Annual financial report 2022

Reclassified income statement ¹

* This item includes Net result from trading, Profit/(loss) from disposal/repurchase of financial assets, and Net result from other financial assets and liabilities designated at fair value through profit or loss.

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

1 - In order to provide a better management representation of the results, the reclassified consolidated income statement figures differ from the layouts of the financial statements envisaged by Bank of Italy Circular no. 262 of 2005, 7th Update.

Reclassified balance sheet ¹

1 - In order to provide a better management representation of the results, the reclassified statement of financial position figures differ from the layouts of the Financial statements envisaged by Bank of Italy Circular no. 262 of 2005, 7th update.

Affiliated Banks

The Affiliated Banks represent the most important part of the Cooperative Banking 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 the 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 loan-to-deposit ratio which, from a liquidity perspective, reflects the structural soundness of the Group and the investment of excess liquidity mainly in government bonds.

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

Figures in millions of euro

Gross customer loans of the Affiliated Banks totalled EUR 48.3 billion at 31 December 2022, up by +2.8% compared to the end of financial year 2021. The trend in loans to customers confirms the evolutionary trend underway since the establishment of the Cassa Centrale Group. The annual growth highlights the high commercial vitality of the Affiliated Banks and the constant support for the main economic context.

The regional analysis of the credit disbursed confirms that the operations of the Affiliated Banks are mainly concentrated in the northern part of Italy, in line with the territorial structure of the branches of the Cassa Centrale Group. Looking in detail at the various geographical areas into which the Group is divided, the allocation is homogeneous in four of the five areas, with the exception of the South and Islands areas which, has a lower incidence on total loans due to the smaller average size of each Affiliated Bank operating in that area.

In 2022 ,the growth in performing loans of the Affiliated Banks totalled EUR 1.7 billion (+3.8% year-on-year), with changes in the various territorial areas ranging from +5% for the North East area to +0.9% for the Trentino-Alto Adige area.

At the counterparty level, the significant exposure of the overall credit disbursed to households and local small and medium-sized enterprises was confirmed, demonstrating the central role of the Affiliated Banks in supporting the growth of the territory.

In 2022, the active management of impaired loans continued in line with the Cassa Centrale Group’s strategy, making it possible to further reduce total non-performing volumes (-13.3% year-on-year). In general, the ratio of impaired loans to gross loans to customers stood at 5.0%, with a regional trend that varied from 4.1% in the North West area to 6.7% in the South and Islands.

Confirming a strategy of the Cassa Centrale Group that is particularly attentive to credit risk management, and in the presence of a decrease in the total stock of impaired loans, provisions on bad loans of the Affiliated Banks stood at 82%, a further increase compared to 73% at the end of 2021. The average coverage levels of the Affiliated Banks remain among the highest in the national banking system.

Figures in millions of euro

* Indirect funding is expressed at market values.

Overall funding of the Affiliated Banks stood at EUR 93.8 billion as at 31 December 2022 (up +1.6% compared to the end of 2021).

Direct funding increased to EUR 64.7 billion (+1.3% year-on-year), confirming the high confidence of depositing customers in the Group’s Affiliated Banks in an environment of strong uncertainty and high propensity to save.

The breakdown of direct funding among regional areas in 2022 continued the trend described above for credit volumes, with a growth in volumes across all areas ranging from +3.4% in the North East area to +0.7% in the Central area. The Trentino-Alto Adige area remained stable.

The different regional areas show a structural surplus of resources in the ratio of lending to funding, which results in a high degree of liquidity for the Affiliated Banks and for the Cassa Centrale Group. The prudent approach to the investment of resources raised by depositors historically characterises the operations of the BCC-CR-RAIKAs.

Total indirect funding of the Affiliated Banks increased to EUR 29.1 billion 1 (+2.4% year-on-year), despite a particularly negative market environment.

The impact of indirect funding on total funding was 31%, substantially unchanged since the end of 2021 (30.8%), although in a context of a more prudent approach by depositing customers. The regional analysis shows that indirect funding as a percentage of total funding exceed 30% in all areas, except for the South and Islands, where the ratio is 14%.

Looking specifically at the breakdown of indirect funding, the managed assets and insurance segment accounts for 70% of total indirect funding at the end of 2022.

The performance of the Affiliated Banks’ indirect funding was affected by the negative market trend, which was reflected in a reduction in funding, valued on the market, of the entire Asset Management, Funds and SICAVs segment (-6.5% year-on-year). Nevertheless, the increase in net funding made it possible to partially counter the negative market effect, reflecting the ability of the Affiliated Banks to shift deposits to the indirect component, in line with the Group guidelines.

The increase in returns on the bond market in the second half of the year led to strong growth in indirect funding under administration (+14.9% year-on-year).

Albeit in a difficult market context, the Bancassurance segment also increased (+5.5%), driven by the definition of a new commercial partnership.

Although the particularly challenging economic context slowed down the rate of growth in indirect funding from the managed segment in 2022, this area remains a central objective for the Cassa Centrale Group, given the significant growth margins available to the Affiliated Banks compared to the rest of the banking industry, having historically favoured the placement of direct funding products in the past. The growth in this segment has been driven and accompanied by important investments 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 with the system, while maintaining a high level of attention to the quality of the overall service offered to the savings customer.
 

Figures in millions of euro

The interest margin of the Affiliated Banks at the end of 2022 totalled EUR 1.73 billion, recording an increase of +30% compared to 2021 and mainly benefiting from the greater contribution of inflation-linked securities in the securities portfolio and the widening of the credit spread, which remains the main source of profit for the Affiliated Banks.

