BANCA MONTE DEI PASCHI SI SIENA S.p.A ANNUAL REPORT

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1 BANCA MONTE DEI PASCHI SI SIENA S.p.A ANNUAL REPORT

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3 Monte dei Paschi di Siena Group Consolidated Annual Report 2011 Banca Monte dei Paschi di Siena S.p.a. Share capital : 7,484,508, fully paid in Siena Companies Register no. and tax code: Member of the Italian Interbank Deposit Protection Fund. Banks Register no Monte dei Paschi di Siena Banking Group, Registered with the Banking Groups Register 3

4 NOTICE OF ORDINARY AND EXTRAORDINARY SHAREHOLDERS MEETING The shareholders of Banca Monte dei Paschi di Siena S.p.A. are hereby convened to an Ordinary and Extraordinary Shareholders Meeting to be held on 27 April 2012 at a.m. in Viale Mazzini 23, Siena, and on 28 April 2012, at the same time and location on second call if necessary, to consider and pass resolutions on the following AGENDA Ordinary session 1. separate and consolidated Annual Report as at 31 December 2011; 2. determination of the number of members of the Board of Directors for fiscal years 2012, 2013 and 2014; 3. determination of the number of Deputy Chairmen for fiscal years 2012, 2013 and 2014; 4. appointment of the members of the Board of Directors for fiscal years 2012, 2013 and 2014; 5. election of the Chairman from amongst the members of the Board of Directors and appointment of as many Deputy Chairmen as determined by the Shareholders' Meeting; 6. determination of Directors' remuneration pursuant to art. 27, paragraph 1 of the Articles of Association; 7. determination of remuneration for the Chairman of the Board of Directors; 8. appointment of the Chairman and other members of the Board of Statutory Auditors (both standing and alternate) for fiscal years 2012, 2013 and 2014; 9. determination of Auditors' remuneration pursuant to art. 27, paragraph 1 of the Articles of Association; 10. Remuneration Report: resolution pursuant to art. 123-ter paragraph 6, of Legislative Decree no. 58 of 24 February Consolidated Law on Finance. Extraordinary session 1. proposed merger by absorption of Agrisviluppo S.p.A. into Banca Monte dei Paschi di Siena S.p.A.; 2. proposed merger by absorption of Ulisse 2 S.p.A. into Banca Monte dei Paschi di Siena S.p.A.. 4

5 GOVERNING AND CONTROL BODIES... 6 CONSOLIDATED ANNUAL REPORT... 7 CONSOLIDATED REPORT ON OPERATIONS... 8 CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheet Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated Cash Flow Statement indirect method 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 Consolidated Statement of Comprehensive Income Part E Information on risks and relative hedging policies Part F Indormation on consolidated shareholders' equity Part G Business combinations Part H Related-party transactions Part I Share-based payments Part L Segment reporting Certification of the Consolidated Financial Statements pursuant to art. 81-ter of Consb Reg. no Independent Auditors' Report ANNEXES

6 GOVERNING AND CONTROL BODIES BOARD OF DIRECTORS Giuseppe Mussari Chairman Francesco Gaetano Caltagirone Deputy Chairman ( ) Ernesto Rabizzi Deputy Chairman Fabio Borghi Director Turiddo Campaini Director Massimiliano Capece Minutolo Director Graziano Costantini Director Frederic Marie De Courtois Director Lorenzo Gorgoni Director Alfredo Monaci Director Andrea Pisaneschi Director Carlo Querci Director ( ) until resignation on 26/01/2012 Mr. Mario Delfini was coopted as Director on 9/02/2012 BOARD OF STATUTORY AUDITORS Tommaso Di Tanno Marco Turchi Paola Serpi Luigi Liaci Francesco Bonelli Chairman Standing Auditor Standing Auditor Alternate Auditor Alternate Auditor SENIOR MANAGEMENT (*) Antonio Vigni General Manager (*) Fabrizio Rossi Antonio Marino Marco Massacesi Giuseppe Menzi Nicolino Romito Acting Deputy General Manager Deputy General Manager Deputy General Manager Deputy General Manager Deputy General Manager (*) Until 12/01/2012; Mr Fabrizio Viola appointed on 13/01/2012 INDEPENDENT AUDITORS RECONTA ERNST & YOUNG S.p.A. 6

7 CONSOLIDATED REPORT ON OPERATIONS CONSOLIDATED ANNUAL REPORT 7

8 CONSOLIDATED REPORT ON OPERATIONS CONSOLIDATED REPORT ON OPERATIONS CONSOLIDATED REPORT ON OPERATIONS Group results in brief... 9 Basis of preparation Major events in Reclassified accounts Corporate Social Responsibility non-financial indicators Group Profile Distribution network The customerbase Macroeconomic scenario Macro environment Social-Economic Trends The regulatory framework Banking activities and Group market shares The Group's profit & loss and balance sheet results Balance Sheet Income Statement Financial highlights and main activities of the Business Segments Consumer Banking Corporate Banking Corporate Centre Non-financial assets Integrated risk and capital management Structured credit products Organisational set-up and processes and human resource management Customer Care Brand and corporate image Social added value Market values and Investor Relations Corporate Governance and other information Events after the balance sheet date Outlook on operations Annexes

9 CONSOLIDATED REPORT ON OPERATIONS 2011 Group results in brief ln 2011, the entire banking industry was conditioned by an extraordinarily difficult market environment, characterised by a progressive slowdown in economic growth and an exacerbation of the sovereign debt crisis in the Eurozone. As of the second half of the year, these events caused an abrupt increase in credit spreads and the closure of interbank and institutional markets, which led to significant growth in the cost of funding for the banking system and a decline in the demand for loans. At the same time a negative spiral was triggered for both stock prices and Italian government bonds which caused a sharp drop in the value of financial assets held by investors. This scenario also had inevitable repercussions on the activities of the Montepaschi Group. With specific regard to funding and lending trends, 2011 registered a shift in funding sources with the progressive replacement of interbank and institutional funding with corporate and ECB funding. At the same time, trends in interestbearing assets were weak, particularly on the back of the low demand for loans from households and businesses and more selective credit policies, which resulted in a contraction in loan book volumes. An increase was also registered in the ratio of doubtful loans to total loans. These funding and lending trends and macroeconomic changes were reflected in the Group's current profit and loss results, with total revenues penalised by the impossibility to immediately transfer the increased cost of funding to yields from interest-bearing assets and by the reduction in lending volumes, at a time when the cost of credit was gradually worsening. A crisis of such vast proportions further reduced the growth prospects of certain business segments in which the Group operates and substantially increased the return required to cover the allocated capital, with negative repercussions on the outcome of impairment tests on goodwill allocated to the various Cash Generating Units (CGUs). Despite this, the Group used every lever at its disposal to counteract the effects of the macro environment and bring the business back to a steady path of growth. In particular: As at 31 December 2011, total funding volumes for the Group came to approx. EUR 281 bln (-7.2% on 31/12/2010; -4.6% on 30/09/2011), with direct funding accounting for approx. EUR 146 bln (-7.2% on 31/12/2010; -8.7% on 30/09/2011) and indirect funding approx. EUR 135 bln (-7.2% on 31/12/2010; +0.2% on 30/09/2011). The trend in direct funding was affected by the fall in institutional funding (wholesale CDs and market repos) while the stock of international bonds remained substantially unchanged with respect to levels at the end of December A downturn was also registered for funding from Corporate customers (almost entirely owing to the reduction in current account deposits of Wholesale corporate customers) while consumer funding registered a slight increase, propped up by over EUR 14 bln in bond placements during the year. With regard to indirect funding, Assets under Management closed the year with over EUR 46 bln in volumes, -8.2% on 31/12/2010 and -2.6% on 30/09/2011 on the back of negative market effects on both shares and bonds held, as well as of net outflows primarily in the area of mutual funds, in line with trends in the banking system. Assets under custody came to approx. EUR 88 bln, down 6.6% on the previous year though picking up on 30/09/2011 (+1.7%), driven primarily by the momentum in deposits from Large Corporate customers. Group Loans to customers stood at approx. EUR 147 bln at the end of December 2011, down 5.6% on 31/12/2010 and 5.5% on 30/09/2011, owing to the particular selectivity in the disbursement of loans as well as the sluggish economic cycle which especially penalised current accounts and short-term lending. Interest-bearing loans to consumer customers, which were also weighted down by a lower demand in loans to households and businesses mainly conditioned by the fall in real estate market sales, showed a more contained decrease (EUR -7 bln on 31/12/10 and approx. EUR -6 bln on 30/9/11) which was concentrated in the latter months of the year. With respect to credit quality, the "net doubtful loans to total loans ratio" as at 31 December 2011 came to 4.39% while coverage of non performing loans came to 41.4%, an increase of 50 bps on 30/09/2011 (41.8% as at 31/12/2010), continuing to be commensurate and in line with the Montepaschi Group's traditional coverage levels. With respect to doubtful loans, coverage stood at 55.5% (vs 56% as at 31/12/2010), while the substandard loans coverage ratio came to 22.2% (vs 21.1% as at 31/12/2010). Regarding the development in total revenues from financial activities and services in 2011, the Montepaschi Group achieved a net income from banking and insurance of approx. EUR 5,507 mln, down 1.2% on 31/12/2010. Q contributed approximately EUR 1,268 mln (-5.4% on Q3 2011), and was influenced by 9

10 CONSOLIDATED REPORT ON OPERATIONS negative results in trading/valuation/hedging of financial assets, only partly offset by the growth in basic income sustained by the growth in interest income which reached the highest level in the past eight quarters. As to the cost of credit, the provisioning rate 1 came to 89 bps (74 bps at the end of 2010) while, in terms of operational efficiency, the cost-to-income ratio stood at 63.6% (vs. 61.6% as at 31/12/2010). The consolidated net profit of the Montepaschi Group before Purchase Price Allocation (PPA) and impairment of goodwill, intangibles and AM Holding, posted a loss of EUR 77.4 mln (vs. EUR 1,096.2 mln of profit as at 31/12/2010). The new macro-economic scenario (weighted down by the sovereign debt crisis), tensions in the main financial markets and persisting uncertainty regarding global economic recovery, called for writedowns in the amount of EUR 4,514 mln, of which EUR 4,257 mln on goodwill; 222 mln net on intangibles from PPA; 35 mln on the investment in AM Holding. Considering the net effects of PPA (around EUR 94 mln) and impairment, a total loss of EUR 4,685 mln was registered for 2011 (vs. a profit of mln in 2010). With regard to capital ratios, as at 31 December 2011, the Tier 1 ratio BIS II was estimated at 11.1% (8.4% at the end of 2010) with a BIS II solvency ratio at 15.7% (12.9% at the end of 2010). 1 Provisioning rate: ratio between annualised net adjustments due to impairment of loans and loans to customesr at the end of the period (Account 70 in the Balance Sheet). 10

11 Basis of preparation CONSOLIDATED REPORT ON OPERATIONS The Report on Operations has been prepared in accordance with the provisions of Article 3 of Legislative decree no. 87/1992 (as amended by Decree 32/2007) and gives an account of the performance and results of the Montepaschi Group, both as a whole and in the various business sectors into which consolidated operations are organised. To allow for a better understanding of how the major factors of value creation were developed for the Group and for all its stakeholders (both in the short and long term), the report integrates economic and financial aspects with qualitative and non-financial components. These non-financial components particularly include the main activities and results achieved by the Group in implementing Corporate Social Responsibility (CSR) objectives relating to Customer relations, Personnel management and the impact of business on Society and the Environment. For additional information on this topic please refer to the Annual Report on Corporate Social Responsibility which can be found on our website under "Our Values". 11

12 CONSOLIDATED REPORT ON OPERATIONS Major events in 2011 Below is a summary of the more significant events of the Montepaschi Group in 2011: Shareholders' equity and capital base Pre-emptive rights issue approved by the Board of Directors of Banca Monte dei Paschi di Siena on 7 and 16 June 2011, by virtue of the authority granted to the Board of Directors by the Extraordinary Shareholders' Meeting of 6 June All 4,824,826,434 newly issued ordinary shares, accounting for approx % of the new share capital, were subscribed to for an overall equivalent amount of EUR 2,151,872, without the support of the Guarantee Consortium. Sale of a commercial office building in Rome -which once housed the central tax collection agency- located between via dei Normanni, via Labicana and via San Giovanni in Laterano to a real estate closed-end fund managed by Mittel R.E. Sgr S.p.A.. The transaction resulted in a Tier 1 increase of 3 basis points. Following prudential recognition of the pre-conditions required by the supervisory authorities, the bank has been able to fully recognise the Tier 1 benefits arising from its real estate deal, which were reflected in an increase of approx. 40 bps in Tier 1. The exercise conducted by the EBA in the second half of 2011 on the capital requirements of major European banks (71 lenders were involved) revealed Banca Monte dei Paschi di Siena s need for capital strengthening in the amount of EUR 3,267 mln. To reduce the capital buffer required by the EBA,The Group has identified the following key initiatives, some of which were already implemented in 2011: - conversion to equity of BMPS shares underlying the FRESH 2003 convertible notes. As a result of this initiative, which was completed in 2011, the number of ordinary shares increased from 10,844,097,796 to 10,980,795,908 and the share capital increased from EUR 6,654,282, to EUR 6,732,246,664.72; the share premium account was increased from EUR 3,938,619, to EUR 4,150,455, allocation to share capital of part of the "Share Premium Account" for a sum equal to the premium on 295,236,070 ordinary BMPS shares underlying the F.R.E.S.H notes issued by The Bank of New York for an amount of EUR 752,261, in April The initiative, which was approved by the Shareholders' Meeting in its extraordinary session on 1 February 2012, is scheduled to be implemented by the first half of 2012; - at par conversion of 18,864,340 savings shares into ordinary shares for an amount of EUR 12,639, The initiative, which was approved by the Shareholders' Meeting in its extraordinary session on 1 February 2012, is also scheduled to be implemented by the first half of 2012; - reduction of RWAs, as a consequence of: the overall trend in assets and their continuing shift towards less risky and/or more collateralised forms of lending; as well as routine maintenance of risk measurement parameters.. - other initiatives arising from the asset disposals specified in the capital plan submitted by the bank in response to the EBA's Capital Exercise and required capital buffer. Business combinations and changes in ownership interests Incorporation of Aiace REOCO S.r.l. and Enea REOCO S.r.l., fully-owned subsidiaries of MPS Gestione Crediti Banca SpA that engage in real-estate transactions, typically associated with debt recovery, with the aim of maximising the value of properties pledged as collateral for loans, by acquiring them (either out of court or at auction) and subsequently reselling them. Merger of MPS Commerciale Leasing SpA into MPS Leasing & Factoring SpA. 12

13 Bond issuances CONSOLIDATED REPORT ON OPERATIONS Covered bonds intended for institutional Eurozone investors were issued for a total amount of EUR 2.25 bln, as part of the bank's EUR 10 bln programme announced at the end of June 2010, which is entirely backed by residential mortgage loans of the Group. Ratings Downgrade of Italy's sovereign debt rating had repercussions on the ratings assigned to Banca Monte dei Paschi di Siena. More specifically: - On 5 October 2011, international ratings agency Moody s lowered its rating on BMPS from A2/P-1 to Baa1/P-2 with a stable outlook. The Bank Financial Strength Rating was affirmed at D+ with a stable outlook. - On 17 October 2011, international ratings agency Fitch lowered its rating on Banca Monte dei Paschi from A- to BBB+ with a negative outlook. The short-term rating was confirmed at F2 as was the individual rating of B/C. These ratings, together with the support rating floor ( BBB ), were later placed on Credit Watch Negative. - On 18 October 2011, international ratings agency S&P s lowered its long-term rating on Banca Monte dei Paschi from A- to BBB+. The short-term rating was confirmed at A-2, with a stable outlook. The rating on Upper Tier 2 hybrid instruments was revised up from BB+ to BBB-. BMPS included in the STOXX Global ESG Leaders indices, the innovative series of indices based on a selection of environmental, social and governance-related performances. The admission is a testimony to the commitment that Banca Monte dei Paschi di Siena has always shown towards issues of sustainability. Taxes and duties Banca Monte dei Paschi di Siena has agreed to pay the Italian Revenue Agency EUR 260 mln, plus interest, to settle all pending litigation arising from claims in relation to certain transactions carried out from 2002 to

14 CONSOLIDATED REPORT ON OPERATIONS Reclassified accounts MPS GROUP RECLASSIFICATION PRINCIPLES The following accounting statements illustrate balance-sheet and profit-and-loss accounts reclassified on the basis of operating criteria. The figures for 2010 comparison are those published in the consolidated Annual Report as at 31 December 2010 (for further details, see Annexes: Montepaschi Group Reconciliation of reclassified accounts and accounting tables"). In some instances, figures were adjusted following Bank of Italy's guidance on recognition of securities lending transactions secured with collaterals other than cash, fully owned by the lender. Following are the reclassifications made to the consolidated profit and loss account as at 31 December 2011: a) The reclassified account Net interest Income was integrated with EUR 29.7 mln to sterilise the effects of settlement of a tax dispute with the Italian Revenue Agency from the interest expense' component. The integration was reclassified into "Tax expense (recovery) on income for the period from continuing operations". b) Net trading income of financial assets in the reclassified income statement, includes the items under Account 80 Net profit (loss) from trading, Account 100 Gains (losses) on disposal/repurchase of loans, financial assets available for sale and financial liabilities and item 110 Net profit (loss) from financial assets and liabilities designated at fair value. The item incorporates dividends earned on securities held in the Group s securities and derivatives portfolio (approx. EUR 99 mln). c) Dividends, similar income and gains (losses) on investments in the reclassified income statement incorporates item 70 Dividends and similar income and a portion of item 240 Gains (losses) on investments (approx. EUR 65 mln, corresponding to the contribution to profit and loss for the period that coincides with the share of profit arising from investments in associates, valued at equity). Dividends earned on securities in the securities and derivatives portfolio, as outlined under item a) above, have also been eliminated from the aggregate; d) Net impairment losses (reversals) on loans in the reclassified income statement was determined by excluding the loss provision taken in connection with the Greek government bond (approx. EUR 17 mln) which was allocated to Net adjustments for impairment of financial assets. Furthermore, the aggregate excludes charges relating to financial plans (EUR 3 mln), which are more properly classified under Net provisions for risks and charges and other operating expenses (income). Additionally, EUR 22 mln in losses arising from disposal of loans were reclassified out of item 100 a) "Gains/losses on disposal of loans" into this item in a logic of recovery, managing them in a similar way to loan value adjustments; e) Net impairment losses (reversals) on financial assets includes the items under item 130b Availablefor-sale financial assets, 130c Held-to-maturity financial assets and 130d Other financial transactions as well as the loss provision taken in connection with the Greek government bond (approx. EUR 17 mln) referred to under the above item; f) The income statement account Personnel expenses was reduced by EUR 26 mln, referring to costs associated with the facilitated terms and conditions of early-retirement schemes for staff in view of the organisational restructuring of Banca Monte dei Paschi di Siena. The amount was reclassified under Integration costs/one-off charges. g) Other administrative expenses in the reclassified income statement was deducted of the portion of stamp duty and client expense recovery (approx. EUR 286 million) posted under item 220 Other operating expenses/income h) The item Net provisions for risks and charges and other operating expenses (income) in the reclassified income statement, which incorporates item 190 Net provisions for risks and charges and item 220 Other operating expenses (income), includes value adjustments to financial plans described under item d) and stamp duty and client expense recoveries as described under item g) above. Sanctions connected with the settlement of a tax dispute with the Italian Revenue Agency, in the amount of EUR 93 mln, were classified out of this restated aggregate into "Taxes expense (recovery) on income for the period from continuing operations" i) The item Integration costs/one-off Charges includes One-off charges of EUR 26 mln associated with the facilitated terms and conditions of early-retirement schemes for staff in view of the organisational restructuring of Banca Monte dei Paschi di Siena and other non-recurring components. This value was reclassified out of Personnel expenses (see item f). 14

