profitability. Bank lending and borrowing interest rates are expected to remain stable, confirming a substantially flat trend in the overall banking spread. The growth of the interest margin is limited by the contraction of credit and unit margins contracted due to competition in the segments with the highest creditworthiness.

A positive contribution will come from the containment of funding costs related to the new T-LTRO auctions and the recent announcements on the monetary policy front, although the scope for reducing overall funding costs will be limited by the minimum level already achieved by deposit interest rates. The high uncertainty surrounding the duration of the pandemic, the expected worsening of the global economic situation and the tensions in financial markets will tend to accentuate demand for low-risk forms of investment in 2020. Households’ greater risk aversion could slow down investment of liquidity in asset management instruments, thus resulting in a lower contribution from these instruments as a percentage of total revenues.

A lower contribution to profitability will also come from payment and liquidity management services, also due to the operating blocks of households and businesses, the increased competitive pressure, especially from non-bank operators, and the digital transformation process. Within a context of weakness in traditional banking activity, improving operating efficiency, cost reduction and new business strategies are confirmed as the main levers for the recovery of profitability in the sector.

The current health crisis situation will also have an impact on the operations of the Cassa Centrale Group, given that the activities of the affiliated Banks are mainly focused on traditional lending to households and small and medium-sized businesses in the areas where they are located. The operating plan of the Cooperative Banking Group for the year 2020 was defined and approved before the onset of the current crisis and forecast a positive development of credit volumes together with a strong growth in indirect funding. It is clear that the sudden change in the operating environment means that the guidelines defined only a few months ago have to be considered outdated.

In this new economic and social context, the Group will focus its attention on the one hand on strongly supporting the economic fabric of the reference territories, which are facing a crisis never experienced in the past, and on the other on overseeing the overall risk profile. The dynamics of customer funding will also be affected by the contingent situation, but it is possible that the solvency standards of the Cassa Centrale Group, among the highest in the entire European banking system, may represent a safe haven for shareholders and depositing customers at a time of great uncertainty.

For this reason, there could be a further increase in direct funding, which would increase the already high liquidity ratio that the Group enjoys today. For the same reasons, it is possible that the flow of direct funding to asset management may slow down due to the uncertainty that arose on the financial markets during the first quarter. In 2020, activities related to the Group’s organisational and operational structure will continue, also considering that the new context will require further investments in technology and human capital.

Given the sudden development of the external scenario, resulting from the current emergency and the possible economic repercussions, the Group is monitoring the situation in order to promptly identify potential impacts on the 2020 financial year.

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