Therefore, the contribution of the interest margin to overall profitability is high (equal to 75% of the net interest and other banking income), in line with the predominantly traditional banking operations that characterise the Affiliated Banks and the Group as a whole.

The net commissions of the Affiliated Banks totalled EUR 641 million, up +5.5% compared to 2021.

The commission margin of the Affiliated Banks contributes 28% on average to net interest and other banking income, with a regional incidence ranging from 31% in the North-West to 23% in the South and Islands areas.

The trend of the net interest and other banking income of the Affiliated Banks (+7.1% year-on-year) is completed by the contribution from dividend and similar income and trading in the Affiliated Banks’ own securities portfolio, down compared to 2021 following the changes in the securities portfolio intended to benefit from the upward trend in market returns.

This development is carried out 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. This development is carried out 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.

1 - Indirect funding is expressed at market values.

Industrial Group

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");
• 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");
• consumer credit services, with the subsidiary Prestipay S.p.A. (hereinafter also "Prestipay");
• other ancillary services, with the subsidiaries Centrale Soluzioni Immobiliari S.r.l., Centrale Casa S.r.l., Claris Rent S.p.A. and Centrale Trading S.r.l.

The main income statement and balance sheet aggregates of the Industrial Group as at 31 December 2022 are shown below.

Figures in millions of euro

* Management data including all intra-group eliminations.

With reference to loans to customers, the Industrial Group's contribution mainly refers to the brokerage activities of the Parent Company and its subsidiaries Claris Leasing and Prestipay.

Gross loans to customers totalled approximately EUR 2.2 billion, up EUR 434 million on the end of the previous year (+24.2%). In particular, there was growth in the portfolio of the Parent Company and of Prestipay, which continues to expand its consumer credit service, as well as the portfolio of Claris Leasing. Performing loans to customers include exposures in margins and default funds to Cassa di Compensazione e Garanzia related to repos, which fell compared to the previous year.

Total gross allocations came to approximately EUR 110 million, down compared to the EUR 122 million at the end of 2021, reflecting, at least in part, the reduction in bad loans compared to 31 December 2021 (-9.7%).

As a whole, net loans to customers of the Industrial Group grew by EUR 446 million compared to the end of 2021 (+26.6%), reaching approximately EUR 2.1 billion.

Figures in millions of euro

* Management data including all intra-group eliminations.
** Indirect funding are expressed at market values; ETF financial products are included in the segment

Total funding of the Industrial Group stands at EUR 9.4 billion and is almost entirely attributed to the Parent Company.

Direct funding (EUR 2.5 billion) grew by around EUR 1.2 billion; this increase is effectively due to the increase in Repos exposures to Cassa di Compensazione e Garanzia.

Indirect funding¹ was EUR 6.9 billion, with around EUR 3.0 billion (43%) represented by the assets under management segment (with transactions mainly related to asset management products), while assets under administration amounted to EUR 4 billion and represents around 57% of total indirect funding, with transactions mainly on the bond market. Assets under administration and assets under management were both impacted by a negative market effect. The decrease of approximately EUR 267 million in those under administration is essentially due to this factor.

Figures in millions of euro

* Management data including all intra-group eliminations and the residual economic results of fully consolidated entities other than the cohesion agreement.

Compared to 31 December 2021, the composition of net interest and other banking income has changed, with the interest margin having a greater impact. It more than doubled at the end of 2022 to come in at approximately EUR 115 million, representing 54% of net interest and other banking income. This growth is mainly due to higher interest income arising from the Parent Company’s securities portfolio, in particular from returns on inflation-linked securities, as well as higher interest income realised by the consumer credit company Prestipay.

Net commissions totalled EUR 114 million, an increase of EUR 4 million compared to the same month in the previous year.

Net interest and other banking income grew by EUR 29 million, despite the EUR 60 million increase in the interest margin, the contribution from own securities trading of the Parent Company, which, at the end of 2021, had resulted in significant profits from trading, fell by around EUR 34 million.

Below is a brief review of the Industrial Group, with particular focus on the activities carried out by the Parent Company and the service companies supporting the Affiliated Banks.

1 - 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.

Business combinations between Affiliated Banks

During 2022, there were two business combinations among Affiliated Banks. Therefore, the number of Affiliated Banks decreased from 71 at the beginning of 2022 to 69.

Details of the business combinations carried out in 2022 are shown below:

• Cassa di Trento e Cassa Rurale Alta Vallagarina e Lizzana: new name Cassa di Trento, Lavis, Mezzocorona, Valle di Cembra e Alta Vallagarina – Banca di Credito Cooperativo – Soc. Coop., effective from 1 April 2022, Trentino-Alto Adige region;
• Cassa Rurale Val di Non e Cassa Rurale Rotaliana e Giovo: new name Cassa Rurale Val di Non – Rotaliana e Giovo, as of 1 July 2022, Trentino-Alto Adige region.

Business combinations between Affiliated Banks are part of the rationalisation of the regional control unit outlined in the Group's Strategic Plan, aimed at pursuing competitiveness and efficiency objectives. These transactions had no impact on the consolidated financial position as they are mergers between entities under common control. In the reporting year, two further aggregation processes were launched - one of which has already been completed - which, upon completion of the authorisation process and approval by the Extraordinary Shareholders' Meetings of the affiliated banks involved, will lead to a further rationalisation of the Cooperative Banking Group's regional presence.