15 CONSOLIDATED REPORT ON OPERATIONS j) Gains (losses) on investments was cleared of components reclassified as Dividends and similar income" (see item c); k) The effects of Purchase Price Allocation (PPA) were reclassified out of other items (in particular Interest income for approx. EUR 54 mln and depreciation/amortisation for approx. EUR 82 mln, net of a theoretical tax burden of approx. - EUR 42 mln which integrates the item). l) Impairment of Goodwill, PPA intangibles and writedown of the investment in AM Holding in the reclassified income statement incorporates groupwide impairment of goodwill (item 260 Impairment of Goodwill for an amount of EUR 4.3 bln), amortisation of intangibles from PPA (approx. EUR 328 mln, gross, included in item 210 net adjustments to (recoveries on) intangible assets ), writedown of the investment in AM Holding (roughly EUR 35 mln under item 240 Gains/losses on investments ). The fiscal effect of the amortisation of intangibles from PPA (approx. EUR 106 mln) was reclassified into "Taxes expense (recovery) on income for the period from continuing operations". Following are the major reclassifications made to the consolidated Balance Sheet: a) Tradable Financial assets on the assets side of the reclassified balance-sheet includes item 20 " Financial assets held for trading", item 30 "Financial assets designated at fair value" and Item 40 " Financial assets available for sale ; b) Other assets on the assets side of the reclassified balance-sheet incorporates Item 80 "Hedging derivatives", Item 90 "Changes in value of macro-hedged financial assets", Item 140 "Tax assets", Item 150 "Non-current assets and groups of assets held for sale and discontinued operations" and Item 160 "Other assets"; c) Deposits from customers and debt securities issued on the liabilities side of the reclassified balancesheet includes Item 20 "Deposits from customers", Item 30 "Debt securities issued" and Item 50 "Financial liabilities designated at fair value"; d) Other liabilities on the liabilities side of the reclassified balance-sheet incorporates Item 60 Hedging derivatives, Item 70 Changes in value of macro-hedged financial liabilities", Item 80 Tax liabilities, Item 90 Liabilities associated with non current assets held for sale and discontinued operations and Item 100 Other liabilities. The accounting statements and the comparative statements of the reclassified consolidated income statement and balance-sheet are enclosed with the Annexes section. 15

16 CONSOLIDATED REPORT ON OPERATIONS C ONS OLIDATED REPORT ON OPERATIONS Highlights at 31/12/11 g INC OME S TATEMENT AND BALANC E S HEET FIG URES AND KEY INDIC ATORS MPS GROUP h INC OME S TATE ME NT F IGURE S (in E UR mln) 31/12/11 31/12/10 % chg Income from banking activities 5, , % Income from financial and insurance activities 5, , % Net operating income % Profit (loss) for the period before PPA, impairment of goodwill, intangibles and writedown of investment in AM Holding , % P arent company's net profit (loss) for the period -4, n.s. h BALANC E S HE E T F IGURE S AND INDIC ATORS (in E UR mln) 31/12/11 31/12/10 % chg Direct funding 146, , % Indirect funding 134, , % of which: assets under management 46,426 50, % of which: assets under custody 88,124 94, % Loans to cus tomers 146, , % Group net equity 10,765 17, % h KE Y C RE DIT QUALITY RATIOS (%) 31/12/11 31/12/10 Net doubtful loans /Loans to C ustomers Net substandard loans /Loans to C ustomers h P ROF ITABILITY RATIOS (%) 31/12/11 31/12/10 C ost/income ratio R.O.E. (on average equity) (1) R.O.E. (on end-of-period equity) (2) Net loan loss provisions / E nd-of-period loans h C AP ITAL RATIOS (%) 31/12/11 31/12/10 S olvency ratio Tier 1 ratio h INFORMATION ON BMP S S TOC K 31/12/11 31/12/10 Number of ordinary shares outstanding 10,980,795,908 5,569,271,362 Number of preference shares outstanding 681,879,458 1,131,879,458 Number of savings shares outstanding 18,864,340 18,864,340 P rice per ordinary share: from 31/12/10 to 31/12/11 from 31/12/09 to 31/12/10 average low high h OP E RATING S TRUC TURE 31/12/11 31/12/10 Abs. chg Total head count - end of period 31,170 31, Number of branches in Italy 2,915 2,918-3 Financial advisory branches Number of branches & representative offices abroad (1) R.O.E. on average net equity: net income for the period / average between net equity at the end of the previous year (inclus ive of net income and valuation res erves ) and net equity for the current year. (2) R.O.E. on end-of-period equity: net equity for the period / net equity at the end of the previous year (inclus ive of valuation res erves ) purged of s hareholder's payout. 16

17 CONSOLIDATED REPORT ON OPERATIONS g RECLAS S IFIED INCOME S TATEMENT (in EUR mln) 31/12/11 31/12/10 C hange MPS Group (*) Ins. % Net interes t income 3, , % Net fee and commis s ion income 1, , % Income from banking activities 5, , % Dividends, s imilar income and gains (los s es ) on inves tments % Net profit (los s ) from trading n.s. Net profit (los s ) from hedging n.s. Income from financial and insurance activities 5, , % Net impairment los s es (revers als ) on: -1, , % a) loans -1, , % b) financial as s ets n.s. Net income from financial and insurance activities 4, , % Adminis trative expens es : -3, , % a) pers onnel expens es -2, , % b) other adminis trative expens es -1, , % Net los s es /revers al on impairment on property, plant and equipment / Net adjus tments to (recoveries on) intangible as s ets % Operating expenses -3, , % Net operating income % Net provis ions for ris ks and charges and other operating expens es /income % Gains (los s es ) on inves tments n.s. Integration cos ts / one-off charges % P &L figures for branches s old % Impairment on goodwill Gains (los s es ) on dis pos al of inves tments % Profit (loss) before tax from continuing operations , , % Tax expens e (recovery) on income from continuing operations % Profit (loss) after tax from continuing operations , ,194.5 n.s. P rofit (los s ) after tax from groups of as s ets held for s ale and dis continued operations Net profit (loss) for the period including non-controlling interests n.s , , % Net profit (los s ) attributable to non-controlling interes ts n.s. Profit (loss) for the period before PPA, impairment on goodwill, intangibles and writedown of investment in AM Holding , , % PPA (Purchas e Price Allocation) % Impairment on goodwill, intangibles and writedown of inves tment in AM Holding -4, ,514.0 n.s. Parent company's net profit (loss) for the period -4, ,670.8 n.s. (*) Figures res tated, where neces s ary, following clarifications provided by Bank of Italy regarding recognition of s ecurities lending with collateral other than cas h fully owned by the lender. 17

18 CONSOLIDATED REPORT ON OPERATIONS QUARTE RLY TRE ND IN RE C LAS S IFIE D INC OME S TATE ME NT (in E UR mln) 2011 (*) 2010 (*) MPS Group 4th quarter 3rd quarter 2nd quarter 1s t quarter 4th quarter 3rd quarter 2nd quarter 1s t quarter Net interest income Net fee and commission income Income from banking activities 1, , , , , , , ,352.1 Dividends, s imilar income and gains (los s es ) on inves tments Net profit (loss) from trading Net profit (loss) from hedging Income from financial and insurance activities 1, , , , , , , ,392.9 Net impairment losses (reversals ) on: a) loans b) financial assets Net income from financial and insurance activities , , , , , ,085.2 Administrative expenses : a) personnel expenses b) other administrative expenses Net los s es /revers al on impairment on property, plant and equipment / Net adjus tments to (recoveries on) intangible assets Operating expenses Net operating income Net provis ions for ris ks and charges and other operating expens es /income Gains (losses ) on investments Integration costs / one-off charges P &L figures for branches sold Impairment on goodwill -0.4 Gains (losses ) on disposal of investments Profit (loss) before tax from continuing operations Tax expens e (recovery) on income from continuing operations Profit (loss) after tax from continuing operations P rofit (los s ) after tax from groups of as s ets held for s ale and dis continued operations Net profit (loss) for the period including noncontrolling interests Net profit (loss) attributable to non-controlling interests Profit (los s ) for the period before PPA, impairment on goodwill, intangibles and writedown of investment in AM Holding PPA (Purchase Price Allocation) Impairment on goodwill, intangibles and writedown of investment in AM Holding -4,514.0 Parent company's net profit (loss) for the period -4, (*) Figures restated, where necessary, following clarifications provided by Bank of Italy regarding recognition of securities lending with collateral other than cash fully owned by the lender. Since the impact of these lending transactions was of low significance until October 2011, adjustments to the quarters were made by a linear estimate of the 2010 effect. 18

19 Montepaschi G roup g RECLAS S IFIED BALANCE S HEET (in EUR mln) CONSOLIDATED REPORT ON OPERATIONS 31/12/11 31/12/10 Chg. YoY AS S ETS (*) abs. % Cas h and cas h equivalents 878 2,411-1, % Receivables : a) Loans to cus tomers 146, ,329-8, % b) Loans to banks 20,695 8,810 11, % F inancial as s ets held for trading 55,482 52,664 2, % F inancial as s ets held to maturity % E quity inves tments % P roperty, plant and equipment / Intangible as s ets 4,365 8,959-4, % of which: a) goodwill 2,216 6,474-4, % Other as s ets 11,779 10,081 1, % Total assets 240, ,162 1, % 31/12/11 31/12/10 Chg. YoY LIABILITIES (*) abs. % P ayables a) Depos its from cus tomers and s ecurities is s ued 146, ,593-11, % b) Depos its from banks 46,793 27,419 19, % F inancial liabilities held for trading 26,329 27, % P rovis ions for s pecific us e a) P rovis ions for s taff s everance indemnities % b) P ens ions and other pos t retirement benefit obligations % c) Other provis ions 1, % Other liabilities 8,760 8, % G roup net equity 10,765 17,156-6, % a) Valuation res erves -3, ,708 n.s. c) E quity ins truments 1,903 1, % d) Res erves 6,577 5, % e) S hare premium 4,118 3, % f) S hare capital 6,732 4,502 2, % g) Treas ury s hares (-) % h) Net profit (los s ) for the year -4, ,671 n.s. Non-controlling interes ts % Total Liabilities and S hareholders' Equity 240, ,162 1, % (*) Figures restated, w here necessary, follow ing clarifications provided by Bank of Italy regarding recognition of securities lending w ith collateral other than cash fully ow ned by the lender. 19

20 CONSOLIDATED REPORT ON OPERATIONS Montepaschi Group g RECLAS S IFIED BALANCE S HEET- Quarterly Trend (in EUR mln) 31/12/11 30/09/11 30/06/11 31/03/11 31/12/10 30/09/10 30/06/10 31/03/10 AS S ETS (*) (*) (*) (*) Cas h and cas h equivalents , Receivables : a) Loans to cus tomers 146, , , , , , , ,457 b) Loans to banks 20,695 16,294 10,793 10,420 8,810 12,606 13,662 10,474 Financial as s ets held for trading 55,482 59,464 54,295 45,307 52,664 54,691 58,752 47,855 Financial as s ets held to maturity E quity inves tments Tangible and intangible fixed as s ets 4,365 8,949 8,936 8,943 8,959 10,179 10,201 10,374 of which: a) goodwill 2,216 6,474 6,474 6,474 6,474 6,474 6,474 6,619 Other as s ets 11,779 10,410 9,220 9,385 10,081 10,845 10,518 11,601 Total assets 240, , , , , , , ,301 31/12/11 30/09/11 30/06/11 31/03/11 31/12/10 30/09/10 30/06/10 31/03/10 LIABILITIES (*) (*) (*) (*) P ayables a) Depos its from cus tomers and s ecurities is s ued 146, , , , , , , ,670 b) Depos its from banks 46,793 32,553 23,219 22,360 27,419 29,626 28,593 25,628 F inancial liabilities held for trading 26,329 30,854 25,507 20,515 27,075 29,474 33,210 23,188 P rovis ions for s pecific us e a) P rovis ions for s taff s everance indemnities b) P ens ions and other pos t retirement benefit obligations c) Other provis ions 1, Other liabilities 8,760 9,994 8,567 8,110 8,043 10,377 9,459 9,684 G roup Companies 10,765 16,527 16,979 17,497 17,156 16,397 16,345 17,167 a) Valuation res erves -3,854-2, c) E quity ins truments 1,903 1,933 1,933 1,949 1,949 1,949 1,949 1,949 d) Res erves 6,577 6,558 6,558 6,887 5,900 5,904 5,903 5,986 e) S hare premium 4,118 3,917 3,938 3,989 3,990 3,990 3,996 4,048 f) S hare capital 6,732 6,654 4,502 4,502 4,502 4,502 4,502 4,502 g) Treas ury s hares (-) h) Net profit (los s ) for the year -4, Non-controlling interes ts Total Liabilities and S hareholders' Equity 240, , , , , , , ,301 (*) Figures res tated, w here neces s ary, follow ing clarifications provided by Bank of Italy regarding recognition of s ecurities lending w ith collateral other than cas h fully ow ned by the lender. 20

21 Corporate Social Responsibility non-financial indicators CONSOLIDATED REPORT ON OPERATIONS Tthe Group's Corporate Social Responsibility objectives are monitored through an ad hoc measurement system called the Sustainability Tree which has been integrated into the core processes of planning, control and reporting. Below are some of the key indicators included in the Sustainability Tree Objectives Performance indicators 31/12/11 31/12/10 Employee Perception Index (scale ) Satisfaction of BMPS branch personnel with working conditions and tools available for HUMAN RESOURCES serving customers. Turnover (%) Voluntary resignations to total staff ratio. Absenteeism rate (%) Days of absence for illness or injury out of total av erage of annual working days Training per employee (hours) Women executives-managers (%) Female employees (%) Customer Perception Index (scala ) Quality of products/service perceived by BMPS customers Customer retention (%) CUSTOMERS Customer acquisition (%) Claims 1 (no) 10,176 11,586 Claims (average days of answer) Microcredits (no.) Migrant banking (customers %) SOCIETY Social aid (EUR mln) Sponsorhips and donations for social purposes Supplier sustainability rating (scale 1-10) Assessment of suppliers CSR performance Energy per capita (GJoule) CO 2 emission 2 per capita (kg) ENVIRONMENT Paper per capita (kg) Green purchases (%) Total spending on supplies of low-environmental impact products and services Financing for energy and environment (millions of euro) 1,351 1,031 (1) Data not inclusive of claims for cloning of credit/debit cards (2) CO2 Emissions: includes greenhouse gas emissions under scope 1 and scope 2 according to the International classification,ghg Protocol. 21

22 CONSOLIDATED REPORT ON OPERATIONS Group Profile The Montepaschi Group is one of the leading Italian banking institutions with 31,170 employees, 6.2 million customers, assets of approximately EUR 241 billion and significant market shares in all the areas of business in which it operates. Consumer banking, which has a strong retail footprint, constitutes the Group's main activity. Operations are carried out through the distribution networks of Banca Monte dei Paschi di Siena, Banca Antonveneta, Biverbanca (60.42% shareholding), which are present across the entire national territory with 2,915 branches, 276 specialised client centres and 143 financial advisory offices, and through the support of Banca Popolare di Spoleto (26.005% shareholding). The Group is also active through specialised product companies in business areas such as leasing, factoring, consumer loans, corporate finance and investment banking. Foreign banking operations are focused on supporting the internationalisation processes of Italian corporate clients in all major international financial markets as well as some emerging countries that have relations with Italy. BUSINESS AREA Retail & Commercial banking Leasing Consumer loans Corporate finance Investment banking and proprietary finance Foreign banking Business support ACTIVITIES Lending Traditional banking services Offer of insurance and pension products through strategic partnership with AXA. Financial advisory. Wealth Management Offer of investment products through investments in associates with AM Holding. Offer of integrated leasing and factoring packages for businesses, artisans and professionals. Special-purpose loans, personal loans, credit cards (option and revolving) Medium-long term credit facilities, corporate finance, capital markets and structured finance. Finance, trading, global markets Products and services supporting expansion and investments of Italian businesses. IT systems and telecommunications. NPL management. Value creation from Group real estate. MAIN GROUP COMPANY Banca Monte dei Paschi di Siena Banca Antonveneta Biverbanca Banca Popolare di Spoleto MPS Fiduciaria MPS Leasing & Factoring Consum.it MPS Capital Services Banca Monte dei Paschi di Siena MPS Capital Services Banca Monte dei Paschi di Siena MP Banque MP Belgio Operating Consortium MPS Gestione Crediti Banca MPS Immobiliare Montepaschi Group - Revenues by business area as at 31/12/2011 Foreign banking 2% Investment banking e proprietary Finance 9% Business support 1% Cancellation of intragroup entries and other 2% Corporate Finance 3% Consumer lending 6% Retail & Commercial banking 75% Leasing 2% 22

23 CONSOLIDATED REPORT ON OPERATIONS Pursuant to art and following of the Civil Code, the role of Parent Company is carried out by Banca Monte dei Paschi di Siena SpA which directs and coordinates the activities of its direct and indirect subsidiaries, including companies that, under current regulations, do not belong to the Banking Group. Founded in 1472 as a public pawnbroking establishment (Monte di Pietà), Banca Monte dei Paschi di Siena has been a member of FTSE MIB40 since September 99 with market capitalisation in the region of EUR 3 bln as at 31/12/2011. BMPS shareholders as at 31/12/2011 Other shareholders (equity < 2%); 40.64% Fondazione MPS ; 45.76% Unicoop Firenze; 2.90% AXA S.A.; 3.96% Caltagirone Francesco Gaetano; 4.05% JP Morgan Chase; 2.69% The Group's mission is to: create value for shareholders, in both the short and long term, giving priority to customer satisfaction, the professional development of resources and the interests of all stakeholders; be a continuously evolving role model in the Italian banking industry, affirming the Montepaschi Group's leading position as a domestic Group with a European vocation; promote a sense of belonging to the Group among employees, while at the same time valuing cultural differences and maintaining the strong foothold of each Group company in the area in which it operates. The Group's values are: Corporate social responsibility Strong customer focus A drive for change Entrepreneurship and productivity Professional skills Team spirit and cooperation The main non-financial assets which form part of the Group's business model and which are a focal point in the development of strategies for both short and medium/long term value creation, are: Human Resources Customerbase and customer care Integrated risk and capital management Brand and corporate image Innovation Social added value The management and development of these assets over the year are examined in the following chapters. 23

24 CONSOLIDATED REPORT ON OPERATIONS Interaction with stakeholders is an integral part of our business model. We are aware that we also have social responsibilities that go beyond our economic performance. We believe it is important to develop effective relationships with all stakeholders, combining the goal of meeting their different expectations with the delivery of business objectives in order to create sustainable value. Objective Sustainability in relations Group commitment Transparent selection process Sustainability in relations BUSINESS PARTNERS Vendors Business partner THE GROUP S STAKEHOLDERS INSTITUTIONS State Supervisory Authorities Trade associations Objective Compliance Support the economy Industry agreements Group commitment Compliance Collaboration Objective Relationship quality Product suitability Financial education and assistance Group commitment Relationships of trust Quality and innovation Fully supported needs Transparency and fairness Objective CUSTOMERS Retail Corporate Institutions Consumer associations Business associations SOCIAL Non-profit organisations Local institutions Communities Media Objective Support local growth Participate in social initiatives Funding for environmental projects Information on corporate activities Group commitment Financial inclusion Local investments Solidarity Protection of the environment Timely and transparent information Growth opportunities Equal opportunities Working environment Work-life balance Group commitment Professional training and development Work quality and engagement Focus on employee needs EMPLOYEES Human resources Trade unions SHAREHOLDERS Shareholders Institutional investors Analysts Objective Capital remuneration Information on corporate performance Group commitment Sustainable value creation Adequate corporate communications 24

25 Distribution network CONSOLIDATED REPORT ON OPERATIONS The Montepaschi Group operates in a logic of developing and streamlining its distribution network, focusing both on growing network coverage and strengthening innovative channels with a view to making the branch a highly-evolved centre for customer relations. Traditional domestic branches are supported by specialised business centres, which develop customer relations with and specifically manage target client segments (Small Medium Enterprises, Private, Institutions), as well as 828 Financial Advisors who provide services through offices open to the public across the national network. Montepaschi Group ATMs totalled 3,614, of which 3,130 in traditional branches (2,865 in locations with a separate entrance that can also be accessed outside branch-hours) and 484 installed in public places with high operational potential (345) and in companies/organisations (139). The number of ATMs increased by 39 units in 2011 and the installation of cash-in machines continued with the aim of giving a sharp boost to the migration of low added-value transactions. Consequently, the number of cash-in ATMs rose to 381, with 227 machines located in self-service areas. ATM For the visually impaired In low-population-density areas (*) 31/12/ % 12.1% 31/12/ % 12.2% Internationally, the Group has a foreign network that is In low-development areas (**) 23.3% 23.5% geographically distributed across all major financial markets as well as in emerging countries with the highest rates of growth and/or key 0 (*) municipalities with less than 5,000 inhabitants relations with Italy. The network is currently structured as follows: 4 (**) Campania, Basilicata, Apulia, Calabria, Sicily, as per EU classification operational branches located in London, New York, Hong Kong and Shanghai, 11 representative offices located in various "target areas (EU, Central-Eastern Europe, North Africa, India and China, 2 banks governed by foreign law: MP Belgium (8 branches), MPS Banque (18 branches), 2 Italian Desks in Spain and Romania. In addition to its physical presence in the area, the Group maintains its customer relations through the use, among other things, of innovative channels whose development is aimed at bolstering telematic services especially with the promotion of integrated multi-channels which, within one single package, include Internet Banking, Mobile Banking and Phone Banking services. In 2011 telematic contracts came to just under 200,000 (gross of the technical elimination of contracts no longer in operation, carried out during the summer, which affected around 126 thousand units), with Q4 contributing approx. 36,000 contracts, down from levels registered in the previous quarters (though there has been an uptrend since the start of the year). Existing contracts totalled approx. 1,625,000 as at 31/12/2011 (+4.1% on 31/12/2010; +13% net of the "technical" elimination of telematic terminals no longer in operation) saw a shift for Internet Banking and Mobile Banking contracts towards Integrated multichannels, a flagship product for the telematic segment thanks to a net annual flow of more than 252,000 contracts (gross of "non-operational" terminals, with Q4 contributing over 48,000) which increased the 25