2022-2025 Strategic Plan

On 30 June 2022, the Board of Directors of Cassa Centrale Banca approved the Group's Strategic Plan (hereinafter also referred to as "SP") with a 2022 2025 time period, which updates the 2021-24 SP approved last year.

The Plan was defined with the full involvement of the Affiliated Banks, as provided for in the Cohesion Contract, in a process whereby each legal entity of the Group defined its own individual SP, which then became part of the Group's consolidated SP.

The main lines of action of the Plan are listed below:

• Drive the distribution model, with the aim of fostering and encouraging greater adoption of advanced customer relationship management tools, which represent the true distinguishing asset of the Cassa Centrale Group;
• Accelerate investments in technology, to continue the journey of digital transformation already embarked upon and evolve the information system to better support all banking activities, particularly those aimed directly at customers.
• Allocate specific resources to product companies, with the aim of offering competitive products and services on the market;
• Put people first, increasing investments and initiatives to growth and develop the distinctive skills of the Group;
• Prioritise risk management, with the aim of providing Shareholders and depositors of Affiliated Banks with security and stability, with some of the highest provisioning levels for credit risk and primary capitalisation in Europe;
• Sustainability, with the aim of preserving and further enhancing the efforts by BCC-CR-RAIKA in the reference regions and local communities, in line with the principles of mutual cooperation that characterise the Group. The commitment to support community and environmental initiatives will be incentivised through the Sustainability Plan.

The economic-financial and equity projections define an evolution that shows a strengthening of the Group's ability to achieve revenues, pursue a containment of operating costs and adopt prudent provisioning policies to face the many uncertainties characterising the current macroeconomic scenario.

The Group has adopted a so-called “rolling” logic in its strategic planning process, according to which the Plan is reviewed on an annual basis. This logic has been adopted taking into account that the Group has been operating since 2019 and is moving in a continuously and rapidly evolving market and regulatory context and, particularly, a macroeconomic context that is heavily influenced by the war between Russia and Ukraine, by the sharp rise in inflation and energy costs and by the consequent increase in market returns at global level.

Impaired asset management and Group NPE strategy

In 2022, in an environment influenced by a macroeconomic framework characterised by high uncertainty following the gradual overcoming of the problems caused by the COVID-19 health emergency and the negative consequences arising from the ongoing geopolitical tensions, the Cassa Centrale Group, through dedicated structures within the Parent Company and the Affiliated Banks, has continued its careful monitoring of the quality of the loan portfolio and the management and reduction of impaired assets.

In this context, the Parent Company prepared the new NPE Strategy and the related Group Operating Plan, with a 2022-2024 time frame. The NPE Strategy and Operating Plan were presented for approval before the Board of Directors of the Parent Company on 31 March 2022 and subsequently sent to the ECB.

The NPE strategy was developed maintaining a prudent approach, considering the volatility of the available macroeconomic forecasts in light of the uncertainty of the actual impacts of the health emergency and the ongoing conflict on Italy’s economy. This prudential approach was applied through the adoption of a particuarly high provisional default rate for the 2022-2024 period compared to the figures of the last few years. According to this logic, the Group's NPE Strategy envisages a slight reduction in the gross NPL ratio for 2022 and 2023, from 5.5% at the end of 2021 to 5.3% at the end of 2023, and a more significant reduction in 2024, which will bring the Group below the threshold of 5% (4.8%). On the other hand, with regard to coverage levels, on the strength of the coverage levels that the Cassa Centrale Group had reached by the end of 2021 (73.6%), NPE Strategy forecasts a slight decrease in the index, nevertheless retaining a provision- al level for 2024 of 67%, which appears to be somewhat higher than the figures of the Italian and European banking system. The combined effect of the reduction in the gross NPL ratio and the retention of a high coverage level on impaired loans will enable the Group to maintain a net NPL ratio of 1.6% at the end of the plan, in line with the figures of the main Italian banking groups.

The final figures at 31 December 2022 showed much better results than the forecasts formulated as part of the NPE Strategy, especially in terms of default rates, which currently do not yet show the negative impacts of the ongoing geopolitical tensions. In 2022, the Cassa Centrale Group achieved a default rate on the performing loan portfolio of around 1%, compared to an estimate of 2.08%. The recovery performance of impaired loans was also better than expected, with collections totalling EUR 502 million against an estimate of EUR 425 million.

The effect of these dynamics on impaired loans, combined with the higher increase in performing loans than expected, led to the achievement of an gross NPL ratio of 4.8% 1 and a net NPL ratio of 0.9% as at 31 December 2022.

The positive performance, as regards the net NPL ratio, is also due to the maintenance of a prudent impaired exposures provision policy in view of the continuation of the macroeconomic uncertainty. This policy made it possible to achieve a level of coverage of impaired exposures of 81.8%, placing the Cassa Centrale Group among the top performers in Italy and Europe in terms of coverage ratio.

1 - The calculation of the gross and net NPL ratio was carried out on the basis of the EBA data model ("EBA methodological guidance on risk indicators", last updated in October 2021).

Changes in the Group's corporate structure

Appointment of new CEO and General Manager Sandro Bolognesi

In December 2021, Mr Mario Sartori resigned from his position as Chief Executive Officer and General Manager of Cassa Centrale Banca with effect from 1 February 2022.

Following this, the Board of Directors, during its meeting of 3 February 2022, co-opted Sandro Bolognesi, former CFO and Deputy General Manager of the Parent Company, and appointed him as Chief Executive Officer and General Manager.

The Shareholders' Meeting of 30 May 2022 renewed the corporate offices by appointing General Manager Sandro Bolognesi as Director, who was confirmed in the role of CEO by the Board of Directors at the same meeting.

Renewal of the Board of Directors and the Board of Statutory Auditors

The Shareholders’ Meeting of 30 May 2022 resolved to renew the appointment of the corporate officers and appointed the 15 members of the Board of Directors, who will remain in office for the next three years: 10 Directors are representatives of the Affiliated Banks, with the Chairperson and the Acting Deputy Chairperson selected from among them.

The new Board of Statutory Auditors was also appointed.

On the same day, the Board of Directors appointed:

• the Deputy Chairperson;
• the CEO;
• the Executive Committee;
• the Board Committees.

Extraordinary shareholders' meeting for amendments to the articles of association

Following the approval by the ECB of the application for assessment pursuant to Article 56 of the TUB of the amendments to the Articles of Association approved by the Board of Directors at the meeting of 2 December 2021, an Extraordinary Shareholders' Meeting was held on 25 March 2022, which approved a number of amendments to the Articles of Association, incorporating regulatory adjustments and updating the governance structure three years after the launch of the Cooperative Banking Group.

For more information please refer to the Report on Consolidated Operations as at 31 December 2021.

Appointment of the new Chief Financial Officer

At the meeting of 10 March, the Board of Directors, in line with the provisions set out in the C-Suite Succession Plan of the Parent Company and having obtained the approval of the CEO, identified Alessandro Failoni as the candidate for the role of Chief Financial Officer (CFO).

The Board, having taken into consideration the positive assessment of the Appointments Committee, confirmed that the candidate meets the requirements set forth in Ministerial Decree 169/2020 for this role.

On 9 June the appointment was approved by the ECB and therefore the Board of Directors, at the meeting of 29 June 2022, appointed Alessandro Failoni as the new CFO, effective from 1 July 2022.

Appointment of the new Chief Operating Officer

At the meeting of 25 August, the Board of Directors appointed Paolo Sacco as Chief Operating Officer (COO) and as head of the new Organisation and Human Resources Department, effective from 1 September 2022.

Climate Risk Stress Test

As part of its climate roadmap, the ECB launched a specific climate stress test exercise (“2022 SSM Climate Risk Stress Test”), starting on 27 January 2022 and concluding in early July 2022 with the publication of the system results. This stress test required financial institutions to report on a common set of climate risk metrics, including the volume of greenhouse gas emissions they finance, with the aim of assessing the degree of preparedness and capacity of European banks to cope with financial and economic shocks from climate risk. Moreover,the exercise required a number of participating banks to assess their short-term exposure to physical and transition risk, and their exposure to transition scenarios over the next 30 years.

The "2022 SSM Climate Risk Stress Test" was a complex and very demanding exercise for the Cassa Centrale Group, also in view of the fact that it was conducted during a pandemic.

To perform the exercise, various preliminary activities were activated, with very significant costs both in terms of the commitment of internal departments (IT, FTE) and in terms of economic investments.

In the letter inviting institutions to take part, the ECB emphasised that this exercise should be seen as a “learning exercise”, both for the participating banks and the supervisor, which will improve the quality and availability of data and ultimately aim to identify vulnerabilities, best practices and challenges faced by European banks, the results of which will be integrated into the Supervisory Review and Evaluation Process (SREP) using a qualitative approach (no direct capital impact on Pillar 2 guidance is foreseen).

The stress test consists of three modules:

• Module 1: general questionnaire to assess how banks are building their climate stress test capabilities as a risk management tool. Module 1 provides an overview of the positioning of banks in this process.
• Module 2: benchmarking analysis to compare banks on a common set of climate risk parameters. This translates into the calculation of two specific metrics aimed at estimating how much banks depend on income from greenhouse gas-intensive industries and how much greenhouse gas emissions banks finance. Module 2 provides an indicative proxy for the sustainability of the banks' business model and how exposed banks are to emission-intensive companies.
• Module 3: bottom-up stress test focusing on transition and physical risks. The stress test assesses how extreme weather events would affect banks in the coming year, how vulnerable they would be if the price of carbon emissions rose sharply over the next three years, and how banks respond to transition scenarios over the next 30 years.

In general, the poor availability of data (greenhouse gas emission data, EPC rating, geo-location guarantees, etc.) was the most critical aspect. The process to collect or reconstruct this data involved enormous effort and required the commitment both of time and dedicated personnel, as well as the use of data provided by specialised third-party providers (such as data on Scope 1, 2 and 3 greenhouse gas emissions) by the Group and its Italian peers.

On the whole, the outcome of some of the assessments conducted by the Supervisory Authority was the result of a prudential approach adopted by the Group in participating in the exercise which, on the reference date of 31 December 2021, was at an early stage of structuring the entire climate stress test framework, in full compliance with the Thematic Review on climate and environmental risks.

Therefore, the data collection process of the climate risk exposure assessment suffered in the initial stages, although the Supervisory Authority greatly appreciated the quality and availability of the numerical data used, as well as the adherence to the timelines outlined in the exercise, the reworkings and level of detail of the explanations provided.

At system level, the ECB considers that banks should establish a robust governance structure for their climate risk stress testing framework and integrate the results of climate risk stress tests into their core business and planning. In general, banks should improve their climate risk management, understand their customers' transition plans and strengthen their strategic plans to benefit from the opportunities of the green transition.