26 CONSOLIDATED REPORT ON OPERATIONS number of existing contracts to 1,130,000 as at the end of the period (+21.8% YoY; +27.2% excluding the effects from the "technical" elimination). The customerbase The Montepaschi Group performs its banking activities with approx. 6.2 million customers, approx. 5.8 million of whom are managed by the Distribution Networks of Banca Monte dei Paschi di Siena, Banca Antonveneta and Biverbanca, while the remainder (around 400 thousand customers) are managed exclusively by Consum.it, the group company specialised in consumer loans, and by the Financial Advisory network. Consum.it 5% Customers as at 31/12/2011 Financial advisory 2% Commercial network 93% Customers managed by the distribution networks are spread throughout the country, with a higher concentration in the regions of central Italy; they are divided by target segments to which an ad hoc Service Model is applied so as to best respond to the specific needs and demands expressed. Commercial customer base geographic breakdown South; 32.46% Northeast; 16.71% Northwest; 16.48% Private 0.64% Affluent 21.47% Family Office 0.03% Commercial customers breakdown SMEs 1.09% Istitutions 0.25% Large Corporate 0.03% Small Business 6.84% Middle; 34.35% Family 69.66% 26

27 CONSOLIDATED REPORT ON OPERATIONS Macroeconomic scenario Macro environment The sovereign debt crisis, tensions in the major financial markets and the ongoing uncertainty regarding the consolidation of public accounts of certain industrialised countries, were the main factors that contributed to the slowdown in global growth registered in At the end of the year, economic development was affected by the first signs of a slowdown in international foreign trade. Uncertainty and volatility grew and some advanced economies were showing signs of recession. In the Eurozone, where the debt crisis became more acute in the closing months of 2011, expanding to take on systemic crisis proportions, economic growth was affected, not only by the heavy fiscal consolidation plans launched by the European countries to avert the risk of default, but also the tardy and often incoherent political response to the various problems and concerns. Positive elements which resulted in some restoration of trust among investors were; the agreement to implement tougher budget rules (Fiscal Compact), the earlier entry into force of the European Stability Mechanism (ESM) and the ECB action of pumping hefty amounts of liquidity into the system in order to support the need for funding of major European institutions. Fuelling the climate of uncertainty, on the other hand, were the situation in Greece and the record-level of unemployment, all of which was underpinned by a halting German economy. Within the Eurozone, Italy was among the countries most affected, with growth of 0.5% in 2011 and a future outlook that will continue to be weighted down heavily by fiscal and budgetary austerity measures. According to the average estimates of major institutional contributors (Banca d Italia, IMF, European Commission, Ministry of Economy and Finance, OECD and Prometeia), Italian GDP is expected to drop 1.2% in A slowdown was also in progress in the USA though the risk of a double-dip recession was said to be unlikely. Attempts were made to consolidate growth thanks to the effective stimulus measures introduced by the FED. Recovery in the U.S., albeit modest, may be affected above all by tensions surrounding employment, high federal debt and a real estate market finding it difficult to stabilise. Though continuing to advance at a sustained rate, a slight "cooling" was also registered in the growth of the Asian economies. China's growth may be affected by the further decline in foreign demand and a more sluggish real estate sector. Japan will begin to grow again over the next two years due to post-tsunami reconstruction. In the USA, recovery continued at a rate close to 3% for the year thanks to improving conditions in the job market. Monetary policy is confirmed to support growth and, against such a backdrop, the FED stated that interest rates will remain exceptionally low at least until the end of The Authority has lowered the forecast for growth in 2012 to between 2.2% and 2.7% (from 2.5%-2.9% estimated previously). The problem of high federal debt may also continue in 2012: the go ahead for the Budget Control Act and the extension of tax reliefs on salaries and subsidies was deemed positive by Moody's, which confirmed the United States' triple-a rating (S&P s, on the other hand, downgraded the US credit rating in August), but regarded as insufficient and the outlook remains negative. Furthermore, the escalation of the European Crisis may significantly perturb US recovery, which is being further affected by a heated presidential race. Among emerging countries, China showed growth rates of over 9% with a positive trend in exports though there were signs of a slowdown in the wake of the expected slump in world trade. A soft landing is thus expected for the Chinese economy even if tensions in the real estate market, the critical state of public accounts in certain regions, shadow financing 2 and inflation, may increase the risk of an excessive economic cooldown. The People's Bank of China appears poised to adopt stimulus measures to avert any such likelihood. In the Eurozone, growth took a sharp step-down in the second half of the year (GDP dipped to +1.3% against +1.6% previously registered), conditioned, among other things, by the German economic momentum (-0.25% in Q4), and scenarios of recession are projected for The slight recovery registered by leading indicators in January (ZEW, IFO and PMI) hints at a less severe recession, however less encouraging signs came from production and orders ( -0.3% YoY and -2.7% YoY respectively in November) faced, among other things, with a slowing global demand. 2 A strongly growing phenomenon in China, consisting in the borrowing of money by small and medium businesses from non-bank lenders (eg. companies, associations, families, etc). 27

28 CONSOLIDATED REPORT ON OPERATIONS A negative impact on the real economy largely came from the tough austerity plans launched by the national governments, the uncertainty surrounding the debt crisis and the EBA's bank recapitalization plans (EUR 15.4 bln for Italian banks against EUR bln for the whole of Europe). Rising concerns over Portugal, although the yield on its 10Y bond dropped significantly after peaking at a record 18%. EU leaders have begun to react decisively to the crisis by putting the following initiatives underway: introduction of the Fiscal Compact plan (not signed by the United Kingdom and the Czech Republic), which will enforce tighter budgetary rules as of 2013; entry into force of the European Stability Mechanism (ESM), brought forward to July 2012 though differences remain regarding the increase in the size of the fund; agreement reached on employment-boosting measures. The European Banking Authority (EBA) announced that by June 2012, European banks will have to recapitalise to the tune of EUR bln (EUR 15.4 bln for Italian banks) with the possibility of a new wave of recapitalisation for the entire banking industry. The rating agencies, with their reviews on the creditworthiness of various countries, marked the development of events (France and Austria lost their triple A by S&P s, while the Greek, Irish and Portuguese bonds approached junk-bond status) and the continuing negative outlook for several Eurozone economies portends a series of fresh downgrades for The markets, therefore, remain highly volatile. Though share prices have bounced back from the lows seen over the summer they still remain far from levels at the start of EU peripheral bond yields reached record highs in 2011 to then fall back or stabilise at year-end in the wake of initiatives by national governments and international authorities that have helped restore some confidence among investors. The same countries also showed a similar trend for 5-year CDSs (Credit Default Swaps). Italy ended 2011 with weak growth (+0.5% YoY), already weighted down by the effects of a recession that may well prove to be severe and drawn out. Since August 2011, leading indicators have remained below the contraction threshold with orders, production and retail sales remaining on a negative trend (-4.1% YoY, -0.7% YoY and -1.8% YoY respectively, as at November). Exports registered a slowdown despite their upturn over the last few months. Employment tensions intensified with the unemployment rate touching a record high of 8.9% in December (8.4% the average figure for the year). Inflation, which in 2011 stood at 2.8%, looks set to remain above 3% for the whole of 2012, partly as a result of the increase in excise duty and the recent tariff adjustments. The indications from the rating agencies also highlight Italy's "delicate" situation: S&P s lowered its rating by 2 notches from A to BBB+ (just 3 notches away from non investment grade ) and maintained its negative outlook. Fitch also cut its rating on Italy from A+ to A- with negative outlook. Concerns regarding the stronghold of European peripheral debt have shifted the preferences of investors towards financial assets believed to be safer, with yields on the German 10-year bonds reaching all-time lows (below 1.65%) before slightly picking up at the end of the year (hovering at around 2%). Uncertainty, however, remains high: in January 2012 Germany's six-month bonds drew a negative yield for the first time, showing how, in a phase of such high volatility, investors are willing to give up some return in exchange for the safe-haven of German bonds. The yield curve has thus flattened significantly on the 2-10 year term when compared to the start of the year. In the United States also, the FED's accomodative policy has further flattened the US yield curve. As of July, the US Libor began to rise on key maturities, only to downtrend at the beginning of US Treasury Activities Yield Curve Euro Benchmarks Yield Curve m 6m 1y 2y 3y 5y 7y 10y 30y 0 3m 6m 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 20y 30y Usa 12/31/10 Usa 12/31/11 Euro 12/31/10 Euro 12/31/11 In the money market, the end of the year saw an upturn in interest rates; the 1M Euribor, which stood at 1.35% in October, registered a progressive slowdown in the closing part of 2011, reaching 0.7% at the beginning of The ECB supported the liquidity of banks and their lending to households and businesses through two longer term refinancing transactions of 36 months (21 December 2011 and 29 february 2012) and reduced the cost of money to a record low of 1% (the same value as at the start of 2011). Inflation will remain above 2% in the coming months. However, in this context of deceleration, pressures on prices should remain low along the time horizon of 28

29 CONSOLIDATED REPORT ON OPERATIONS the monetary policy, so much so that some analysts expect a new reference rate cut of 25 bps in the short term, though it is predicted that interest rates are likely to hold at 1% throughout Moreover, further actions were identified, including: expansion of eligible collateral in refinancing transactions (to also accept Asset Backed Securities rated single-a ); purchase of Government bonds by European central banks as part of the plan (transitional and timerestricted by nature) to purchase bonds from struggling countries in order to counter the shortcomings in the devolution of monetary policies resulting from the sovereign debt crisis; reduction of the bank statutory reserve ratio (from 2% to 1%) in order to free eligible collateral and support money market activities; adequate dollar liquidity for key institutions was ensured through coordinated actions by the major central banks worldwide. The major global financial markets registered a particularly negative performance, especially over the summer period, with recovery for the U.S. stock market index and a certain level of consolidation for the European indices in the closing months of the year. From 31/12/2010 to 31/12/2011, the Dow Jones gained 5.5%, S&P 500 remained more or less stable while a more disappointing performance was recorded in Europe (Dax down by approx. 15%, FTSE Mib by over 25%) and in Japan where the Nikkei slid by more than 18%. Efforts by EU leaders and national governments and the hefty amounts of liquidity provided by the ECB have partially reassured the markets although uncertainty continues to remain high. In Italy, the 10Y BTP-Bund spread went from record high levels in November (575 bps) to below 400 bps in After touching 7.5% in late 2011, the yield on the 10Y BTP bounced back to around 5.6%. The Italian 5Y CDSs fell from its all-time peak of almost 600 bps reached in November. In the currencies market, the euro suffered as a result of the debt crisis, losing ground against all major currencies. At the end of the year, the euro/dollar cross rate returned to below 1.30; the single currency also touched an 11- year low against the yen. Following its depreciation, however, the Euro showed signs of improving in the first weeks of Pressure on the Beijing government for it to intervene to appreciate the yuan. In September, the Swiss National Bank established an exchange rate at a minimum of 1.2 francs against the euro. Social-Economic Trends Over several years now, a number of important patterns and trends have emerged with repercussions not only on the social and economic fabric but also on the activities and operations of banks. There has been an increase in the population (over 60.8 mln at the end of 2011; +6.9% since the turn of the century), with a higher percentage of foreign citizens (trebling from the year 2000 to almost 5 million, accounting for 8%) and senior citizens, with the number of over-65s rising over the decade (from 18.4% to 20.6%), against a fall (from 67.3% to 65.3%) in the working-age population (15-64 years). Such demographic trends will continue over the coming decades, heightened further by the increase in life expectancy. Aging of the population exerts increasing pressure on public spending, with a potentially strong impact on the balance of pension schemes and social security, and gives growing importance to private pension funds and to insurance products designed to provide personal protection. In terms of organization, there are changes in people s lives, the education system and in businesses and banks, which will have to adapt their range of product offerings and service models to the new environment as they growingly shift toward pension and insurance products. Immigrants contribute over 11% to Italian GDP, accounting for a growing percentage of total employment (from 6.8% in 2007 to almost 10% today) and a significant presence in terms of active companies managed (almost 4%; 7.2% if including artisan businesses). The comparison between social expenditure incurred and taxes paid is positive for the state treasury since the immigrant population is young (over-65s account for just 2.2%). The bankification rate of immigrants grew stronger (over 70% of migrants in Italy hold a current account) as did relations with the banking system. 29

30 CONSOLIDATED REPORT ON OPERATIONS Employment levels remained fairly stable in 2011, while the unemployment rate rose (from 8.1% to 8.9%) and the percentage of temporary contract workers exceeded 10%. The recent economic cycle has had negative repercussions, especially on youth employment (for which the unemployment rate soared to over 30%), highlighting the lack of financial independence of this population segment and increasing the risk of depleting society's main source of innovation and vitality. Companies saw a rise in the average age of employees and in the number of retiring personnel, with the risk of a loss in skills and productivity. The job market scenario and the decline in consumption (-0.9% between 2007 and 2011), point to the economic hardship of Italian families in these years of recession and reflect the sluggish recovery. The incidence of relative poverty (income below 60% of median income) is higher than elsewhere in the EU (18.4% of Italians have an income that is insufficient for a decent living standard). The banking system assists the more vulnerable members of society through: microcredit and charity, which may play a role in providing assistance in situations of financial hardship; institutional activities of banking foundations in favour of voluntary work, assistance and public health; loans granted to non-profit organisations (direct impact); system-level and independent initiatives to support families experiencing temporary financial difficulties (eg. suspension of mortgage repayments). The lower propensity to purchase homes, affected by the reduced saving capacity of households and the deterioration in confidence levels, has had a negative effect on real estate sales, interrupting the industry's long upward trend (ongoing since at least 1986) and impacting one of the few real certainties for Italian families: the growth in home values. In 2009, real assets (especially real estate) accounted for 68% of household wealth, representing investments that were deemed secure and profitable. The performance of the real estate market has also impacted bank operations in terms of volumes and higher credit risk. Following the uptrend in 2010 (+9.7%), which was boosted by the widening use of loan subrogation, mortgage loans fell again in 2011 (approx. -10%, a level similar to that registered annually in the period ). According to CRIF data, the risk index measuring new doubtful loans and late payments on at least six installments peaked in early 2010 (2.3%) to then fall to 1.6% last year, having been mitigated by the grace period granted by banks and extended to July The use of new technologies to communicate, receive information and boost work efficiency has grown, with an increase in the portion of households that access Internet (62% vs. the European average of 73%) and have broadband connection (52% vs. the European average of 68%). The network is prevalently used to communicate via , search for information on goods and services (means exercised by approx. 70% of users) and access banking services (over 30% of users). Current accounts authorised to operate via Internet exceed 17 million 3 (over 50% of the total) with the most frequent transactions being statement queries followed by money transfers and top-ups on mobile phones and prepaid cards. The new frontier in latest generation "mobile" devices (smartphones and tablets), which facilitate access to on-line services, constitutes a business opportunity for the banking system which can leverage the development of new technologies to increase productivity, improve response times and reduce internal and customer service costs while growing customer satisfaction and developing customer relations. Welfare state reorganisation enhanced the role of the Third Sector, which can be considered one of the main instruments used in implementing the principle of subsidiarity introduced into the Constitution with the reform of Title V. The Third Sector, which absorbs around 3% of employment and accounts for approx. 2.5% of GDP, represents a set of private organisations focused on producing public goods for the communities and is characterised by the presence of volunteers and the absence of profit-making goals. The sectors developed are mostly in the areas of (i) culture, sports and recreation (ii) social welfare (iii) education and research (iv) health. 3 Source: Italian Banking Association. Data as at February 2012 and in relation to

31 CONSOLIDATED REPORT ON OPERATIONS Financial tensions affecting the third sector are primarily due to short-term loans to finance the time lag between ouflows and revenues. At the end of 2011, bank loans to non-profit institutions (proxy for thethird Sector) came to around EUR 10 bln (+6.4% as compared to 2010). The regulatory framework Agreement between the Italian Banking Association and Consumer Associations: Extension of deadline to 31 July 2012 for submission of applications for the 12-month suspension of mortgage repayments on the purchase of a first home for households who have experienced an adverse event (job loss, temporary lay-off, death or lack of self-sufficiency). As at 30 November 2011, over 55,000 mortgages had been suspended for an outstanding debt of approximately EUR 7 bln, providing over EUR 420 mln in terms of liquidity to the families concerned. Law 107 of February 2011 ( the Milleproroghe decree ): Tax reforms for mutual funds under Italian law, through the changeover (effective 1 July 2011) from a regime charged to the fund (according to which it is the SGR, ie. investment company, that directly withholds the tax on the value increase that matures daily) to taxation charged to the underwriter calculated on the actual variation in value at the time of divestment compared to the underwriting date. This will put an end to the misalignment between the tax regime of Italian funds (as well as the historic Luxembourg funds) and the one envisaged for harmonised foreign funds. Law 106 of 12 July 2011: For persons with an ISEE (Equivalent Economic Situation Indicator) not exceeding EUR 35 thousand, the standard provides for the possibility to renegotiate mortgages for the purchase or renovation of homes whose initial value was no more than EUR 200 thousand, shifting from a variable to a fixed interest rate and agreeing upon an extension of up to 5 years for the repayment plan. As for new loans to businesses, banks no longer have the possibility to unilaterally modify contractual terms of new loans granted, unless conditions permitting such amendments are defined and set forth from the outset of the contract. As part of payment services, it is expected that, as of 1 January 2012, the beneficiary's account will be credited within one day of receiving the transfer order (two days for paper-based orders). Law 111 of 15 July 2011: Among the urgent measures introduced for financial stabilisation, for the 2011 fiscal year there was an increase in the regional productivity tax IRAP for banks and insurance companies (the new levels of taxation has been set at 4.65% and 5.9% respectively). Law 214 of 22 December 2011 (conversion of Legislative Decree no. 201 of 6 December 2011): Major novelties to banking system standards include: introduction of a maximum threshold (0.5% per quarter) for all-inclusive fees on the provision of credit. In the event of overdrawn amounts (in the absence of credit facilities or surpassing credit limits), a fast facility fee can be charged, commensurate with the costs borne by the bank and determined as a fixed amount. possibility, by the Ministry of Economy, to give guarantees on bank liabilities (issued after the enactment of the Conversion Law) based on capital adequacy assessments carried out by the Bank of Italy. the maximum amount for cash transfers (and bearer passbook accounts) was lowered to EUR 1000, also for the payment of salaries and pensions which, therefore, will have to be made through electronic instruments or current accounts. Within three months from publication of the Law in the Official Gazette (27/12/2011), the Ministry of Economy and Finance, the Italian Banking Association and the Bank of Italy will have to set out the features of a basic payment account, inclusive of a number of free services and transactions as well as a debit card, at no cost to the more disadvantaged segments of customers (such as recipients of minimum pensions and welfare); stamp duty on financial statements for bank accounts and bearer passbook accounts held by natural persons is not payable on average annual balances of below EUR 5,000. For all other persons/entities, stamp duty has been increased to EUR regardless of balance amount; for communications to customers regarding financial instruments, a proportional charge is due of 1 per thousand per year (1.5 per thousand from 2013) on the market or nominal value, with a minimum of EUR and a maximum of EUR 1, (the maximum taxation threshold will be eliminated as of 2013). 31