Complaints and disputes

On 16 January 2020, the financial holding company Malacalza Investimenti S.r.l. (hereinafter also "Malacalza Investimenti") brought a civil action against Carige, FITD, SVI and Cassa Centrale Banca, contesting the validity of the resolution to increase the share capital by EUR 700 million approved by the Shareholders of Banca Carige in the Shareholders' Meeting of 20 September 2019 and submitting a claim for damages of over EUR 480 million (subsequently increased to approximately EUR 539 million), on account of the alleged hyperdilutive nature of the resolution (reducing Malacalza Investimenti's shareholding from 27.555% to 2.016%).

The contested invalidity of the shareholders' meeting resolution (which can no longer be annulled as it has already been executed, with the subscription by Cassa Centrale Banca of the capital increase and the acquisition of an 8.34% shareholding) is based on the allegedly unlawful exclusion of the option right, failure to comply with the principle of accounting parity and the determination of the issue price of the new shares in breach of the criteria laid down by company law.

The same defendants, including Cassa Centrale Banca, were then sued in two further disputes by the shareholder Vittorio Malacalza and 42 other shareholders of Carige, with a claim for a further approximate total of EUR 11.4 million, plus revaluation and interest, based on assumptions and arguments coinciding with those put forward by Malacalza Investimenti.

The proceedings ended with a judgement of 15 November 2021 by which the Court of Genoa, in acceptance of the claims of the defendants, ascertained the validity of the capital increase resolution adopted by Carige on 20 September 2019 and rejected the claims for damages brought by the plaintiffs, ordering the latter to pay the legal costs.

In December 2021, Malacalza Investimenti S.r.l., Malacalza Vittorio and 5 small shareholders out of the initial 42 appealed against the first-level ruling before the Court of Appeal of Genoa, (with a reduction of the claims for damages, as regards the latter, from approximately EUR 8.4 million to EUR 84 thousand).

In March and April 2022, Cassa Centrale Banca appeared in the three lawsuits pending before the Court of Appeal.

At the hearing of 20 April 2022, the Court ordered the joinder of all the proceedings, reserving any decision until the continuation. Following various postponements, the Court set the first hearing for 8 February 2023 to verify the necessary notification of the defaulting parties and proceed with the ruling.

As a result of the assessments carried out with the support of solicitors, Cassa Centrale Banca, considering the risk of losing the case, decided not to make provisions for risks and expenses in line with the provisions of the IAS/IFRS international accounting standards.

On 5 January 2022, the Court of Cassation published an order dismissing the appeal filed by North East Services S.p.A. under extraordinary administration (hereinafter NES) against the order of the Court of Treviso issued in the challenge against the bankruptcy liabilities of the insolvency procedure.

Specifically, with respect to the claim for the values deposited by Cassa Centrale Banca and owned by the same (amounting to EUR 930,327.90 at the time of the declaration of insolvency of NES), the Official Receiver the Court of Treviso dismissed the claim and ordered that Cassa Centrale Banca be established as an unsecured creditor only. In view of this, Cassa Centrale Banca challenged the bankruptcy liabilities, appealing against the decision of the Official Receiver in the part in which it excluded the claim in its entirety and established Cassa Centrale Banca as an unsecured creditor for the claimed amount of EUR 930,327.90.

In the challenge against the bankruptcy liabilities, the Court of Treviso, with order dated 7 January 2016, recognised in favour of Cassa Centrale Banca the claim/return of part of the money that NES should have kept at the date of the opening of the proceedings (EUR 273,074.36) and allowing a residual claim of approximately EUR 657,253.54 in bankruptcy on an unsecured basis.

In a subsequent appeal, NES requested the repeal of the aforementioned order and the confirmation of the bankruptcy liabilities in the part in which it established Cassa Centrale Banca for the whole of its claim as an unsecured creditor. The Court of Cassation dismissed the appeal and ordered NES to pay the legal costs.

Rating updates

DBRS Morningstar

On 8 February 2022, the rating agency DBRS Morningstar, at the end of the first assessment process carried out on Cassa Centrale Banca, awarded the latter a BBB (Low) rating in relation to the Long-Term Issuer Rating and Long-Term Senior Debt profiles. In this way, the issuer and the related issues of financial instruments are placed in the "Investment Grade" category. This category includes instruments considered to be of higher quality, issued by companies characterised by positive management and favourable development prospects.

DBRS's assessment takes into account the role of Parent Company played by Cassa Centrale Banca since the establishment of the Cooperative Banking Group in 2019, in exercising management and coordination over the affiliated Cooperative Credit Banks - Rural Banks and Raiffeisenkassen, monitoring the stability of the Group.

In particular, the levels of liquidity, capitalisation and funding were considered positive. Further strengths of the Group were found in the improvement of asset quality and the high level of coverage of impaired loans.

Fitch

The rating agency Fitch has assigned a long-term issuer rating of BBB- to Cassa Centrale Banca. The score falls within the investment grade category. The rating implies a low risk of insolvency and adequate capacity to honour the financial commitments.

The rating was influenced by the Group’s virtuous characteristics, such as a stable, broad and diversified customer base and a high level of liquidity and capitalisation. The process of reducing impaired exposures undertaken since the launch of the Group, and the high coverage rate of NPLs, were also positively evaluated. The stable outlook confirms the prediction that the Group will be able to maintain its current levels of capitalisation, reducing exposure to sovereign debt and offsetting any impact of external events.