32 CONSOLIDATED REPORT ON OPERATIONS Law 148 of 14 September 2011: As of 2012, the tax rate on capital income and other financial income was standardised at 20%, with the exception of income from Italian and foreign government bonds, postal bonds and long-term saving plans specifically established, which will continue to be taxed at 12.5%. Income on pension funds will continue to be taxed at 11%. Law Decree 1 of 24 January 2012: The deadline within which banks are to find ways of reducing interbank fees charged to retailers accepting credit and debit card payments has been extended to 1 June 2012 (if measures are ineffective, a Government decree will be issued). Furthermore, since a life insurance policy is one of the conditions for a loan facility, banks are required to submit estimates to their customers from at least two different companies. Banking activities and Group market shares The performances of leading banks were especially conditioned by the following events: trend reversal in the economic cycle; the sovereign debt crisis which, in the second half of 2011, directly involved Italy; the further decline in saving propensity due to the stagnation of real income, the employment crisis and tighter taxation; financial and economic difficulties of families and businesses. Against this backdrop, traded volumes showed signs of decelaration while interest rates continued on the upward trend that began in the second half of Banking industry: Loans and direct funding - annual change (%) at end of period Retail and Corporate Interest rates - % 7 4 4,5 Active (left hand scale) 4,25 Funding (right hand scale) ,6 3 Loans 3,75 Direct funding 1 dec 10 mar-11 june 11 sept ,5 dec 10 mar-11 june 11 sept 11 1,2 Direct funding at banking system level ended 2011 with an average increase of +2.2%, slightly lower than the figure registered at the end of 2010 (+2.9%). The result was penalised by the drop in current accounts (-2.8% for the year at the end of 2011) and by the slowdown in repos while it benefitted from the boost in bonds and other forms of deposits. The fall in current account deposits was affected by the partial shift towards forms of guaranteed cash investments with higher yields, such as time deposits and bonds; the trend in repos is largely the result of reduced operations with central counterparties which, in turn, reflects the increase in ECB liquidity. The Group's market share for direct funding remained stable in the region of 7.9% for the year, in line with end-2010 levels. Net flows on indirect funding were negative, having been penalised by the lower saving propensity of households as well as tensions in the stock and bond markets. According to the provisional monthly data by Assogestioni, mutual fund flows were negative by over EUR 30 bln, with outflows affecting all product categories particularly bonds and monetary markets (approx. - EUR 25 bln overall), having been weighted down by sovereign debt risk and low returns. Assets under management slumped by more than 10% for the year, reflecting, among other things, the performance of financial markets. The market share for Group-distributed products stood at 4.83% at year-end, in line with 2010 levels. The cautious stance adopted by savers is also evidenced by the trends in retail assets under management which registered a negative net funding (- EUR 10 bln), with a decrease in volumes of over 16% on an annual basis. The Group's market share remains stable at around 3.3%. 32

33 CONSOLIDATED REPORT ON OPERATIONS With regard to bankassurance life insurance, net funding was approx. EUR 8 bln in the first three quarters of the year, boosted by traditional policies; new annual production registered a sharp fall (approx. -34%) which affected all product categories. In terms of volumes, the decline was limited (less than 1% for the year), with a drop in linked policies and an increase in reserves relating to traditional produts (approx. +6%). AXA-MPS's market share in the new bankassurance business stood over 6.6% (annual cumulative figure). Bank loans ended 2011 with an average growth in the region of +4.2% (+3% the value registered in 2010), with levels in excess of +6% at the start of the year and a slowdown in the closing months of the year (up to +1.5% in December); growth momentum consistently remained at least one percentage point above the annual growth rate registered in the Eurozone. The sluggish pace registered in the final part of the year affected both the short-term component (from +5.2% at the end of 2010 to +0.6%) and the medium-long term component (from +3.6% to +1.9%) and was largely the result of loans to financial companies (YoY decline since July) as well as loans to households (from +7.3% YoY in December 2010 to +4.3%), which were weighted down by the drop in home purchase loans (-7% YoY in the first three quarters). The ratio of household debt to disposable income remained fairly stable at around 66%, a level far lower than the Eurozone average which is almost 100%. The weight of debt servicing has remained largely unchanged, standing at 10.8% in Q Loans to non-financial companies continued to show growth rates of around 5% throughout 2011 (with the exception of December when a +3.1% was registered), with the main contribution coming from short-term loans (from +6.1% for the year in January to +5.1%), while medium-long loans showed more limited growth (from +3.4% to +1.9%). These trends were largely affected by the lower self-financing capacity of businesses and the adverse prospects for growth for fixed investments. The Group's market share for lending remained stable in the region of 7.6% for the year, in line with end-2010 levels. Credit quality continued to be affected by the difficult economic scenario. In the first three quarters of the year, the rate of impairment remained high (at around 1.8%) though it was down from the same period in 2010 when it reached 2%. In the last quarter of 2011, preliminary information reports a sharp rise in non-performing loans and the rate of impairment, which may have returned to above 2% with an increase that has affected both households and businesses. Between January (which saw discontinuity in the time series) and December, the stock of non-performing loans increased by over EUR 16 bln, accounting for 17.6% of the aggregate. The ratio of nonperforming loans to total loans climbed to 2.9% (2.4% at the end of 2010). Bank interest rates have increased, largely reflecting the escalation of tensions surrounding the government bonds market and, in turn, the growing difficulties in wholesale funding, as well as the increase in risk premiums on credit facilities granted. The deposit rate rose by 39bps in the course of the year, reaching 1.08% (+24 bps current accounts, +148 bps deposits with agreed maturity, repos +119 bps). As for bonds, the rise in average returns was close to 50 bps, while the yield on fixed-rate issuances was well above 4%, from 3.7% at the start of the year. Increases on interest earned reflect the trend in the cost of funding which shifted from 1.5% at the end of 2010 to over 2% and are also largely related to the performance of yields on Italian government bonds. More specifically, the interest rate on loans went from 3.62% to 4.25%, an increase which mainly affected short-term loans (+1.1 percentage points) and, to a lesser extent, loans to businesses with maturity over 5 years (approx. +50 bps) and those to households for home purchases (+16 bps). In 2011, the average spread between the lending and funding rate came to below 2.2 percentage points, largely stable compared to the previous year. Although the capital base of credit institutions has been strengthened in accordance with the provisions of national and European Supervisory Authorities ( the Tier 1 ratio of five leading banking groups went from 9% at the end of 2010 to 10.2% last September), banks have, nevertheless, been called to submit additional capital strengthening plans. In the first three quarters of the year, the operating profit of major banking groups remained unchanged compared to the same period in The decline in net interest income (-1.4%) was more or less offset by the growth in other revenues; against stable operating costs, operating income was in line with 2010 figures. Provisions and value adjustments increased by over 3% despite the fact that the component relating to credit quality was down by nearly 10%. Overall profitability may be affected by goodwill impairment testing carried out by certain groups. 33

34 CONSOLIDATED REPORT ON OPERATIONS The Group's profit & loss and balance sheet results ln 2011, the entire banking industry was conditioned by an extraordinarily difficult market environment, characterised by a progressive slowdown in economic growth and an exacerbation of the sovereign debt crisis in the Eurozone. As of the second half of the year, these events caused an abrupt increase in credit spreads and the closure of interbank and institutional markets, which led to significant growth in the cost of funding for the banking system and a decline in the demand for loans. At the same time a negative spiral was triggered for both stock prices and Italian government bonds which caused a sharp drop in the value of financial assets held by investors. This scenario also had inevitable repercussions on the activities of the Montepaschi Group. With specific regard to funding and lending trends, 2011 registered a shift in funding sources with the progressive replacement of interbank and institutional funding with corporate and ECB funding. At the same time, trends in interestbearing assets were weak, particularly on the back of the low demand for loans from households and businesses and more selective credit policies, which resulted in a contraction in loan book volumes. An increase was also registered in the NPL share of total loans These funding and lending trends and macroeconomic changes were reflected in the Group's current profit and loss results, with total revenues penalised by the impossibility to immediately transfer the increased cost of funding to yields from interest-bearing assets and by the reduction in lending volumes, at a time when the cost of credit was gradually worsening. A crisis of such vast proportions further reduced the growth prospects of certain business segments in which the Group operates and substantially increased the return required to cover the allocated capital, with negative repercussions on the outcome of impairment tests on goodwill allocated to the various Cash Generating Units (CGUs). Despite this, the Group used every lever at its disposal to counteract the effects of the macro environment and steer the business back to a steady path of growth. Balance Sheet FUNDING FROM CUSTOMERS As at December 2011, the Group's total funding volumes stood in the region of EUR 281 bln, down 7.2% on 31/12/2010 and 4.6% on 30/09/2011 with a fall in both direct funding (-7.2% YoY; -8.7% QoQ) and indirect funding (-7.2% YoY), the latter of which picked up at the end of the year (+0.2% on 30/09/2011): g CUS TOMER FUNDING (in millions of euros ) (*) (*) (*) Chg. % Chg. % 31/12/11 30/09/11 30/06/11 31/12/10 vs 30/09/11 vs 31/12/10 Direct funding 146, , , , % -7.2% Indirect funding 134, , , , % -7.2% assets under management 46,426 47,665 49,375 50, % -8.2% assets under custody 88,124 86,619 93,543 94, % -6.6% Total funding 280, , , , % -7.2% (*) Figures on Direct Funding w ere restated follow ing clarifications provided by Bank of Italy regarding recognition of securities lending w ith collateral other than cash fully ow ned by the lender. More specifically: Direct funding, totalling approx. EUR 146 bln, registered a drop of 7.2% on 31/12/2010 and 8.7% on 30/09/2011, with Group market share remaining at around 7.9%, in line with results at the end of The trend is primarily attributable to the fall in institutional funding, down approx. EUR 8 bln on 31/12/2010, largely owing to wholesale CDs (- EUR 1.5 bln on 31/12/2010) and market repos (approx.- EUR 3.6 bln YoY ), whereas the stock of international bonds remained substantially unchanged with respect to levels at the end of December 2010 (issuances for an amount of approx. EUR 4.6 bln). In terms of corporate funding, volumes were down by roughly EUR 3 bln in the year, primarily on account of wholesale Corporate customers. Consumer funding, on the other hand, rose slightly and was propped up during the year by over 14 bln worth of bond placements. 34

35 CONSOLIDATED REPORT ON OPERATIONS The following table shows a breakdown of major types of direct funding from customers: Direct funding ( /mln) (*) (*) (*) Q/Q change Y/Y change Type of transaction 31/12/11 30/09/11 30/06/11 31/12/10 Abs. % Abs. % Current accounts 62,196 65,502 65,356 65,774-3, % -3, % Time deposits 1,515 2,246 2,188 3, % -1, % Reverse repurchase agreements 14,352 20,731 22,152 17,848-6, % -3, % Bonds 60,265 59,479 60,666 56, % 3, % Other types of direct funding 7,996 12,280 15,250 14,130-4, % -6, % Total 146, , , ,593-13, % -11, % (*) Figures restated, where necessary, following clarifications prov ided by Bank of Italy regarding recognition of securities lending with collateral other than cash fully owned by the lender. Indirect funding, totalling approx. EUR 135 bln, was down 7.2% from 31/12/2010 and up 0.2% from 30/09/2011 on the back of assets under custody. More specifically: - Assets under Management closed the year with volumes over EUR 46 bln in volumes, down 8.2% on 31/12/2010 and 2.6% on 30/09/2011 on the back of: negative market effects on both shares and bonds held, as well as of net outflows primarily in the area of mutual funds, in line with trends in the banking system. A further breakdown of volumes according to a Mifid-based approach structurally aimed at selecting the most suitable investment solutions for customers (products, investment lines, Group and Third-party Asset Management Companies) shows that the prevailing segment is that of life insurance policies, Funds and Sicavs. With regard to the insurance sector, technical reserves came to around EUR 24 bln (-2.7% on 30/09/2011; -6.4% on 31/12/2010;) propped up by over EUR 3.6 bln in premiums collected during the year with Unit-Linked policies accounting for the largest share (1.4 bln) followed by Index-Linked and traditional policies (1.2 bln and 0.9 bln respectively), the latter of which picked up in the fourth quarter. Mutual investment funds and Sicavs, amounting to approx EUR 16 bln, fell 11.8% on 31/12/2010 (-3.9% on 30/09/2011) with a negative net funding of around EUR 1 bln owing to the increase in policy redemptions in the latter part of the year. Assets under management, which saw annual outflows of EUR 655 mln, were down 5% from 31/12/2010 to stand at EUR 6.3 bln, though performance improved from 30/09/2011 (+1.4%). Assets I Fondi Under comuni Management Breakdown as at 31/12/11 Life-insurance policies 51.8% Mutual funds/sicav 34.7% Individual portfolios under management 13.6% - Assets under custody came to approx. EUR 88 bln, down 6.6% on the previous year though picking up on 30/09/2011 (+1,7%) driven by the momentum in deposits from Large Corporate customers. 35

36 CONSOLIDATED REPORT ON OPERATIONS LOANS TO CUSTOMERS Group loans to customers stood at approx. EUR 147 bln at the end of December 2011, down 5.6% on 31/12/2010 and 5.5% on 30/09/2011, owing to the particular selectivity in the disbursement of loans as well as the sluggish economic cycle which especially penalised current accounts and short-term lending. Interest-bearing loans to consumer customers, which were also weighted down by a lower demand in loans to households and businesses mainly conditioned by the fall in real estate market sales, showed a more contained decrease (- EUR 7 bln on 31/12/10 and approx. - EUR 6 bln on 30/9/11) which was concentrated in the latter months of the year. The Group's market share for lending remained stable in the region of 7.6% for the year, in line with 2010-end levels. Loans to customers ( /mln) (*) (*) (*) Q/Q Change Y/Y Change Type of transaction 31/12/11 30/09/11 30/06/11 31/12/10 Abs. % Abs. % Current accounts 14,246 16,407 16,233 15,214-2, % % Mortgages 80,856 82,171 82,789 84,383-1, % -3, % Other forms of lending 34,038 37,378 38,486 39,098-3, % -5, % Repurchase agreements 882 2,052 2, , % 4 0.5% Securities lending 3,106 3,822 3,749 4, % -1, % Impaired loans 13,480 13,231 12,853 11, % 2, % Total 146, , , ,329-8, % -8, % (*) Figures restated, where necessary, following clarifications prov ided by Bank of Italy regarding recognition of securities lending with collateral other than cash fully owned by the lender. The aggregate includes approx. EUR 81 bln in mortgages, which accounts for the predominant form of lending with new contracts in 2011 totalling approx. EUR 5.8 bln. As for special purpose loans which are disbursed by the Group through dedicated product companies, new flows in 2011 totalled approx. EUR 6 bln (-2% YoY), with Q contributing EUR 1.4 bln (+1.5% on Q3 2011). Within consumer lending, disbursements in 2011 totalled EUR 2.7 bln, substantially in line with levels in the previous year (-0.8%), with Q4 contributing EUR 675 mln, up almost 10% on Q3. The aggregate includes a growth in card lending (+22.7% yoy), substantial stability for personal loans (-0.3%) while special-purpose loans were down on the previous year (-16.2%). As for small business and corporate lending, factoring turnover came to approx. EUR 9.1 bln, a sharp increase on the previous year (+38.2%) and up 4.7% n Q3. Special purpose loans and corporate finance EUR mln Chg. 4Q11 vs 3Q11 Chg. YoY 31/12/11 4Q11 3Q11 2Q11 1Q11 31/12/10 Ins. % Ins. % MPS Capital Services (disbursements) 2, , % % MPS Leasing & Factoring incl.: leases negotiated 1, , % % factoring turnover 9,134 2,191 2,093 2,480 2,371 6, % 2, % Consumit (disbursements) 2, , % % 36

37 NON PERFORMING LOANS CONSOLIDATED REPORT ON OPERATIONS As at 31 December 2011, the Montepaschi Group recorded a net exposure of EUR 13,480 mln in terms of non performing loans, accounting for approx. 9.19% of total customer loans. Volumes during the period rose by around EUR 2.1 bln, largely owing to doubtful loans (+957 mln from 31/12/2010) and past dues (+512 mln), whose quarterly performance gradually improved up to the fourth quarter when there was a fall in volumes as compared to the previous quarter. Substandard loans were also up (+444 mln) as were restructured loans (+186 mln). With regard to the quality of performing loans, as at 31/12/2011 the average probability of default came to 2.23%, down 3 bps on 30 September 2011 (2.21 % as at 31/12/2010). CUSTOMER LOANS BY RISK Risk category - Net book values 31/12/11 30/09/11 30/06/11 31/12/10 weight % weight % in million EUR (*) (*) (*) 31/12/11 31/12/10 A) Non performing loans 13,480 13,231 12,853 11, a1) Doubtful loans 6,442 6,348 6,055 5, a2) Substandard loans 4,459 4,269 4,168 4, a3) Restructured loans 1,435 1,443 1,472 1, a4) Past due 1,144 1,171 1, B) Performing loans 133, , , , Total customer loans 146, , , , (*) Figures restated, where necessary, following clarifications prov ided by Bank of Italy regarding recognition of securities lending with collateral other than cash fully owned by the lender. As at 31 December 2011, coverage of non performing loans came to 41.4%, growing by approx. 50 bps on 30/09/2011 (41.8% as at 31/12/2010), continuing to be commensurate and in line with the Montepaschi Group's traditional coverage levels. With respect to doubtful loans, coverage stood at 55.5% (vs 56% as at 31/12/2010), while the substandard loan coverage ratio came to 22.2% (vs 21.1% as at 31/12/2010). PROVISIONING RATIOS 31/12/11 30/09/11 30/06/11 31/12/10 "provisions for non performing loans" / "gross non performing loans" "provisions for substandard loans" / "gross substandard loans" 41.4% 40.9% 40.7% 41.8% 22.2% 20.6% 20.3% 21.1% "provisions for doubtful loans" / "gross doubtful loans" 55.5% 55.2% 55.4% 56.0% The table below reports the figures for the Group's major companies, within which BMPS and BAV show a provisioning ratio for doubtful loans which, on average, stands at around 58.7%. For an accurate interpretation of the details contained in the table, it should be noted that Doubtful loans under litigation are normally written down by direct amortisation also, while mid-long term loans are generally supported by collaterals thus requiring more limited provisioning. This is particularly evident in MPS Capital Services (Doubtful loans coverage came to 34.4%), whose business is mainly characterised by the disbursement of mortgage loans: DOUBTFUL AND SUBSTANDARD LOANS BY BUSINESS UNIT Risk category - Net values at 31/12/2011 Group BMPS BAV MPS Capital Services Banca per le Imprese MPS Leasing & Factoring Consum.it Biverbanca in million EUR Doubtful loans 6,442 3, , % of total customer loans 4.39% 2.88% 4.67% 11.48% 3.33% 2.33% 3.15% "loan loss provisions" / "gross doubtful loans" 55.5% 58.6% 59.5% 34.4% 62.6% 76.6% 64.5% Substandard loans 4,459 2, % of total customer loans 3.04% 2.27% 1.61% 5.41% 5.78% 1.21% 2.31% "loan loss provisions" / "gross substandard loans" 22.2% 23.9% 23.0% 16.0% 17.7% 38.0% 20.7% 37