MREL Requirement

As part of the regulatory framework for the recovery and resolution of credit institutions and investment firms (the so-called BRRD), the Single Resolution Board (or SRB) communicated in April 2022 to Cassa Centrale Banca, as the Group's resolution entity, the Minimum Requirement of Eligible Liabilities (MREL¹) to be met at a consolidated level for Cassa Centrale Banca and at an individual level for the Affiliated Banks identified as Relevant Entities by the relevant legislation in the 2021 resolution cycle ². The MREL Requirement, formulated in accordance with Article 12 bis, paragraph 2), letters a) and b), of Regulation (EU) no. 806/2014, defined as a percentage of the total risk exposure amount (MREL-TREA) and as a percentage of the leverage ratio exposure (MREL-LRE), was communicated by the Single Resolution Committee ³.

Given the general-hybrid approach adopted by the Single Resolution Committee, own funds on a consolidated basis shall be considered suitable to meet the consolidated MREL requirement, while the only eligible liabilities will be those issued directly by the Parent Company Cassa Centrale Banca (as the "central entity" of the Resolution Group) and that will comply with the eligibility conditions set out in Regulation no. 877/2019 ("SRMR2"). This consideration stems from the single-point-of-entry (SPE) Resolution Strategy defined by the Supervisory Authority for the Group, according to which resolution tools and powers would be applied exclusively to the Parent Company.

The minimum requirement for own funds and eligible liabilities on a consolidated basis (with which the Parent Company must comply) is 21.79% of TREA (to which the combined capital reserve requirement (CBR) of 2.5 per cent should be added) and 5.91% of LRE. The Parent Company is required to meet the above requirements by 1 January 2024. From 1 January 2022, the Group is required to meet an interim requirement of 18.19% of TREA (to which the combined capital reserve requirement (CBR) of 2.5 per cent should be added) and 5.91% of LRE.

There are no subordination requirements to meet the above targets.

At the reference date of 31 December 2022, Cassa Centrale Banca complies with the mandatory intermediate level of the MREL requirement, both as a percentage of the total risk exposure amount (MREL-TREA) and as a percentage of the leverage ratio exposure (MREL-LRE), on a consolidated basis.
 

1 - Specifically, the MREL requirement allows each intermediary, in case of resolution, to have an adequate amount of capital resources and other liabilities to absorb losses and replenish capital. It aims to preserve financial stability by promoting an orderly and effective crisis management system. Failure to meet the MREL requirement can have a negative impact on the loss-absorbing capacity and recapitalisation of institutions, as well as on the overall effectiveness of the resolution.
2 - In the first four months of 2023, the Group expects to receive a new MREL communication from the SRB, which will define the MREL requirements to be met at consolidated level for Cassa Centrale Banca and at individual level for the affiliated banks identified as relevant entities by the relevant legislation in the 2022 resolution cycle.
3 - “Exposure to the leverage ratio” is the measure of total exposure calculated pursuant to Articles 429 and 429 bis of EU Regulation no. 575/2014

Inspection by the Bank of Italy and the European Central Bank

Inspection by the Bank of Italy on Anti-Money Laundering and Transparency

In the first half of 2021, the Banking Group was subject to an inspection by the Bank of Italy aimed at checking compliance with the provisions on combating money laundering and on the transparency of banking transactions and services. The results of the inspection were communicated by means of an inspection report dated 12 January 2022.

The Supervisory Authority found that three years after the Group's start the objectives of strengthening and harmonising operating and management standards in the areas under investigation have not been fully achieved, with the need to further strengthen the control units governing the Group's anti-money laundering and transparency processes, also with a view to improving the ability of the Parent Company Cassa Centrale to oversee the behaviour of its Affiliated Banks. The areas of intervention have been analysed and a detailed timetable has been drawn up for the implementation of the action plan on Anti-Money Laundering and Transparency. The schedule was sent to the Supervisory Authority on 24 March 2022 along with the response to the inspection report. The remedial actions indicated in the plans of action are progressively implemented and reported to the Bank of Italy according to its indications provided from time to time.

European Central Bank inspection on capital adequacy

At the end of 2021, the ECB's capital adequacy audit of the Cassa Centrale Group was completed, aimed at assessing the calculation of Pillar 1 capital requirements.

The outcome of the audit which was notified in early 2022, highlighted a number of points of concern for which the Group took prompt action to resolve. A dialogue was initiated with the JST aimed at representing the remedial plan undertaken by the Group in this regard with the aim that it will be finalised according to the timeframe expected by the Supervisory Authority.

European Central Bank inspection on credit and counterparty risk

In January 2022, the ECB notified the start of an on-site inspection (or “OSI”), from March 2022, on credit and counterparty risk with the aim of assessing the compliance and implementation of IFRS 9. The inspection focused on the segment of exposures to commercial real estate, as part of the broader spectrum of control and analysis activities conducted on the entire European banking system. The inspection team carried out a credit quality review on a sample group of positions and assessed the credit risk processes, including all ancillary aspects (see governance, credit processes, internal regulations, as well as the IFRS 9 models and rating systems adopted by the Group).

The ECB’s final report will be provided in 2023 and will include the results of the inspection, namely the findings that were discussed in a preliminary manner during the closing meeting of the activity in July 2022.

European Central Bank inspection on IT risk

In a letter dated 17 June 2022, the ECB informed the Cassa Centrale Group that an on-site inspection of IT risk would commence in September 2022, with the aim of assessing the management of IT operations and of IT projects, including any ancillary aspects related to these purposes and scope.

The inspection, officially started in September and concluded in November, involved areas of the Parent Company, Allitude, the Affiliated Banks and the Group Companies related to processes associated with IT operations (IT asset inventory and end-of-life management of systems, change management, capacity and performance management, incident and problem management, management of infrastructure operations) and to the framework of IT project management (alignment of ICT projects with the Group’s Business Strategy, management of ICT demand, the creation of ICT solutions).