38 CONSOLIDATED REPORT ON OPERATIONS With regard to gross performing loans, provisions continued to stand at around 0.6%, substantially in line with levels as at 31/12/2010. As for the management of the Doubtful loans book, which is assigned to the Group company specialising in this area, MPS Gestione Crediti Banca S.p.A., recoveries totalled EUR mln (-9.0% YoY), of which EUR mln in Q4 (+60.3 % on Q3 2011). THE GROUP'S SECURITIES AND DERIVATIVES PORTFOLIO As at the end of December 2011, the Group's portfolio of securities and derivatives came to EUR 38 bln with Italian government bonds (approx. EUR 26 bln) accounting for approx. 61%, mainly included under accounting category AFS (80%) and, to a lesser degree, under HFT (18%). The breakdown reflects the Group's strategic aim of boosting interest income through investments, both strategic and short-term, within a market framework that continues to be characterised by a steep yield curve. Securities portfolio (excluding derivatives): breakdown by issuer class Breakdown of Italian government securities portfolio 2% 1% 14% 16% 69% Government and central banks Other public istitutions Banks Other issuer class 18% 80% Available for Sale (AFS) Held for Trading (HFT) Loan and Receivable (L&R) The Group's portfolio remained stable compared to 31/12/2010 with a rise of approx. EUR 1.1 bln in the AFS accounting category due to strategic investments in Italian government bonds made in the second quarter of 2011, offset by a similar reduction in L&R securities. Volumes in Q4 fell by approx. EUR 2bln, largely owing to the depreciation of financial assets following the trends in Italy's spread: PORTFOLIO OF TREASURY SECURITIES AND DERIVATIVES ( /million) MONTEPASCHI GROUP Chg. Q/Q Chg. Y/Y 31/12/11 30/09/11 30/06/11 31/12/10 Type of portfolio Abs. % Abs. % Held For Trading (HFT) 1 9,967 10,723 9,744 10, % % Available For Sale (AFS) 2 22,905 23,980 24,935 21,802-1, % 1, % Loans & Receivable (L&R) 3 5,326 5,491 5,465 6, % % Total 38,198 40,193 40,145 38,197-1, % % (1) "Financial Assets Held for Trading" excluding "Loans" and net of the value of derivatives recognised under "Financial Liabilities held for Trading" (2) "Financial Assets Held for Sale" excluding "Loans", including Equity Investments. (3) Securities classified as "Loans and Receivables" posted to "Loans to Customers" e "Loans to banks". With regard to the Group's regulatory trading book, in 2011 market risk in terms of VaR (Value at Risk) 4, showed an overall growing trend that was marked by high volatility particularly in the second half of the year. Tensions recorded in the peripheral European countries - especially with regard to the Italian sovereign debt which began to draw attention as of July and intensified over the last quarter, reaching its peak at the start of November to coincide with the government crisis - heightened the volatility in financial markets across all major risk sectors. In December, the level of VaR returned to values closer to the annual average to stand at EUR mln as a consequence, among other things, of the reduced exposure in Italian government bonds by the subsidiary, MPS Capital Services. The Group s VaR came to EUR mln as at 31 December Market risk in the Group s Regulatory Trading Book, is operationally monitored using VaR (Value-at-Risk), as further explained in the Notes to the Financial Statements Part E Information on risks and relative hedging policies). 38

39 CONSOLIDATED REPORT ON OPERATIONS A look at the Group s legal entities at the end of December 2011, shows that market risk continues to be concentrated in MPS Capital Services (72% of total risk) and Banca Monte dei Paschi di Siena (approx. 25%), with the remaining part attributable to other banks (3%). A breakdown of VaR by risk factors as at 31/12/2011 shows that 56% of the Group s portfolio was allocated to risk factors such as Credit Spread (CS VaR), 21% was absorbed by interest rate risk factors (IR VaR), 16% was absorbed by equity risk factors (EQ VaR) and the remaining 7% by foreign exchange risk factors (FX VaR). During the year, the Group s VaR ranged between a low of 7.19 mln recorded on 3 February and a high of mln on 10 November. On average, VaR stood at EUR mln during the year. The exact figure at the end of 2011 came to EUR mln. 39

40 CONSOLIDATED REPORT ON OPERATIONS INTERBANK POSITION As at 31 December 2011, the Group's net interbank position reached EUR 25.7 bln in funding, up by approx. EUR 10 bln on the previous year and approx. EUR 11 bln compared to 30/09/2011. The performance is due to the increase in ECB funding (+ 20 bln from 31/12/2010; +17 bln from 30/09/2011), particularly in the latter part of the year, through access, among other things, to three-year refinancing transactions promoted by the Monetary Authorities (through the issue of state-backed bonds) in order to address the gradual reduction in interbank funding (approx. -4 bln on 30/09/2011) and replace collateralised funding: At the end of December 2011 the short-term and structural liquidity position showed a non-committed counterbalancing capacity of approx. EUR 9.5 bln (approx EUR 7 bln as at 31/12/2010). CAPITAL FOR REGULATORY PURPOSES AND CAPITAL RATIOS In continuity with the approach adopted at the end of 2010, regulatory capital was estimated on the basis of calculation metrics introduced by Basel 2 (Advanced Internal Rating Based (IRB) and Advanced Measurement Approach (AMA) methodologies for legal entities and portfolios that are subject to validation). The application of internal models is allowed in respect of certain qualitative and quantitative limits from regulatory provisions. In particular, limits are established (so-called floors ), whereby any savings on capital obtained with the internal models is subject to maximums to be benchmarked against the requirements calculated based on previous regulations (Basel I). Such limitations are expected to be eliminated in the future, taking into account the continuous fine-tuning and consolidation of the internal models adopted The floor level on Basel 1 requirements for 2011 was "prudentially" confirmed at 85%. Accordingly, as at 31 December 2011 the Group's regulatory capital stood at EUR 16,503 mln with a TIER 1 of 11.1% (8.4% as at 31 December 2010) and a Total Capital ratio of 15.7% (12.9% as at 31 December 2010) (for further details, please refer to the tables and comments in Part F of the consolidated Notes to the Financial Statements). Regulatory capital (EUR mln) 31/12/11 31/12/10 Chg. % Tier 1 capital 11,649 9, % Tier 2 capital 5,357 5, % Items to be deducted % Total regulatory capital (before Tier 3) 16,503 14, % Total regulatory capital 16,503 14, % Tier 1 Ratio 11.1% 8.4% Total Capital Ratio 15.7% 12.9% 40

41 CONSOLIDATED REPORT ON OPERATIONS In particular, Tier 1 came to approx. EUR 11,649 mln, up by approx. EUR 2,506 mln on (when it was 9,142 mln). Increases in Tier 1 include, in particular, the capital raising completed in July 2011, the share premium reserve, the effects attributable to the sale of part of the Group's real estate used in the business and the elimination of the prudential filter on tax-alignment of goodwill. The more significant decreases include the negative P&L result registered as at 31 December 2011 and the coupon payment on Tremonti Bonds. Tier 2 stood at an approximate value of EUR 5,357 mln, down from the end of 2010 (by around EUR 99 mln) owing to the reduction in positive Tier 2 items, only partially offset by the fall in negative items and in deductions. The elements to be deducted from Tier 1 and Tier 2 totalled approx. 502 mln, up from EUR 455 mln as at 31 December 2010), mainly as a result of the change in value of insurance investees. As a result, the total capital for regulatory purposes came to approx. 16,503 mln, an increase of EUR 14,144 mln as at , resulting from the above-described factors Risk Weighted Assets (RWA) came to approx. 105 bln as at 31 December 2011 (approx. 109 bln as at ). This contraction is the combined result of multiple efficiency drivers in the risk weighting of exposures, the shift in the allocation of risk assets to lower risk and/or more collateralised assets and the lower number of risk weighted assets relating to the deconsolidation of the company Consorzio Perimetro Gestioni Immobiliari. At the same time, the Montepaschi group proceeded with the updates of PD and LGD parameters used in regulatory reporting within the AIRB scope, for banks adopting or intending to adopt advanced risk measurement models, so as to better capture recent loan book trends. Income Statement TRENDS IN OPERATING INCOME: NET INCOME FROM BANKING AND INSURANCE ACTIVITIES: Regarding the development in total revenues from financial activities and services in 2011, the Montepaschi Group achieved a net income from banking and insurance of approx. EUR 5,507 mln, down 1.2% on 31/12/2010. Q contributed approximately EUR 1,268 mln (-5.4% on 3Q2011), and was influenced by negative results in trading/valuation/hedging of financial assets, only partly offset by the growth in basic income sustained by the growth in interest income. FINANCIAL AND INSURANCE INCOME (EUR mln) (*) (*) (*) (*) (*) Chg. 4Q11 vs 3Q11 Chg. YoY 31/12/11 4Q11 3Q11 2Q11 1Q11 31/12/10 Abs. % Abs. % Net interest income 3, , % % Net fee and commission income 1, , % % Income from banking activities 5, , , , , , % % Dividends, similar income and gains (losses) on equity investments % % Net trading income (loss) / valuation of financial assets n.s n.s. Net hedging income (loss) n.s n.s. Financial and insurance income 5, , , , , , % % (*) Figures restated, where necessary, following clarifications prov ided by Bank of Italy regarding recognition of securities lending with collateral other than cash fully owned by the lender. Since the impact of these lending transactions was of low significance until October 2011, adjustments to the quarters were made by a linear estimate of the 2010 effect. Income from banking activities: quarterly trend 1,268 1,341 1,415 1,483 1,406 EUR mln 4Q11 3Q11 2Q11 1Q11 4Q10 41

42 CONSOLIDATED REPORT ON OPERATIONS A closer look at the aggregate reveals the following: Income from banking activities at period-end stood at approx. EUR 5,301 mln (around 5,503 mln at the end of 2010; -3.7%) with Q contributing around EUR 1,341 mln, down 0.6% on the previous quarter. More specifically: - Net interest income came to approx. EUR 3,500 mln, down 2.4% on the previous year. Performance was affected by a reduction in the loan book due to a lower demand for loans from customers and necessary selectivity in lending policies. Net interest income was also impacted by the effects of Italy's higher spreads which translated into higher costs of funding only partially transferable to interestbearing asset yields. Q contributed approx. EUR 931mln. A significant upturn on Q (+6.4%), this was the highest level in the last eight quarters. The trend, also influenced by one-off items (approx. 25 mln), was largely due to loan book repricing (with an impact of approx. 25 mln) and a shift towards ECB funding, which made it possible to contain the increase in the cost of funding.. - Net fee and commission income stood at approx. EUR 1,801 mln, down 6% on the previous year and 10.4% on Q Performance was especially affected by the lower demand for financial products from customers and and reduced lending activities. Net trading income (loss) / valuation of financial assets totalled around EUR 166 mln, an improvement on 31/12/2010 when it stood at - EUR 23.1 mln. The aggregate includes trading income which came to approx. - EUR 9.3 mln, having been penalised by market trends which adversely affected the valuation of held-for-trading assets, especially in the second half of the year. "Gains (losses) on disposal / repurchase of loans, available-for-sale financial assets and financial liabilities" amounted to EUR 172 mln (EUR 59.4 mln as at 31/12/2010), driven by sale of assets in the Available for Sale portfolio and the positive effects from Banca Monte dei Paschi di Siena's buyback of the irredeemable Floating Rate Equity-linked Subordinated Hybrid notes, as part of Banca Monte dei Paschi di Siena's capital increase (impact of approx. EUR 76 mln). Finally, net profit (loss) on financial assets/liabilities designated at fair value came to EUR 3.4 mln (- EUR 30.4 mln as at 31/12/2010), weighted down by changes in value of BMPS bonds, placed with institutional customers, for the part not completely hedged against risk. NET TRADING INCOME (LOSS) / VALUTATION OF FINANCIAL ASSETS (in millions of euros) Chg. 4Q11 vs 3Q11 Chg. YoY 31/12/11 4Q11 3Q11 2Q11 1Q11 31/12/10 Abs. % Abs. % Net profit (loss) from trading n.s % Gains (losses) on disposal/repurchase of loans, financial assets available for sale and financial liabilities Net profit (loss) from financial assets and liabilities designated at fair value n.s n.s % 33.8 n.s. Net profit (loss) from trading n.s n.s. Net income from banking and insurance activities also includes: Dividends, similar income and gains (losses) on investments totalling EUR 72.2 mln (vs. EUR 91.8 mln as at 31/12/2010; Q contributing EUR 9.4 mln), were primarily attributable to gains from investments consolidated at equity with the largest share coming from insurance (AXA-MPS: approx. EUR 57 mln). Net profit (loss) from hedging: - EUR 32 mln (-0.6 mln as at 31/12/2010), mainly owing to the repurchase of cash flow hedged securities. THE COST OF CREDIT: NET IMPAIRMENT LOSSES (REVERSALS) ON LOANS AND FINANCIAL ASSETS Against revenues from the disbursement of loans for the year, in 2011 the Group posted approx. EUR 1,311 mln in net impairment losses (reversals) on loans, with Q contributing approx. EUR 470 mln (vs. EUR 271 mln in Q3 2011), largely affected by the deteriorating macroeconomic backdrop which made planned optimisation actions less effective. The ratio between adjustments for the year and customer loans at year end shows a provisioning rate of 89 bps, higher than the one registered at the end of 2010, within a consistently rigorous framework in terms of provisions. 42

43 CONSOLIDATED REPORT ON OPERATIONS Net impairment losses (reversals) on financial assets was negative by approx. EUR 153 mln (-38.7 mln as at 31/12/2010) mainly due to depreciation of AFS stock and UCITS that became impaired. The value includes impairment for an amount of EUR 17.2 mln of the only Greek Government bond held in the portfolio. As a consequence, income from banking and insurance activities stood at approx. EUR 4,043 mln (approx. 4,377 mln as at 30/06/2010; -7.6%), with Q contributing approx. EUR 741 mln (-25.8% on the previous quarter). COST OF OPERATIONS: OPERATING EXPENSES Operating expenses in 2011 totalled EUR 3,503 mln (+2.1% on the previous year). The aggregate includes higher charges (lease payments) arising from the sale of part of the Group's real estate used in the business, which was completed in Excluding these increases, YoY operating expenses would be down 0.8%. OPERATING EXPENSES (EUR mln) Chg. 4Q11 vs 3Q11 Chg. YoY 31/12/11 4Q11 3Q11 2Q11 1Q11 31/12/10 Abs. % Abs. % Personnel expenses 2, , % % Other administrative expenses (*) 1, , % % Administrative expenses 3, , % % Net losses/reversal on impairment on property, plant and equipment / Net adjustments to (recoveries on) intangible assets % % Operating expenses 3, , % % (*) of which 125 million in higher rental fees resulting from demerger of "Consorzio Perimetro Gestione Proprietà Immobiliari S.c.p.a. Operating expenses: quarterly trend Q11 3Q11 2Q11 1Q11 4Q10 EUR mln 43

44 CONSOLIDATED REPORT ON OPERATIONS More specifically: A) Administrative expenses amounted to approx. EUR 3,307 mln (+1.6% YoY) due to: personnel costs, amounting to approx. EUR 2,195 mln, down 0.7% on 2010 levels. This item benefitted from the structural effects of the process of headcount reduction and rearrangement and actions aimed to step up efficiency in managing spending aggregates; other administrative expenses (after stamp duty and customer expense recovery) came to EUR 1,112 mln, up on the same period of the previous year as a result of increased charges (lease payments) associated with the sale of part of the Group's real estate used in the business which was completed at the end of 2010 (following the deconsolidation of the Consortium company Consorzio Perimetro Gestione Proprietà Immobiliari S.c.p.a. ). Excluding these, the aggregate would have shown a downturn of 5.5% as evidence of the cost synergies obtained from reorganisation and cost management actions. B) net adjustments to PPE and intangible assets amounted to approx. EUR -195 mln, up 11.5% compared to 31 December As a result of the above, Net Operating Income came to approx. EUR 541 mln (-42.8% YoY) with a cost-toincome ratio of 63.6% (61.6% as at 31/12/10). NON-OPERATING INCOME, TAX AND PROFIT (LOSS) FOR THE PERIOD Profit for the period included: Net provisions for risks and charges and other operating expenses (income) (EUR 375 mln, of which 200 mln in Q4 2011), was up by approx. EUR 182 mln (+94%) due to higher provisions for legal disputes, clawback actions and claims (around EUR 96 mln) and charges arising from contractual obligations associated with asset disposals (about EUR 63 mln) and contingent liabilities for approximately EUR 30 mln. EUR 24 mln in losses on investments with respect to a profit of EUR mln in 2010, which was primarily attributable to the capital gain arising from the sale of part of the Group s properties used in the business (approx. EUR mln) and from the Group s disposal to AM Holding of its shareholding in Prima Sgr after closing of the agreement (EUR mln). Integration costs / One-off charges, came to approx. - EUR 26 mln (-19.5 mln as at 31/12/10) and were related to early retirement incentives for employees following the organisational restructuring of Banca Monte dei Paschi di Siena. Gains on disposal of investments amounted to EUR 34.6 mln, primarily accounted for by the capital gain arising from the sale of a commercial office building in Via dei Normanni, Rome. As at 31/12/2010, this item totalled EUR 182 mln and included capital gains from the disposal of banking business (72 branches of Banca Monte dei Paschi di Siena). On the back of these components, profit (loss) before tax on income from continuing operations as at 31/12/2011 totalled approx. EUR 150 mln (roughly EUR 1,489 mln in 2010, which was inclusive of EUR 182 mln in capital gains arising from the disposal of banking business, EUR mln in capital gains from the sale of real estate used in the business and EUR mln from the transfer of the shareholding in Prima SGR to AM Holding after closing of the agreement), with a negative performance of - EUR 453 mln in Q4. PROFIT (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS (in EUR mln) Chg. 4Q11 vs 3Q11 Chg. YoY 31/12/11 4Q11 3Q11 2Q11 1Q11 31/12/10 Abs. % Abs. % Net operating income n.s % Net provisions for risks and charges and other operating expenses/income n.s % Gains (losses) from Investments % n.s. Integration costs / one-off charges % % Profit (Loss) from disposal of branches n.s. Gains (losses) on disposal of investments % % Profit (Loss) before tax from continuing operations , n.s. -1, % 44

45 Profit (loss) for the year was also affected by the following items: CONSOLIDATED REPORT ON OPERATIONS Tax expense (recovery) on income for the period from continuing operations, - EUR 248 mln (vs. approx. -EUR 393 mln in 2010), include higher charges following settlement of a tax dispute with the Italian Revenue Agency. The aggregate was positively influenced by the effects of the IRAP (regional productivity tax) rate increase recognised in June and tax deductions pursuant to legislative decree no. 98 of 6/7/2011 on subsidiaries' goodwill; Profit (loss) after tax from groups of assets held for sale, EUR 17.7 mln, essentially on account of the capital gain arising from the disposal of MPS Monaco SAM and a stake in MPS Venture SGR. Profit for the year attributable to non-controlling interests stood at EUR 3.5 mln (-1.5 mln in 2010). The consolidated net profit of the Montepaschi Group before Purchase Price Allocation (PPA) and impairment of goodwill, intangibles and AM Holding, posts a loss of EUR 77.4 mln (vs. EUR 1,096.2 mln of profit as at 31/12/2010). At the end of 2011, a comparison of the fair value of goodwill to its carrying amount called for impairment adjustments in the amount of EUR 4,514 mln, of which EUR 4,257 mln on goodwill; EUR 222 mln net on intangibles from PPA; EUR 35 mln in depreciation of the stake in AM Holding. The reasons justifying the need for a reduction in goodwill value lie primarily in the new macroeconomic scenario, which was penalised by the sovereign debt crisis, tensions in the main financial markets and persisting uncertainty regarding global economic recovery. Goodwill adjustments (for further details, please refer to the Consolidated Notes to the Financial Statements Section B Consolidated Balance Sheet ) were allocated to the following CGUs: EUR 2,738 mln to MPS Consumer; EUR 935 mln to BAV Consumer; EUR 5 mln to MPS Corporate; EUR 356 mln to BAV Corporate; EUR 223 mln to Biverbanca (MPS Group share). Considering the net effects of PPA (around EUR 94 mln) and impairment, net loss for 2011 totalled EUR 4,685 mln (vs. a profit of mln in 2010). ************* Following is a reconciliation between the Parent Company s and consolidated net equity and profit for the period, in compliance with Consob instructions. Reconciliation between Parent Company and Consolidated Net Equity and Profit (Loss) for the year Amounts /000 Shareholders' equity Net profit (loss) Balance as per Parent Company's Accounts 9,406,929-4,644,378 including Parent Com pany's valuation reserves -3,843,321 Impact of line-by-line consolidation of subsidiaries 1,591, ,876 Impact of associates 120,584 67,728 Reversal of dividends from subsidiaries -72,500 (*) -311,993 Effect of write off of depreciation/revaluation of equity investments -276, ,578 Other adjustments 4, Subsidiaries' valuation reserves -10,680 Consolidated balance 10,764,535-4,685,274 including valuation reserves -3,854,001 (*) Interim dividend paid out by MPS Ireland 45

46 CONSOLIDATED REPORT ON OPERATIONS Financial highlights and main activities of the Business Segments In the interest of identifying its reportable Business Segments as provided for by IFRS 8, the Montepaschi Group adopted a business approach that selected the main business sectors into which the Group s business operations are organized (and whose results are periodically reported to the highest decision-making levels) as the basis of representation for a breakdown of its income/capital aggregates: Consumer banking, Corporate banking and the Corporate Centre. These business segments coherently aggregate the Group's different organisational units as at 31/12/2011, as outlined below (for further details please refer to the Consolidated Notes - Part L Segment reporting ): Consumer banking Corporate banking Corporate Center Divisionalised entities BMPS + BAV Sales & distribution networks Financial advisory Family Office Consum.it Direct markets Product companies MPS Fiduciaria Retail Private Divisionalised entities BMPS + BAV Sales & distribution networks Product companies MPS Capital Services MPS Leasing & Factoring MPS Banque MP Belgio Foreign network P.M.I. Enti e P.A. Grandi Gruppi Non-divisionalised entities Biverbanca Banca Popolare di Spoleto (*) Service companies MPS Gestione Crediti Banca Group Operating Consortium MPS Immobiliare Minor companies and Corporate Center Finance (*) Up to 31/03/2011; Consumer banking division In Q2 2011, the organisational scope of the Consumer banking division was altered to no longer include the investee, Banca Popolare di Spoleto, whose results - consolidated using the proportional method - are now allocated to the Corporate Centre. In view of this change, the comparative data for 2010 has been recalculated with respect to the values published in the Consolidated Report on Operations as at 31/12/2010. SEGMENT REPORTING - Primary segment (EUR mln) December 2011 Consumer Banking Corporate % chg yoy % chg yoy Banking Corporate Center % chg yoy Total Reclassified Group % chg yoy PROFIT AND LOSS AGGREGATES Financial and insurance income 3, % 1, % % 5, % Net impairment losses (rev ersals) on loans and financial assets % % n.s. 1, % Operating expenses 2, % % n.s. 3, % Net operating income % % n.s % BALANCE SHEET AGGREGATES Interest-bearing loans to customers 62, % 68, % 9, % 140, % Deposits from customer and debt securities issued - Distribution network (*) 76, % 21, % 47, % 146, % Indirect funding - Distribution network 66, % 39, % 27, % 134, % PROFITABILITY RATIOS Assets under management 41, % 1, % 3, % 46, % Assets under custody 25, % 38, % 24, % 88, % Cost Income 71.6% 34.2% 63.6% Raroc 14.5% 12.8% - 4.9% (*) Values relating to the Consumer banking division reflect data from the BMPS and BAV distribution networks The more significant business aspects concerning the Business Segments in 2011 will be reported in the following pages. 46

47 Consumer Banking Areas of business CONSOLIDATED REPORT ON OPERATIONS Funding from and provision of financial and non- financial services (among other things through the management of electronic payment instruments) to Retail customers (Family, Affluent and Small Business segments); Consumer loans; Services and products for Private customers in the areas of wealth management and financial planning, advisory on non-strictly financial services (tax planning, real estate, art & legal) and financial advisory. Target customers The Consumer banking division Includes over 5.7 million customers, distributed across the country with a stronger presence in the areas of central Italy. Within this client segment, the largest share (70.6%) is made up by Consumer households (Family), who mainly apply for credit facilities (consumer loans and mortgages) and investment services for smaller portfolios. This is followed by clients with larger portfolios (21.8%) who require a more customised approach (Affluent), small businesses (Small Business, 6.9%) and high-net worth (Private) individuals who make up 0.7% of total clients. To provide a complete overview of the Consumer banking division, the Family Office segment specifically involves a direct management of the customer so as to create and consolidate long-term relations with high-worth families while offering a tailored service that covers all of their financial and non-financial assets and provides "value-protection" through careful planning of inter-generational transfers. Consumer customer - base geographic breakdown South; 32.6% Northeast; 16.6% Northwest; 16.4% Affluent 21.76% Private 0.65% Consumer customers breakdown Family Office 0.03% Small Business 6.94% Middle; 34.3% Family 70.62% 47

48 CONSOLIDATED REPORT ON OPERATIONS Profit &Loss and Balance-Sheet results As at the end of 2011, the distribution network of the Consumer Banking division posted approx. EUR 144 bln in total funding, down 3.1% on the previous year (-0.8% on 30/09/2011). The aggregate includes direct funding, mainly from on-demand items and bonds, which came to approx. EUR 77 bln, stable with respect to both 31/12/2010 (+0.3%) and 30/09/2011 (-0,2%). Indirect funding, totalling approx. EUR 67 bln, was down 6.8% YoY (-1.5% on 30/09/2011), as it was affected by the downturn in assets under custody (-4.1% YoY; stable on 30/09/2011) and a reduction in revenues from bancassurance and Funds/Sicavs which held back growth in assets under management as well (down 8.4% on 31/12/2010; -2.4% on 30/09/2011). With regard to credit management, "interest-bearing loans which stood at EUR 63 bln, were down 3.5% on the previous year (-2.3% on 30/09/2011), primarily on the back of low demand for loans from households and businesses which determined a more significant downturn in medium-long term forms of lending in the last part of C ONS UME R BANKING - BALANC E S HE E T AGGRE GATE S 0 0 (million of E uro) 31/12/ vs 2010 DE POS ITS FROM C US TOME RS AND DE BT S E C URITIE S IS S UE D - DIS TRIBUTION NE TWORK(*) 76, % As s ets under management 41, % As s ets under cus tody 25, % INDIRE C T FUNDING - DIS TRIBUTION NE TWORK 66, % TOTAL FUNDING - DIS TRIBUTION NE TWORK 143, % AC TIVE LOANS TO C US TOME RS 62, % (*) Franchise of Banca Monte dei Paschi di Siena and Banca Antonveneta Consumer banking - Distribution network Direct funding breakdown 7% 7% 2% 12% 72% Family Affluent Small Business Private Direct markets Consumer banking - Distribution network Indirect funding breakdown 38% 23% 33% 6% Bancassurance Assets under management Mutual investment funds/sicavs Asset under custody Consumer banking - Distribution network "Active" loans to customers breakdown 1% 31% 13% 55% Family Affluent Small Business Private In terms of Profit and Loss, the basic income in Consumer banking exceeded EUR 3.1 bln in 2011, an increase of 1.4% on the previous year. The increase was driven by the growth in interest income (+5.7% YoY), which offset the decrease in net fee and commission income (-4.1% YoY) due to lower revenues from loans and lower continuing fees on financial products (reflecting the reduction in volumes of assets under management). As for cost items, a decrease in operating expenses (-2.1% YoY) was again recorded in 2011 while adjustments for impairment of loans and financial assets increased by 15.3% as a result of the ongoing economic and market 48

49 CONSOLIDATED REPORT ON OPERATIONS distress. As a consequence of the above components and of the contribution from "Other revenues" (EUR 78 mln vs. 23 mln in 2010), Consumer banking posted a Net Operating Income of EUR mln, with cost-income at 71.6%. C ONS UME R BANKING - PROFIT AND LOS S AGGRE GATE S (million of E uro) 31/12/ vs 2010 Net interes t income 1, % Net fee and commis s ion income 1, % Other income % INC OME FROM BANKING AND INS URANC E 3, % Net impairment los s es (revers als ) on loans and financial as s ets % Operating expens es 2, % NE T OPE RATING INC OME % Consumer banking Breakdown of revenues Consumer banking - Distribution network Breakdown of revenues 1% 10% 4% 89% Distribution network Direct markets Product companies 37% 31% 28% Family Affluent Small Business Private PERFORMANC E OF C OMPANIES REPORTING TO THE C ONS UMER BANKING DIVIS ION (million of E uro) 31/12/ vs 2010 C ONS UM.IT (net profit for the period) % MPS FIDUC IARIA (net profit for the period) % 49

50 CONSOLIDATED REPORT ON OPERATIONS Sales and distribution strategy Within a context characterised by a persisting economic crisis, tensions on the financial markets, reduced purchasing power of household salaries, lower investments by small businesses and new regulations (taxes, pensions, traceability of payments, etc.), the Consumer banking division pursued its sales and distribution strategy by operating along the guidelines summarised in the table below and illustrated in detail in the following pages: CONSUMER BANKING DIVISION THE SURROUNDING CONTEXT THE SURROUNDING CONTEXT THE SURROUNDING CONTEXT Persisting economic crisis with repercussions More attention paid to the cost of Development of Self Service -type on the real economy in terms of: reduction services and increasing interest in more products; in the purchasing power of salaries, lower functional bank relationships; Wealth management; saving power of families, reduced revenues Increased use of alternative channels; for companies. Protection and pension; Preference for less risky, shorter term savings and investment products. Support to -and quality of- lending. Highly volatile markets. New tax and pension legislation. The Save Italy decree: new legislative provisions particularly on the traceability of payments and methods for payment of salaries and pensions by the Public Administration. Customers need more support from the bank to make choices in line with the current economic cycle for the purpose of safeguarding their property and lifestyles in the medium-long term. More attention paid to protection and pension issues. Increased use of alternative channels and e-money. Wealth management and advisory; Protection and pension.. Protection and pension. Development of Self Service -type products; Expansion of e-money product offering; Growth of the customer base. Main initatives Customer base expansion and 'Full Potential' development Marketing of Conto Zip (with 57,488 accounts opened by new customers with BMPS and BAV as at the end of the year), which obtained the 'Cerchio d Oro' award for Financial Innovation promoted by AIFIN. Roll-out of the Conto Italiano Zip Base, a low-cost account for new traditional low-transaction customers, which was launched in January 2012 in all of the Group's banks; Redefinition of the marketing strategy for current accounts, with product offerings and relationship approaches differing according to the customer cluster. Against this framework, the Conto Italiano Il conto a km zero ('zero km account')" provides an umbrella brand to the Group's offering of current accounts on the market. The name "Conto Italiano" and the graphic design of the logo (with the colours of the Italian flag) evoke the concept of 'italianness' which has distinguished our Bank's position on the market since 2007 (with the advertising campaign "Una storia italiana dal 1472 (An Italian story since 1472)". The zero km headline is evocative of the Italian excellence and financial safety of our products, which are in no way related to the risks of the international creative and speculative finance which have been stigmatised by the global crisis. A new current account for families has been added to the product range. Branded as Conto Italiano per Noi, it will be launched in parallel with the start of the advertising campaign in the first quarter of Launch of the Tuttofare Giovani personal study loan for university students, young people interested in training courses, graduates intending to attend specialisation master programmes. Combined offerings of loans and current accounts at special conditions for Consum.it customers. As of the second part of the year, these initiatives were enhanced with a combined offering of basic services for protection and investment, aimed at making the return on current account deposits more rewarding. Implementation of customer loyalty campaigns through measures including, among other things, direct crediting of salaries. 50

51 CONSOLIDATED REPORT ON OPERATIONS Launch of the referral initiative Uno di Noi (One of Us), enabling all Group employees to deliver a form to friends and relatives to sign up for current accounts and ancillary services at particularly favourable conditions; Initiatives to meet the needs of pensioners and Public Administration employees who, as a result of newly introduced regulations, will need to have their pensions channelled to bank accounts or prepaid cards. Cross-selling initiatives to spur synergies between different market segments. Marketing campaigns for different forms of deposit (repos, time deposits, certificates of deposit) with priority given to initiatives aimed at inflows of new funds. Credit support and quality of lending Personal loan and customer support solutions for the definition of sustainable repayment plans that are better in line with household spending budgets. Support to customers in temporary financial difficulty, with the Group participating in banking system initiatives (Family Plan) and implementing independently developed projects (Fight the Crisis), which, as at 31/12/2011, saw the suspension of repayment plans for 6,110 mortgage loans (for an overall outstanding debt of approx. EUR 670 mln) and about 5,000 personal loans for a total amount exceeding EUR 7.5 mln. Initiatives aimed at increasing short-term consumer lending. Continuation of actions aimed at safeguarding Credit Quality. Hedging of financial risks to protect small-sized enterprises from unfavourable market rate trends. The internal sales policy provides for the underwriting of OTC derivative contracts to be strictly correlated with the underlying loans in terms of duration, nominal amount and interest rate index. Support to small businesses through the Time Out programme, with a grace period applied to 9,822 mortgage loans groupwide (for a residual debt of approx. EUR 3.2 bln as at 31/12/2011) and 1,401 unsecured loans (for a residual debt of roughly EUR 177 mln as at 31/12/2011). A Special Mention for Local Support was awarded by the Italian Banking Association to the product Time Out during the first edition of the Award for innovation in banking services at the ABI Lab forum held in Milan on 24 March The Group was recognised for pioneering the introduction of a series of anti-crisis measures and, in particular, a suspension of instalment payment of principal for medium- and long-term loans. Package of products on offer for small-sized tourism businesses including short- and medium-term unsecured loans for the renovation and improvement of tourism infrastructures and mortgage loans for the purchase or construction of hospitality facilities (including the purchase of buildings). Launch of the Mutuo Natura mortgage loan for the purchase or restructuring of high energy performance buildings in compliance with bio-energy criteria. The loan was conferred the "Product Innovation Award" by the Italian financial weekly Milano Finanza" in Credit facilities for investments aimed at purchasing photovoltaic stations (solar energy) for electrical power generation. Wealth management and advisory Time deposit ceilings and offering of short-term bonds. Extension of the multi-line system to wealth management with prior consent (GPA). Initiatives aimed at boosting the funding capacity of the Small Business segment. Completion of the roll-out of the new MPS Advice platform to all 'consumer' market segments and Group banks (BMPS, BAV and Biverbanca) and development of additional protection/pension advisory services for the Family Office and Financial Advisory markets. A total of nearly 223,000 advanced advisory proposals were formalised in 2011 (+8% YoY). 51

52 CONSOLIDATED REPORT ON OPERATIONS Release of a new Bond segment with periodic payment of coupons (Bond 2016 Multicorporate 2) and three new segments with secured capital at maturity (Protetto 100 Cedola BRIC 2016, Protetto 100 Energia Pulita and Protetto 100 Cedola BRIC 2016/2). Integration of the existing catalogue with new vehicles (e.g. Ubs Equity Sicav, Fidelity Fast) and new investment houses for the markets of Financial Advisory (Aviva Investors, Swiss & Global and the Anima Sgr fund "Anima Traguardo 2016 Cedola 3") and Family Office (Carmignac, Lemanik and Russell Inv, New Millenium, Kairos). Advisory in the area of high-networth financial planning and 'inter-generational' transfers Expanding the range of e-money instruments on offer Promoting the use of payment cards and related functions available on Group ATMs, partly through prize competitions and information-providing tutorials. As at 31/12/2011, the stock of payment cards distributed by Banca Monte dei Paschi di Siena, Banca Antonveneta and Biverbanca came to approximately 3.3 million (debit cards 47%; charge cards 31%; prepaid cards 19%; revolving credit cards 3%). Promoting the use of the POS service despite the challenging macroeconomic scenario which has caused a number of store closures. As at 31/12/2011, the number of POS terminals installed at retailer outlets was in the region of 126,000 (-3.5% YoY). Development of Self Service channels. The Distribution Network continues to work on increasing the awareness of customers on the use of remote channels. Upgrade of the Internet Banking platform in close connection with development of Customer Relationship Management (CRM) tools. The Trading Online (TOL) environment has been redesigned to be more competitive. Specific testing has ensured I-Phone accessibility of the Mobile Banking application to visually impaired users. Protection and Pension Marketing of the Valore Autonomia insurance policy, an innovative product in the banking industry that ensures a life annuity to customers in the event of their permanent loss of self-sufficiency. Use of the AXA MPS Mia Protezione operating platform, which allows up to 15 customised solutions to be managed under one single insurance coverage account as per customer needs, with the possibility of escalating discounts on insurance premiums. Marketing of automobile liability insurance policies through the Group's franchise. The AXA MPS Personal and Property Protection insurance offering was confirmed to cover for property damage of businesses, personal damage caused to the key man and, as of the fourth quarter of 2011, to employees as well, through the Infortuni Business (Business Injury) policy for protection from occupational risk. Direct Marketing sales approach for the insurance product AXA MPS Pronto Tutela, a policy which provides a per diem allowance in the event of hospitalisation due to injury, together with significant coverage for the reimbursement of any legal fees incurred and additional indemnities. Release of the product AXA MPS Business Injury Protection, an insurance policy for businesses (including free-lance professionals, self-employed workers, small businesses) providing coverage for both occupational and non-occupational injuries; the policy also makes it possible to insure the employees of the company subject to different maximum limits. 52

53 CONSOLIDATED REPORT ON OPERATIONS Release of the AXA MPS Injury Protection policy, specifically designed for Family and Affluent current account holders. Available in a Basic and Advanced version, it provides for different indemnities based on the policy holder's current account balance and pre-determined crediting transactions (in its "Advanced" version, the policy also correlates the indemnity to current account debiting transactions). Marketing of the automobile liability insurance policy AXA MPS Guidare Protetti. Restyling of the single-premium fire insurance policy AXA MPS Mutuo Sicuro Incendio now on offer in combination with all mortgage loans for consumer customers. Release of the product, AXA MPS Mia Protezione (My Protection), an innovative multi-line property & casualty policy which stands as the flagship product of the Group's insurance offering for New product features, such as the Life Cycle, added to the 'AXA MPS previdenza' open-ended pension funds. Launch of the new services, MPS Advice Protezione, with a view to offering customers Property and Casualty protection advisory and MPS Advice Previdenza, which makes it possible to conduct an analysis of the customer's pension gap and offer advisory services to optimise the client's position through customised proposals. 53

54 CONSOLIDATED REPORT ON OPERATIONS Companies reporting to the Consumer banking division Consum.it The consumer credit market in 2011 was characterised by the following main factors: Growth in Personal Loans (+4.3%); Decrease in car loans (-9.9%) to just below the levels of 2010, a good second half of which, however, benefitted from the final wave of incentives for the automotive industry; Downturn in Fifth-of-salary backed loans" and "Other special-purpose loans", with disbursements down 9.0% and 5.8% respectively in 2011; Stable performance of Optional/Revolving credit cards (+0.5%), even though at historically low levels. Within this context, the wide range of products offered by Consum.it to its customers was a determining factor: at a time when car loans (-20.3% on 2010), other special-purpose loans (-9.8%) and personal loans (-4.1%) were being weighted down by a delicate market phase and product policy restrictions (both in pricing and lending terms) while the revision of regulations on revolving cards (-8.4%) continued to limit potential channels of development, it was precisely the latest additions to the product range such as Option cards (+46.1%) and Fifth-of-salary backed loans (+23.8%) that propped up overall disbursements, tapping into the opportunities that these segments present. In 2011 Consum.it disbursed new loans for an amount of approximately EUR 2.7 bln, basically in line with the previous year (-0.8%), consolidating its competitive position CONSUM.IT at 5.27% of the sample surveyed by the Italian Consumer Lending by type of facility as at 31/12/2011 Credit Association (Assofin), despite the market downturn tracked during the year by the association itself. A breakdown Specialpurpose loans by type, reveals that the share of fifth-of-salary backed loans 21% has risen from 8 to 10% to EUR 272 mln. An increase from 9 Personal loans and fifth-ofsalary backed to 13% to a total of EUR 342 mln was also registered in Cards 19% loans 'Option' cards. Personal loans were down (totalling EUR 60% 1,353 mln they are still the primary segment, but were down from 52% to 50%) as were car loans (down from 15% to 12% to a total of EUR 331mln) and other special loans (down to 9% from 10%, to a total of EUR 239 mln). Revolving cards were stable at around 6% of the total. The multi-channel approach of the Consum.it model proves to be an additional winning factor, as it matches the distribution power of the Group (by far the main channel, with over EUR 1,515 mln worth of new loans in 2011) with the growth potential of dealers (in special-purpose loans) and other intermediaries in the business of Personal Loans and Fifth-of-salary backed loans. Of particular significance is the ability shown by the company in expanding the Group's customer base (almost EUR 317 mln through Direct Marketing in 2011). As at the end of 2011, there were about 854,900 customer accounts (one third of which managed by Consum.it on an exclusive basis) with business in the year registering 228,700 new customers for he year. Meanwhile, 172,400 customers who, at the end of 2010, held credit facilities expiring in 2011 did not enter into any new loan contracts. MPS Fiduciaria Banca Monte dei Paschi di Siena continued to be the main distribution channel in 2011, with excellence shown particularly in the Family Office and Financial Advisory segments. Trusts, a segment which had trended downward in 2010, has revived the interest of customers for this 'separation of control' special-purpose instrument as shown by the Network with new customer acquisitions, some of which are currently being finalised. The growth trend of MPS Fiduciaria was influenced by the reorganisational activity carried out at the beginning of 2011, which made it possible to: - strengthen the internal advisory and organisational support units, thereby achieving higher service standards; - define the company's sales and distribution plan; 54