The results of the inspection and any findings will be communicated in a specific report during 2023, which will form the basis of the next meeting with the Supervisory Authorities over the subsequent months regarding any exceptions identified and the definition of the consequent remedial plan.

Update to the Equity Investments of Cassa Centrale Banca

Renewal of corporate appointments of CCB subsidiaries

The Shareholders’ Meetings of the Cassa Centrale Banca subsidiaries were held in October for the appointment of the new Boards of Directors and Boards of Statutory Auditors, which shall remain in office for three years until the approval of the financial statements as at 31 December 2024 (spring 2025).

The new corporate bodies, in line with the Parent Company’s guidelines, will be tasked with implementing the development approaches and projects referred to in the 2022-2025 Strategic Plan.

Change in organisational structure and voluntary liquidation of the Company Centrale Credit Solutions S.r.l.

Following the establishment of the Re.o.Co. Management Structure, Centrale Soluzioni Immobiliari S.r.l., the Board of Directors of Cassa Centrale Banca, in its meeting of 27 January 2022, ordered the convening of an Extraordinary Shareholders' Meeting of Centrale Credit Solutions S.r.l. to start the procedure for the liquidation of the Company. On 4 March the Extraordinary Shareholders’ Meeting was held which resolved on the voluntary liquidation of the company and appointed the receiver.

Liquidation of Centrale Credit Solutions S.r.l. was completed in September. At the end of the liquidation activities, the Shareholders’ Meeting resolved to distribute the assets to the sole shareholder Cassa Centrale Banca for an amount of EUR 4,129,557.

Share capital increase of Neam

In its meeting of 2 December 2021, the Board of Directors of Cassa Centrale Banca resolved to subscribe to the share capital increase promoted by the Board of Directors of NEAM. The capital increase, which was completed on 17 January 2022 for an amount of EUR 1,525,000, was necessary to provide the company with the resources required to meet its capital ratios following the increase in the company's assets under management.

After the increase, NEAM's share capital now consists of 240,000 shares of 12.5 EUR/share, for a value of EUR 3,000,000.

Share capital increase of Prestipay

In October, the Shareholders’ Meeting of Prestipay S.p.A. resolved on a share capital increase totalling EUR 6 million, 60% subscribed by Cassa Centrale Banca, for a value of EUR 3.6 million, and the remaining 40% subscribed by Deutsche Bank, for a value of EUR 2.4 million. The underlying motivations for the share capital increase include an increase in loans higher than the forecasts for 2022, and prospectively for 2023. This increase led to a higher capital absorption for credit risk, which resulted in the need for early capital strengthening compared what was proposed in the Company’s business plan.

Sale of the equity investment in Iccrea S.p.A. – Tranche 4

With regard to the equity investment in Iccrea Banca S.p.A., note that the third tranche of the sale of its shares, equal to 897,000 shares for a value of EUR 47,361,600, originally scheduled for 31 December 2021 and included in the "shareholding structure" Transaction Agreement of 14 October 2019, was finalised - subject to agreement between the Parties - on 19 January 2022.

On 21 December 2022, the fourth and final tranche of the sale of Iccrea assets held by the Affiliated Banks was completed. The transaction, part of the shareholding structure agreements, involved the sale of 899,078 shares for a value of EUR 47,471,318.41. Following this transaction, the entity shareholder structure process was completed and there are therefore no more crossing interests between the two Cooperative Credit Banking Groups.

Carige S.p.A. Cassa di Risparmio di Genova e Imperia

Following the promotion of the full takeover bid by BPER Banca on Banca Carige ordinary shares involving a total of 156,568,928 ordinary shares, representing 20.582% of the Issuer’s share capital, for a consideration of EUR 0.80 per ordinary share, the Board of Directors of Cassa Centrale resolved to join the takeover bid in question, thus selling, in July 2022, the entire equity investment held by Cassa Centrale equal to 45,000,000 ordinary shares.

Launch of the partnership with Assimoco Group in the bancassurance sector

On 10 March 2022, the Board of Directors of Cassa Centrale Banca resolved to continue exclusive negotiations with the Assimoco Group in order to define a five-year collaboration for the distribution of a complete range of life and non-life insurance products through the Affiliated Banks of the Cassa Centrale Group and through its subsidiary Assicura Agenzia.

Assimoco is a subsidiary of the German insurance company R+V Versicherung, which belongs to the DZ Bank Group, a historical partner of Cassa Centrale Banca and an expression of German cooperative credit.

Following the negotiations, a framework agreement was signed on 17 May 2022 between R+V Versicherung, the Assimoco Group companies, Cassa Centrale Banca and Assicura Agenzia, aimed at defining the rules of the strategic partnership in the context of the project and the shared financial and commercial objectives. In addition to the framework agreement, a distribution mandate was also signed, whereby the companies grant Assicura an agency mandate for the distribution of insurance products, and the management mandate defining the collaboration in the field of asset management between the companies and Cassa Centrale Banca.

Russian-Ukrainian conflict

Classification and measurement of loans to customers in light of the Russia-Ukraine war.

In order to calculate expected loss at 31 December 2022, the Cassa Centrale Group has incorporated the macroeconomic scenario as at October 2022 into its IFRS 9 impairment model, including the effects of the ongoing conflict in Ukraine and the uncertain evolution of the economic environment, aspects which have a major influence on growth forecasts, the main macroeconomic variables and the financial indicators for 2023-2025, compared to the previous forecasts.