55 - plan and monitor information-sharing and training activities; - channel the network's demand for non-financial advisory services to Monte Paschi Fiduciaria. CONSOLIDATED REPORT ON OPERATIONS 2011 also saw the opening of an office in Milan and the new headquarters in Rome. These locations are deemed strategic for the company's advisory-based business. Assets under trust amounted to EUR 2, as at the end of 2011 and accounts totalled approximately 2,260. The strategic partnership with AXA As in previous years, fruitful consolidation activities continued in 2011 with a view to strengthening the strategic partnership between the Montepaschi Group and the AXA Group in the areas of life and P&C bancassurance and supplementary pension schemes. This collaboration was centred around an in-depth revision and innovation of certain products in the AXA-MPS catalogue and the addition of new ones in the area of life and P&C insurance. In this latter segment, the most notable novelties were the rollout across the distribution network of P&C car insurance policies and the introduction of a 'multi-guarantee' policy designed to provide tailormade solutions for customers with more advanced requirements. Particular focus was given to raising protection and pension awareness of both the distribution network and customers through a wide series of training and information-sharing initiatives and events. The variety of activities pooled together by the Joint Venture has made it possible for both companies to consolidate the AXA-MPS market share in the industry of their choice. In particular, an increase was registered in the market share of life insurance policies, branch 3 (unit linked from 4% to over 6%, index linked from 20% to 35%). In the supplementary pension segment, AXA-MPS ranks third amongst competitors both in terms of number of policy-holders (8.82% market share) and net worth (market share of 6.27%) and stands out as the first player in terms of number of new underwriters of open-ended pension funds. Corporate Banking The Corporate banking division oversees the Group's business strategies targeted to Small/Medium Enterprises, Institutions and Public Administration as well as legal persons consisting in Large Corporate groups and financial institutions having a particularly significant annual turnover or otherwise characterised by specific needs and operational complexities. As at 31/12/2011 the customerbase consisted in 78,600 clients (primarily SMEs), mainly concentrated in Northern Italy but with a significant footprint in Central Italy also. Corporate customer - base geographic breakdown South; 21.5% Northeast; 24.1% Middle; 31.8% Northwest; 22.6% Istitutions 18.02% Corporate customers breakdown Large Corporate 2.05% Istitutional customer breakdown Istitutions - Public Administration 25.0% Key Client SMEs 22.30% Large Corporate customers breakdown Key Client Istitutions 0.56% SMEs 79.93% Istitutions - Third Sector 64.8% Istitutions - Public Utilities and Financial Istitutions 10.2% Financial Istitutions 9.25% Industrial Groups 67.89% 55

56 CONSOLIDATED REPORT ON OPERATIONS The division is active in corporate banking through its offer of several financial products and services in terms of lending as well as forms of strategic collaboration which include trade associations and Confidi credit guarantee consortia. The placement of products and delivery of services to target customers are ensured through the Group's distribution network which, for more highly-specialised offerings, relies on the support of the product companies who report directly to the division: MPS Capital Services (corporate finance, capital markets and structured finance) and MPS Leasing & Factoring (specialised in the offer of leasing and factoring solutions for businesses). The Corporate banking division is also responsible for the activities carried out by banks and branches abroad to support the business of domestic customers in the foreign markets (especially in emerging or developing countries), with particular reference to the development and completion of internationalisation projects for Small and Medium Enterprises Profit & Loss and balance sheet results As at 31 December2011, volumes of total funding with Consumer and Corporate customers amounted to approx. EUR 62 bln, down 10% on the previous year (-5.5% on 30/09/2011). Direct funding, accounting for approx. EUR 22 bln, slumped 14.3% for the year (-16.6% on 30/09/2011) having been weighted down by shortterm and on-demand funding. Indirect funding, consisting largely in assets under custody, stood at approx. EUR 40 bln (-7.5% on 31/12/2010) reflecting, in particular, the downturn in operations with Large Corporates though some signs of recovery were evident in Q4 (+2% on 30/09/2011). With regard to lending, at the end of 2011 "active loans (excluding NPLs) disbursed by the division totalled approx. EUR 68 bln, falling 9.8% from 31/12/2010 (-6.6% on 30/09/2011) largely owing to the weaker demand for funding by businesses, which not only had repercussions on the activities of the sales network but also on the mid/long term activities of the specialised credit companies. C ORPORATE BANKING - BALANC E S HE E T AGGRE GATE S (million of E uro) 31/12/ vs 2010 DE POS ITS FROM C US TOME RS AND DE BT S E C URITIE S IS S UE D - DIS TRIBUTION NE TWORK (*) 21, % As s ets under management 1, % As s ets under cus tody 38, % INDIRE C T FUNDING - DIS TRIBUTION NE TWORK 39, % TOTAL FUNDING - DIS TRIBUTION NE TWORK 61, % INTE RE S T-BE ARING LOANS TO C US TOME RS 68, % (*) Franchise of Banca Monte dei Paschi di Siena and Banca Antonveneta Corporate banking - Distribution network Direct funding breakdown Corporate banking - Distribution network Indirect funding breakdown 12% 3% 1% 1% Bancassurance 37% SMEs Assets under management 51% Istitutions Large Corporate 95% Mutual investment funds/sicavs Asset under custody 56

57 Corporate banking - Distribution network Interest-bearing loans to customer breakdown CONSOLIDATED REPORT ON OPERATIONS 16% 13% 71% SMEs Istitutions Large Corporate With reference to profit and loss aggregates, total revenues for the the Corporate banking division came to approx. EUR 1.9 bln in 2011, slightly higher than the previous year's result (+0.9%), thanks to the growth in income from banking activities (+2.7% YoY), which was boosted by both net interest income (+3.1%) and net fee and commission income (+1.7%) thereby fully absorbing the decline in revenues from trading of Mps Capital Services. Net operating income totalled approx. EUR 437 mln (-19.8% YoY) reflecting the higher net impairment losses on loans and financial assets, partially offset by the reduction in operating costs. The cost-income ratio for this division stands at 34.2%. C ORPORATE BANKING - PROFIT AND LOS S AGGRE GATE S (million of E uro) 31/12/ vs 2010 Net interes t income 1, % Net fee and commis s ion income % Other income % INC OME FROM BANKING AND INS URANC E 1, % Net impairment los s es (revers als ) on loans and financial as s ets % Operating expens es % NE T OPE RATING INC OME % Corporate banking Breakdown of revenues Corporate banking - Distribution network Breakdown of revenues 23% Commercial network 8% 14% SMEs 6% Foreign Istitutions 71% Product companies 78% Large Corporate PERFORMANC E OF C OMPANIES REPORTING TO THE C ORPORATE BANKING DIVIS ION (million of E uro) 31/12/ vs 2010 MPS C APITAL S E RVIC E S (net profit for the period) % MPS LE AS ING & FAC TORING (net profit for the period) % MONTE PAS C HI BANQUE (net profit for the period) 5.6 n.s. MONTE PAS C HI BE LGIO (net profit for the period) % 57

58 CONSOLIDATED REPORT ON OPERATIONS Business strategy Against a continuously evolving backdrop, both from an economic-financial point of view as well as a regulatory one, business priorities in 2011 mainly focused on developing customer relations, giving precedence to geographical areas with higher entrepreneurial potential whilst seizing the best opportunities for capital growth in activities with Institutions and Public Administration. In order to achieve these objectives, the following key levers were introduced in the course of the year: increasing the capital base, with a special focus on growth in direct funding and loan book quality; expanding the share of wallet in lending through greater utilisation of unused lines of corporate credit; supporting manufacturing industries experiencing financial difficulties through initiatives developed independently by the Group (in particular, the "Support package for SMEs 5 and the Support package for Businesses in the Province of Siena ) in addition to agreements/projects introduced at banking system level ( Agreement for Credit to SMEs 6, "Italy & Tourism Project 7 ); offering higher value-added 'export finance' products and services, also designed to hedge against country and trade risk in the most appealing emerging markets, with a view to providing best support to businesses in their internationalisation process; Use of funding from the Loan and Deposit Fund (Cassa Depositi e Prestiti, CDP) and the European Investment Bank (EIB) for the disbursement of mid/long term loans to SMEs, through the following agreements: - ABI-CDP Agreement which, as of 31 march 2011, provides for the possibility to issue 10-year loans with CDP funding; - "MPS Global Renewable Energy Loan FL, an EIB-Montepaschi Group Agreement signed on 13 April 2011 for the financing of projects in the sector of renewable energy sources and energy efficiency; - Italia MID-CAP III/E, an EIB-Montepaschi loan signed on 18 July 2011 for the funding of loans to Mid Cap companies (unlisted mid-sized businesses). rationalising and adjusting the product catalogue to make it increasingly consistent with the investment and protection needs of SMEs. In relation to this last point, there follows a summary of key initiatives in 2011 concerning products/services for the SME segment: The product Montepaschi Joint Notice was restyled. Now called Montepaschi for Growth, it was designed to finance businesses that launch a capital strengthening process, in line with the provisions contained in Agreement for Credit to SMEs. The product Welcome Energy was revised following approval of the Fourth Energy Bill and is currently solely aimed at financing small photovoltaic systems. The first 'micro-wind-power' agreement was signed to provide financial support to Corporate clients for investments in small-sized wind power installations. The financial package Terramica, aimed exclusively at agricultural businesses, was implemented in Q with a further six products dedicated to: (i) businesses operating in agro-energy; (ii) advance payment of EU 5 In Q3, Time Out products (a grace period for instalment payments of principal for a maximum of 12 months on mid/long term, secured or unsecrured loans) and Prorogatio products (extension - upon request and up to 6 months - of the maturity of advances on receivables owed to companies by the Public Administration and channelled through the Bank provided that valid certification pursuant to current regulations is supplied) were extended by the Group to 31/12/ New agreement signed on 16 February 2011 by ABI, the Presidency of the Council of Ministers, the Ministry of Economy and Finance and the main Trade Associations. The agreement replicates the "Joint Notice" model (an initiative that expired on 31 January 2011), which the Group joined in April Agreement put underway in June 2009 by the Ministry of Tourism in collaboration with part of the credit system, Trade Associations (Confturismo-Confcommercio, Federturismo-Confindustria and Assoturismo-Confesercenti) and the relative Confidi consortia. The Group, which had already joined the agreement, renewed its participation in the project in June 2011, offering customers credit lines that are usable by businesses through the combination of a Confidi guarantee and the product Tourinvest. 58

59 CONSOLIDATED REPORT ON OPERATIONS farm subsidies under the Common Agricultural Policy (CAP) for 2013; (iii) businesses operating in the cereal, wine and olive oil sectors; (iv) agritourism businesses. The new loan Sovvenzione 2011 was marketed in Q Designed to support the short-term financial needs of SMEs, the product entails a minimum level of funding (EUR 100,000.00) on top of unused financial credit lines, with one-time repayment of principal and interest at pre-fixed maturity (set at 2 January 2012). The new product Montepaschi for IPOs was released; a medium-long term loan, the amount of which is determined on a proportional basis to the total share capital raised during the public offering phase. The product falls under the Italian Banking Association - Italian Stock Exchange agreement (into which the group entered in June 2011), intended to make lines of credit available to newly-listed companies. In terms of Mixed Products, June saw the start-up of the marketing campaign for Corporate Acceptance", a Montepaschi Group-branded redesigning of the traditional bankers' acceptance. The instrument is intended to provide companies with sources of financing alternative to bank credit, and "sophisticated" savers with a profitable and highly-guaranteed form of investment. The product Montepaschi Clean Energy is a loan for businesses involved in the construction of alternative energy-producing facilities, other than PV plants (wind, biogas and biomass, geothermal, etc.), that fall under the regulatory framework of public incentive schemes through an all-inclusive tariff within the limits provided for by Law no. 99 of 23/07/2009,. As to the development of products/services designed especially for the customer segment Institutions/Public Administration, the following key initiatives are highlighted: Rollout of the new service Paskey TribunaliOnLine (accessible via internet banking and dedicated to insolvency practicioners, bankruptcy judges and clerks/registrars) which - through the use of digital signatures - allows for the digitalisation of banking transactions connected with receiverships and enforcement procedures on property. Implementation of the product Paschi in Tesoreria and the Digital Signature Kit in over 100 public schools. The service is part of the project Ordinativo Informatico OIL for Italian public schools, which was developed by the Italian Banking Assoication on the initiative of the Italian Ministry of Education, University and Research with the aim of facilitating the use of ICT in public schools where treasury services are provided by banks. With reference to participation in tenders launched by public institutions, the following can be reported for 2011: Region of Tuscany: Banca Monte dei Paschi di Siena participated in the tender for provision of treasury services to the Region of Tuscany and was awarded the contract as the Lead Bank of the 'Temporary Consortium of Companies (it. RTI) in which the following participated: Banca Nazionale del Lavoro, Cassa di Risparmio di Firenze, Banca Popolare dell Etruria e del Lazio, Cassa di Risparmio di San Miniato, Cassa di Risparmio di Prato e Pistoia. INPS: In February the negotiated tender phase called by INPS (National Social Security Institute) to award the pension payment service in Italy was concluded with the signing of a new agreement. Banca Monte dei Paschi di Siena, Banca Antonveneta and Biverbanca participated in the tender as a consortium, and were awarded the payment service for a large batch of pensions. 59

60 CONSOLIDATED REPORT ON OPERATIONS Activities of the product companies reporting to the division MPS Capital Services In 2011, the company continued to consolidate its Project Financing activities on infrastructures 8, utilities and in the sectors of Real Estate 9 and Shipping Finance 10, against a general economic and financial backdrop that saw a certain level of buoyancy for infrastructures up until the end of July. The company's Acquisition Financing activities were aimed at evaluating and structuring important industrial acquisitions in the sectors of footwear/leather goods, cosmetics and pharmaceuticals which have been less markedly affected by the economic crisis. Moreover, activities continued at a heightened pace regarding completion of transactions - in which the company acted as Mandated Lead Arranger (MLA) - with high-standing counterparties characterised by strong industrial capacities. Three Structured Finance transactions were finalised in support of companies operating in the water and energy industries as well as in the sector of renewable energy. With regard to syndicated loans in which the company acts as lead arranger, 8 transactions were placed on the market for a total of EUR mln (MPS Capital Services contributing EUR mln). At the end of 2011 a further 5 transactions were under syndication for a total of EUR mln (MPS Capital Services contributing EUR 53.7 mln). Private Equity activity (supporting the development of small and medium businesses with strong growth potential) was mainly carried out through MPVENTURE SGR (former MPS Venture SGR), an associate company of MPS Capital Services S.p.A.. The company manages 6 closed-end investment funds reserved to professional investors for a subscribed total of EUR 360 mln. Over the last few months of the year, MPS Venture SGR closed its first partial subscription of the new fund, VENTURE 3, which will become operational in In its capacity as arranger on behalf of the Parent Company, MPS Capital Services organised 5 syndicated loan transactions for a total of EUR 42 mln. On the basis of mandates signed by the customer, 3 lending transactions totalling EUR 42 mln were also being coordinated at the end of the year. In the area of Investment Banking, activities carried out by the company in the stock market consisted chiefly in services supporting major capital raising transactions and the listing of important companies, whereas activities in the bond market focused on providing support to a number of corporate bond issuances and to the issuance of 15- year Italian government bonds (BTP). MPS Leasing & Factoring MPS Leasing & Factoring, a company of the Group specialising in leasing and factoring services for businesses, merged its subsidiary MPS Commerciale Leasing in Q The following activities carried out by the leasing segment in 2011 should be particularly noted: financial support to small and large investors for the construction of photovoltaic and biomass plants (Green economy); completion of the campaign (with good commercial results) signed in October 2010 with Ford Italia for the distribution - through leasing agreements - of the car Ford KA (produced in "limited edition" with the logo "Unika") via the Montepaschi Network; as representative of a pool of leasing companies (UBI Leasing, Agrileasing, Credemleasing, ABF Leasing and Credito Piemontese), MPS Leasing & Factoring signed a public leasing contract for over EUR 250 mln for the construction of a new administrative and institutional office building for the Region of Piedmont. Factoring activities were also of significance with specialised training for resources, proximity to customer needs, review of products/services, which generated substantial growth in turnover compared to Finalisation of a syndicated loan aimed at completing the segments coplanar to the urban stretch of the A14 (Roma Est area), extraordinary maintenance of the viaducts damaged by the 2009 earthquake, and upgrades of tunnels. 9 In the latter part of the year and with the role of Mandated Lead Arranger (MLA) and Agent Bank, the bank participated in a syndicated loan with four other institutions for the expansion of a major outlet located in the Region of Tuscany lending transaction were executed in favour of ship-building groups for the purchase of bulk carriers (liquid and dry cargo) as well as a ship for transport and assistance to oil platforms. 60

61 International banking CONSOLIDATED REPORT ON OPERATIONS Support to Italian corporate customers operating primarily in international markets was ensured through the following key activities: business initiatives on specific customer targets, broken down by type of business and geographical area of reference; targeted in-depth development actions to achieve higher added value transactions and the utmost level of customer loyalty; precise tracking of current customers and prospects, both through targeted and organised visits during adhoc sales campaigns and special meetings at trade fairs. activities continued in relation to the Agreement with SACE (Italian export credit insurance agency) concerning a medium-term financing programme in support of costs and investments in the SMEs internationalisation process with a first-demand SACE guarantee of up to 70% of the amount disbursed. As a result of the Agreement, disbursements in 2011 amounted to EUR mln for a total of 20 lending transactions while secured credit export transactions came to EUR mln. Partly the result of specifically-targeted marketing campaigns to increase foreign trade flows, volumes of commercial/financial items traded by the Montepaschi Group's retail banks in 2011, registered an increase of approx. 6% from Source ESTAT, survey on all service models, excluding Large Corporate groups. 61

62 CONSOLIDATED REPORT ON OPERATIONS Corporate Centre The Corporate Centre is an aggregation of: a) operating units which, on an individual basis, are below the benchmarks required for primary reporting; b) the Group s head office units (including governance and support, proprietary finance, equity investments and segments of divisionalised entities, which include in particular ALM, Treasury and Capital Management); c) service units providing support to Group units, particularly with regard to collection of doubtful loans (reporting to the Credit Governance Area), real estate management, and IT systems management and development (all reporting to the Human Resources, Property and Facility Management" area). The Corporate Centre also incorporates the results of Biverbanca (not reporting to the bank s divisions), the pro-rata interest of Banca Popolare di Spoleto (included under Consumer banking until 31/03/2011), the profit & loss of companies consolidated at equity and those available for sale, as well as cancellations of intragroup entries. Group equity investments The process of rationalisation of the Group's equity investment portfolio saw Banca Monte dei Paschi di Siena involved in the following major transactions: a) New equity investments - acquisition of a 3.30% stake in La Ferroviaria Italiana SpA, as a result of the final division of liquidation of Alexa SpA; - acquisition of a 16% stake in Società Gestione Crediti Delta SpA, a newly-established company originating from the Delta Group's Restructuring Plan; - acquisition of a 1.57% stake in Net Insurance SpA, an insurance company specialising in property and casualty insurance, by subscribing to a share capital increase; - acquisition of a 14.98% stake in S.A.T. Società Autostrada Tirrenica SpA, licensee of the stretch of motorway linking Livorno and Civitavecchia; - Acquisition of a 3.007% stake in Risanamento SpA as a result of subscription to the share capital increase carried out as part of the company's restructuring plan; - Acquisition of a 3.52% shareholding in GAL Colline Moreniche del Garda Scrl, a non-profit company that aims to promote the launch of new economic initiatives and enhance the value of human and material resources in the area by encouraging collaboration between local institutions and private entrepreneurs. b) Capital raising/reinstatement transactions and increased equity investments - increase from 10% to 100% in the investment held in Siena Mortgages 03-4 Srl which thus becomes part of the Montepaschi Banking Group; - subscription of capital increase for Immobiliare Novoli SpA, maintaining shareholding unaltered at 8.33%; - subscription of capital increase for Fidi Toscana SpA, by partially exercising preemptive rights, thus reducing the shareholding from % to 28.14%; - payment of the final tranche in the share capital of Aeroporto di Siena Spa, subscribed to in April 2008; - increase in the investment held in Prima Holding 2 SpA, from 27.32% to 27.84%; - subscription of capital increase for Soggetto Intermediario Locale Appennino Centrale Scrl, increasing the shareholding from 1.34% to 3.44%; - subscription of capital increase for Terme di Chianciano S.p.A., increasing the shareholding from 33.97% to 48.86%; - subscription of capital increase for Nomisma S.p.A., increasing the shareholding from 7.45% to 8.86%; c) Divestment/Sale of equity investments - sale of a part of the stake in Sorin SpA, reducing the shareholding from 7.197% to 5.736%; - divestment of the 11% shareholding in Alexa SpA, following conclusion of the liquidation procedure; 62