In order to determine the IFRS 9 value adjustments on the customer loan portfolio as at 31 December 2022, conservative criteria — in accordance with the IAS/IFRS accounting standards — were adopted, taking into account the socioeconomic effects resulting from the pandemic crisis, as well as the uncertainty arising from the Russian-Ukrainian conflict and the still ongoing inflationary spiral. However, given the difficulty in estimating their duration and development, the Bank incorporated the potential impacts of the aforementioned events - which suggest a possible increase in insolvency rates in the future - into its credit evaluations.

On 28 October 2022, ESMA issued a public statement on “European common enforcement priorities for 2022 annual financial reports”, underlining that the current macroeconomic environment poses a significant challenge for the expected credit loss models used by European financial institutions due to a lack of experience in modelling such circumstances. Furthermore, acknowledging that different groups of borrowers may be affected differently by the current macroeconomic developments, ESMA draws attention to the need for a greater consideration of the risk drivers of specific economic sectors in measuring the expected loss.

In light of these considerations and also taking account of the further deterioration of the macroeconomic growth forecasts associated with the Russian-Ukrainian conflict, the Group adopted new mechanisms for determining suitable minimum coverage of allocation (floors) on the performing positions, on the basis of Group risk drivers that include a high impact of the overall cash exposure at Group level allocated to Stage 2, as well as the entrusted counterparty belonging to economic sectors deemed most vulnerable in the new risk environment (sectors related to energy-intensive and gas-intensive sectors and/or those impacted directly or indirectly by the Russian-Ukrainian conflict).

For the purposes of calculating the expected loss as at 31 December 2022, the Cassa Centrale Group has used the three scenarios — mild, baseline and adverse — appropriately averaging their contributions, in light of macroeconomic projections that expect continued high variability in the future and potential uncertainty linked to the possible evolution of the health emergency and the Russian-Ukrainian conflict. The scenarios used were those provided by the info-provider Prometeia, using a scenario generation system that considers publications from leading forecasting bodies as well as publications issued by the Supervisory Authorities, with no corrections.

Despite a confirmed growth trend, the updating of the macroeconomic scenarios shows a lowering of expectations for the 2023-2025 period, with a negative impact on medium-long term forecasts compared to the projections based on the scenarios in late 2021.

The interventions outlined above, guided primarily by a conservative approach and in any case improved and finalised during the year, made it possible to limit potential future “cliff effects” as well as identify the economic sectors at greatest risk in the current context, with particular reference to the sectors of the economy impacted by the sharp increase in energy prices. At the same time, this also ensured the reduction of potentially distorted elements in the estimates.

In order to reflect the uncertainty in the outlook for certain segments of the economy and in line with ECB regulations, probability of default (PD) curves were differentiated by sector, a component calibrated using the Group's internal data and refined in the first half of 2022. This had effects on staging and on the calculation of expected losses, refining the previous approach of penalisation (by downgrading creditworthiness) in certain economic sectors and geographical areas considered more exposed to the negative effects of the pandemic and the current stress introduced by price rises and the uncertainty in the availability of raw materials resulting from the conflict in Ukraine.

Update on cyber risk management in the light of the Russian-Ukrainian conflict

In relation to the ongoing Russian-Ukrainian conflict, specific actions were adopted to strengthen the security monitoring of the Cassa Centrale Group. In particular, the actions involved continuous threat analysis, collection and enhancement of indicators of compromise shared by cyberthreat intelligence sources and targeted information and awareness activities, all of which concerned the Group, with the involvement of the corporate control functions and top management.

Following the communication sent in March to critical third parties, with a request for increased security monitoring and prompt reporting to the Group of possible impacts resulting from security incidents, no reports and/ or critical issues were sent.

A glimpse into 2023

The outbreak of the conflict between Russia and Ukraine, the effects of which are largely yet to be fully understood, heavily influenced 2022.

In particular, the direct effects on the prices of energy commodities influenced an inflationary trend, which already signalled a rapid increase in prices globally in the second half of 2021. While initially considered a temporary situation, this trend currently represents one of the most important challenges facing central banks.

Indeed, persistent inflation is driving the world's main Central Banks to raise their key interest rates in an attempt to curb the inflationary trend and prevent its incorporation into the expectations of economic operators, with the risk of triggering a price-wage spiral.

Against this backdrop, the effects of the pandemic have taken a back seat but nonetheless continue to affect the economic climate in the background.

Given the challenging context, the entire banking sector will have to continue to assess the evolution of the situation very carefully and maintain a strong focus on credit quality, aiming to consolidate the results achieved in recent years in terms of asset quality.

The very duration of the conflict is now an unpredictable variable, but at the same time fundamental in determining the repercussions on the Italian and world economies. Consequently, a clearer quantification of the impacts will only be possible in the coming quarters.

The climate of continuing uncertainty has affected the dynamics of financial markets, slowing down household financial investments, to the extent that liquidity investments in asset management instruments developed in a more subdued manner than in the previous quarters.

Within an environment of persistent uncertainty in traditional banking activity, improving operating efficiency, cost reduction and new business strategies are confirmed as the main levers for the recovery of structural profitability in the sector. The latter is supported by the new rate environment created by the consistent hikes by the central banks, after nearly a decade of near-zero or sub-zero returns, which had compressed the sector’s profitability.

In the current economic and social context, the Group continues to focus its attention on strongly supporting the economic fabric of the reference regions, which are facing a rapidly and constantly changing situation, and on overseeing the overall risk profile.

Activities related to the Group's organisational and operational structure continued, with a renewed focus on investments in technology and human capital, aspects which are considered as fundamental enablers to the achievement of the objectives set out in the Group's new Strategic Plan.