63 - divestment of the 25% shareholding in Pedemontana Veneta SpA; - divestment of the 0.004% shareholding in Visa Inc.; - sale of the 16.66% shareholding in Tethys S.p.A.; CONSOLIDATED REPORT ON OPERATIONS - sale of the shareholding in Hopa SpA, thus reducing the stake from 14.77% to 0.53%; - divestment of the 0.316% shareholding in the London Stock Exchange GRP PLC; - divestment of the 17.94% shareholding in Bell Sarl, under liquidation, following dissolution and windup of the company; - divestment of the 0.75% shareholding in Bic Liguria ScpA; - sale of a part of the stake in Bilanciai International SpA, reducing the shareholding from 3.19% to 2.62%; Finally, the initiatives undertaken by the other Companies of the Montepaschi Group in the course of 2011 were as follows: Banca Antonveneta exercised its right of withdrawal from FIN.SER. SpA (15% shareholding); Biverbanca: (i) sold its 0.018% stake in the London Stock Exchange GRP PLC; (ii) sold its 3% stake in Promovalsesia Scrl, under liquidation, following the dissolution and termination of the company; MPS Capital Services SpA (i) acquired a 3.31% shareholding in Arkimedica SpA; (ii) acquired a 2.82% shareholding in Bioera SpA; (iii) acquired a 30% shareholding in DBI-FAU Srl; (iv) sold its 22% stake in MPS Venture SGR to La Centrale Finanziaria Generale thereby reducing its shareholding from 70% to 48% with the subsequent removal of the company from the Montepaschi Group; (v) acquired a 10% shareholding in Siena SME 11-1 Srl, a special-purpose vehicle company for the securitisation of performing loans. MPS Leasing & Factoring SpA acquired a 10% shareholding in Siena Lease 11-1 Srl, a specific-purpose vehicle company for securitisation transactions on lease fees. MPS Gestione Crediti Banca SpA established Aiace REOCO Srl and Enea REOCO Srl (fully-owned subsidiaries), which engage in real-estate transactions, typically associated with debt recovery, with the aim of maximising the value of the properties pledged as collateral for loans by acquiring them (either out of court or at auction) and subsequently reselling them. Monte Paschi Banque SA sold its 100% shareholding in Monte Paschi Monaco SAM. The Monegasque bank, therefore, is no longer part of the Montepaschi Group; Agrisviluppo exercised its right of withdrawal from the following cooperatives: Cantine Riunite & Civ. Società Cooperativa Agricola (11.33% shareholding); Caseificio Sociale del Parco (28.67% shareholding); Consorzio Interregionale Ortofrutticoli (16.66% shareholding); Italcarni (11.85% shareholding) and Progeo (19.13% shareholding); Finally, at Group-level, there was the merger by absorption of MPS Commerciale Leasing SpA into MPS Leasing & Factoring SpA (with legal effect as of 1 May 2011) as well as the merger by absorption of San Paolo Acque Srl, under liquidation, into MPS Immobiliare SpA (as of 13 December 2011). 63

64 CONSOLIDATED REPORT ON OPERATIONS Non-financial assets Integrated risk and capital management Risk Management Process The Montepaschi Group attaches the utmost importance to the process of identifying, monitoring measuring and controlling risk. The risk management process within the Group has been further enhanced in recent years with the gradual extension of the advanced models to the various entities within the Group for operational and reporting purposes. The fundamental principles of the Montepaschi Group s Risk Management process are based on a clear-cut distinction of the roles and responsibilities of the different functions at first, second and third-levels of control. The Board of Directors of the Parent Company is responsible for defining strategic guidelines and risk management policies at least on a yearly basis and setting the overall level of risk appetite for the Group also quantitatively in terms of Economic Capital. The Board of Statutory Auditors and the Internal Controls Committee are responsible for evaluating the level of efficiency and adequacy of the Internal Controls Systems with particular regard to risk control. Top Management is responsible for ensuring compliance with risk policies and procedures. The Risk Committee establishes Risk Management policies and ensures overall compliance with the limits defined for the various operating levels. The Risk Committee of the Parent Company is also responsible for assessing initiatives for capital allocation and submitting them to the Board of Directors and assessing (Regulatory and Economic) capital consumption at Group level and for each strategic business area and/or company of the Group as well as the trends of risk/return performance indicators. The Finance Committee of the Parent Company has the task of setting the principles of and providing strategic guidance for Proprietary Finance. Furthermore, it deliberates and submits proposals concerning the interest rate and liquidity risk exposure of the Banking Book and defines Capital Management actions required. The 'Internal Audit' area has the task of performing an independent and objective "assurance" and advising activity, aimed both at monitoring the compliance of operations and risk trends (also through on-site inspections) and at assessing the efficiency of the overall internal control system with a view to improving the effectiveness and efficiency of the organisation. The Risk Management Area of the Parent Company defines integrated analysis methodologies needed to measure overall risks so as to guarantee they are accurately measured and constantly monitored. It also quantifies Economic Capital consumption as well as the minimum amount of capital to be held to cover all existing risks. The Area produces control reports and ensures compliance with the operational limits set by the Board of Directors on the basis of internally-developed models. The Risk Management area is also responsible for measuring, monitoring and controlling the risk and performances relating to investment services/products offered to or held by the customers. The Business Control Units which are internal to the business and operating units of the Parent Company and Group subsidiaries, carry out conformity checks on the transactions they are responsible for and are the first level of organisational supervision of operations within the more general system of Internal Controls. From an overall organisational and governance point of view with regard to Group risk, it should be noted that in the first half of 2009, the Risk Management Area was made to report directly to the General Manager while maintaining a functional connection with the Board of Directors and the CFO. The change was in alignment with regulatory provisions and International best practices and aims at guaranteeing greater autonomy and forcefulness to risk management actions and to the effectiveness of the entire risk management and control process. As a consequence of the re-allocation, new risk information flows were designed for the Group s Top Management (Chairman, General Manager and Internal Controls Committee) and for the Board of Directors in addition to the already-existing reporting flows. 64

65 CONSOLIDATED REPORT ON OPERATIONS Among the types of risk which the Montepaschi Group may incur in its day-to-day operations, the main ones include: credit risk, counterparty risk, issuer risk, concentration risk, market risk (price, interest rate and foreign exchange) in the Trading Book, interest rate risk for the Banking Book (Asset & Liability Management - ALM), liquidity risk, equity investments risk, UCITs risk (alternative funds), operational risk, business risk, real-estate risk, reputational risk. Risk inherent in investment products/services for the Group's customers are also monitored, with a view to protecting the customer and preventing any potential repercussions in terms of reputation. Activities relating to the international regulatory framework In line with the principles set out in the new Accord on Capital Adequacy (Basel II) in relation to First Pillar risks, in the first half of 2008 the Montepaschi Group completed its work on the internal models for credit and operational risks. Pursuant to Circular Letter 263/2006 of the Bank of Italy, on 12 June 2008 the Montepaschi Group was officially authorized to use the advanced models for the measurement and management of credit risk (AIRB Advanced Internal Rating Based) and operational risk (AMA Advanced Measurement Approach) as of the first consolidated report at 30/06/2008. Throughout the year work continued on the completion and extension of these models to those entities not included in the initial scope of validation as did the activities aimed at improving the internal market and counterparty risk models. Furthermore, activities continued in relation to Second Pillar compliance. The first half of the year saw the completion of methodological and organisational activities aimed at coordinating the optimisation and control of all processes relating to the ongoing self-assessment of the Group s Internal Capital Adequacy Assessment Process (ICAAP). As per regulations, a comprehensive ICAAP report was prepared in April and submitted to the Supervisory Authority. With regard to Pillar III, the Public Disclosure document is a highly-effective summary through which the Market is provided with all the relevant information as to activities under way, capital adequacy and risk exposure, as well as a general description of the systems used to identify, measure and manage such risks. The Montepaschi Group, a class 1 bank under Supervisory classifications, fulfilled the obligation of quarterly disclosure as instructed in Supervisory regulations. In order to ensure compliance with the disclosure obligations contained in the regulations, specific planning initiatives were put forth with the objective of optimising the drafting and timely disclosure of the document as well as the relevant organisational processes. The working group, coordinated by the Risk Management Area, under the responsibility of the manager in charge, saw the collaboration of all of the Parent Company's main units. The report is published on the Montepaschi Group website (www.mps.it/investor+relations) and is regulary updated on the basis of the current regulatory framework. In the course of the year, the Risk Management Area (together with other Group functions involved in the process) supported the preparatory activities for the EU-wide stress tests requested by the EBA. An in-depth review of methodology and application-related aspects required by the new international supervisory framework ( Basel 3 ) was put underway, with a special focus on treatment of Liquidity, Counterparty and Market risk and related adjustments to the reporting database. 65

66 CONSOLIDATED REPORT ON OPERATIONS Analysis of Economic Capital The Overall Economic Capital (or Overall Absorbed Capital) is intended as the minimum amount of capital resources required to cover economic losses resulting from unforeseen events generated by the simultaneous exposure to different types of risk. In the quantification of Economic Capital, all types of risk come into play with the exception of liquidity and reputational risk which, instead, are mitigated through organisational policies and processes. The Risk Management Area of the Parent Company periodically quantifies the Economic Capital for each type of risk, mainly on the basis of internally-developed models for each risk factor. The methodologies are largely developed with a Value-at-Risk (VaR) approach and are thus aimed at determining the maximum loss the Group may incur with a specific holding period and within a pre-set confidence interval. For certain risk factors and specific portfolio categories (Credit Risk and Operational Risk in particular), the models were officially validated by the Supervisory Authorities for regulatory purposes. The outputs from the models developed internally for the different risk factors (validated and operational) constitute the main tool for the day-today control and monitoring of the risk exposures generated in these areas and for the control of operating limits and delegated powers in accordance with the guidelines given and approved by the Parent Company. With regard to credit risk, most of the input for the Credit Portfolio Model also under continuous methodological development originates from the internal models used for reporting purposes which, in conjunction with additional information and fine-tuning, aim to measure risk from a strictly operational logic. In terms of Operational Risks, the model s output at Group-level is re-allocated on the basis of historical loss criteria, the estimate provided by top management as well as the gross income and is used for operating purposes. Furthermore, the Overall Economic Capital also contains information on the sensitivity shift in economic value resulting from the internal Asset & Liability model which, in the last period, was continuously fine-tuned following an improvement in the representation and measurement of core deposits, behavioural patterns (prepayment risk) and related options. Business risk is currently measured as a risk factor in relation to the rigidity of the cost structure with respect to the changes in the business structures caused by external market components and internal strategies opted for. Equity investment risk is the risk resulting from the volatility of market valuations in relation to the equity investments held in the portfolio. Real estate risk is the risk of incurring potential losses resulting from unexpected changes in the real estate portfolio. As mentioned above, liquidity risk which saw significant developments in its monitoring procedure is not included in the quantification of Economic Capital. Nevertheless, the Montepaschi Group established operational limits as well as a formal liquidity risk management policy both for situations of business-as-usual and those of market stress. More specifically, on the basis of pre-determined tolerance thresholds, specific contingency plans were set out and formalized, ready to be activated should the need arise. Specific mitigation policies were defined in relation to other risks which cannot be measured using a quantitative approach (e.g. reputational risk). The Economic Capital by risk factor, therefore, results from the corresponding operating metrics of risk quantification. VaR measurements by risk factor maintain their own individual validity in accordance with current regulations and international best practices and are established with differentiated holding periods and confidence intervals. The Overall Economic Capital, therefore, results from the combined measurement of each risk factor listed: the measurements are standardised both in terms of time horizons (yearly holding period) and selected confidence interval in line with the rating assigned to the Montepaschi Group by the official rating agencies and are subject to intra-risk and inter-risk diversification processes. The final output shows the Group s Overall Economic Capital or Overall Internal Capital for the different types of risk along with the weight of inter-risk diversification with respect to the building-block approach which does not involve quantification. The total of these micro risk-factors, which directly impact the Group s equity, is subject to regular measurement by the Parent Company s Risk Management Area which prepares all the periodical documentation for the Parent Company s Risk Committee and Board of Directors. Finally, Planning & Control is responsible for reporting results adjusted by risk and determining the specific value creation in a risk-adjusted logic using metrics of measurement consistent with income and absorbed economic capital. Moreover, it reformulates the risk measures received from the Risk Management Area for the Group's individual legal entities and business units. The allocation of capital, in terms of balance, forecasts and periodical monitoring, is also determined by Planning & Control in conjunction with the corporate bodies of each legal entity, with specific reports prepared according to the individual business lines of the banks included in the scope of consolidation and submitted to the Parent Company's Risk Committee for approval. 66

67 CONSOLIDATED REPORT ON OPERATIONS As at 31 December 2011, the Overall Economic Capital of the Montepaschi Group (excluding intra-group operations) was broken down as follows; credit risk (63% including counterparty risk, issuer risk and concentration risk), equity investments risk (6%), operational and business risks (11%). The working capital against financial risk (mainly consisting in typical trading book and ALM Banking Book risks) comes to approx. 18% of the Overall Economic Capital. Capital against real estate risk comes to 2%. Further information on the nature, control and monitoring of the individual types of risk is provided in Part E of the Notes to the Financial Statements. 67

68 CONSOLIDATED REPORT ON OPERATIONS Structured credit products Business model description objectives and strategies A portion of the Montepaschi Group s capital is allocated to stock market investments, an area in which the Group pursues a multitude of objectives. In particular, the Group aims to: attain a risk-adjusted return that is significantly higher than the cost of allocated capital so as to create value for the shareholders; achieve diversification with respect to other risks that are typical of its business; maintain in-depth and up-to-date knowledge of financial market trends which additionally and inevitably condition the domestic markets in which the Group mainly operates. In pursuing the above objectives, the Group set up a specifically dedicated unit within the Finance Division of the Parent Company. The scope of operations within the financial markets tends to be as broad as possible so as to draw the maximum benefit from risk diversification and reduced exposure to specific sectors of the stock market. For this purpose, in addition to typical investment acitivities in government bonds, securities and forex markets, 2002 also saw the launching of targeted activity on the market of corporate bonds and credit derivatives. This specifically dedicated unit followed market pattern developments over time, making investments in structured bonds as well. These investments are in line with the above-mentioned process of diversification. Financial technology has actually made it possible over time to take positions on specific credit risk components such as correlation and recovery through structured bonds. A specialist desk was also set up within MPS Capital Services to support this Parent Company unit. The investment process, for this area too, starts with the specific analyses and evaluations made by the traders in a bottom-up logic. The process is included in the overall monitoring of portfolio risks. In other terms, positions are taken following an analysis by traders and within the maximum risk profile of the portfolios. All operations in securities markets are subject to risk limits set by the Board of Directors that are monitored daily by the Business Control Unit and the Parent Bank s Central Risk Management Unit. These are stop-loss and risk limits, which also include, in particular, nominal limits for maximum exposure for major issuer categories broken down by rating. The information provided below relates to the entire Montepaschi Group. For the purposes of this report, the category of Structured Credit Products is intended in a broad sense and refers in keeping with the instructions initially provided by the Financial Stability Forum (currently the Financial Stability Board) and then by national bodies, Consob and Bank of Italy to investments in securities issued by special-purpose vehicles outside the Montepaschi Group and not included in the aforementioned disclosure concerning Consolidated SPEs, and to structured credit derivatives. For the sake of reporting clarity, below is a brief description of the various types of investments and acronyms used in this paragraph. For the purpose of this analysis, the exposures reported have thus been distinguished between " positions in securities" and " positions in derivatives" at Group-level as at 31 December Positions in securities are mainly taken in the form of cash instruments, while " Positions in derivatives" are held through credit derivatives on standardised indices. Significance for the bank s activities The overall book value of positions in securities on structured credit products, amounting to EUR 2, mln, accounts for approx. 0.85% of consolidated assets. The definition of structured credit product used in this section does not correspond to the definition of structured debt security considered in other sections/parts of the Consolidated Notes to the Financial Statements, insofar as not all structured credit products embed credit derivatives, which need to be separated [from their host contract] for IAS/IFRS purposes. The book value of structured credit products is allocated as follows: under item 20 Financial assets held for trading in the amount of EUR mln, or 22% of total positions in securities; under item 40 Financial assets available for sale in the amount of EUR mln, or 5% of total positions in securities; under item 60 Loans to banks and 70 Loans to customers in the amount of EUR 1, mln, or 73% of total positions in securities. 68

69 The portfolio remains substantially unchanged from the end of CONSOLIDATED REPORT ON OPERATIONS The total book value of net positions in credit derivatives on indices is EUR 8.43 mln. Description of positions in securities The information provided is divided into macro-categories of structured credit products and includes the nominal amount, risk exposure and P&L impact for More specifically, for the risk exposure of positions in securities, the tables report the book value which reflects economic loss in the event of default with a very conservative estimated recovery of zero. Realised expense and income consist in losses and gains from trading for the period of reference; devaluations and revaluations with a P&L effect show the change in book value directly posted to P&L, whereas, in the case of instruments classified as Available for Sale (AFS), devaluations and revaluations show the change in book value posted to an equity reserve. All amounts are expressed in EUR million. Overall, at Group level, positions in structured credit products amount to a nominal value of 2, /mln, equivalent to a book value of approx. 2, /mln. With reference to classification for Supervisory purposes, the positions are mainly allocated to the Banking Book (89% of book value) and, in a smaller degree, to the Trading Book (approx. 11%). With regard to the Banking Book (book value of approx. 1, /mln), there is a prevalence in CLNs which account for approx. 59%, followed by CDOs which come to approx. 30%. The remaining 11% refers to ABSs and Dynamic Managed Portfolios. The Trading Book, on the other hand, contains investments for a book value of /mln, approx. 56% of which is accounted for by ABSs and 44% by CDOs. Montepaschi Group Structured Credit products: total exposure Securities positions (EUR/mln as at ) Classification Instrument Category Nominal Exposure Realized Profit/Loss Unrealized Profit/Loss Effect on Net Equity Banking Book Trading Book ABS 93,23 87,35 0,32-0,17-0,02 CDO 620,76 551,55-0,21 27,55 0,85 CLN 1088, ,39 0,00-13,41-18,82 Dynamic Managed Portfolio 100,00 105,38 0,00-2,22 0,00 Banking Book Total 1902, ,67 0,11 11,75-17,99 ABS 143,74 130,86 1,29-2,92 0,00 CDO 149,22 101,49-1,45 14,61 0,00 Trading Book Total 292,96 232,35-0,16 11,69 0,00 Structured Credit products total , ,02-0,05 23,44-17,99 Structured Credit products total , ,33 Due to the limited significance of the positions in the Regulatory Trading Book, the analysis reports the details of all positions without, however, breaking them down by supervisory criteria. The table below provides a product breakdown of exposures in securities by type of structure (synthetic or traditional) and by type of product (ABS, CDO, CLN, other). A traditional structure involves investments in funded structures which do not embed credit derivatives, whereas a synthetic structure involves unfunded and funded structures which include credit derivatives. As a whole, traditional structures account for 56% and synthetic for 44% of total risk exposure. 69

70 CONSOLIDATED REPORT ON OPERATIONS Structured Credit products - Exposure Montepaschi Group Structured Credit products - Exposure Montepaschi Group Synthetic 44% Traditional 56% ,08 185,63 6,31 467,41 472,31 211,90 105,38 ABS CDO CLN Other Traditional Synthetic Following is the breakdown of positions in securities by rating. Structured Credit products (EUR/mln) Rating Nominal Exposure Realized Profit/Loss Unrealized Profit/Loss Effect on Net Equity AAA 264,00 263,91 0,86-4,75 0,00 AA+ 18,30 15,80 0,15-1,10 0,00 AA 409,31 386,57 0,57 0,78 0,02 AA- 202,50 162,65 0,00 28,36-0,05 A+ 593,86 588,91 0,00-13,29-18,82 A 304,18 285,51-0,03-1,22 0,00 A- 171,14 146,71-1,46 7,41 0,00 BBB+ 95,00 95,83 0,20-0,12 0,00 BBB 62,50 60,38 0,29 0,00 0,00 BB+ 22,80 18,58 0,01 7,91 0,00 BB 14,09 0,24 0,00 0,00 0,00 BB- 2,00 1,51 0,00 0,00 0,00 B+ 0,00 0,00 0,15 0,00 0,00 B 6,17 4,98-0,82 0,00 0,85 B- 6,00 1,05 0,00-0,03 0,00 CCC- 13,38 3,58 0,00-0,08 0,01 CC 6,00 0,01 0,03-0,60 0,00 Not Rated 4,58 3,80 0,00 0,17 0,00 Total 2195, ,02-0,05 23,44-17,99 Overall, 97% of nominal exposures is made up by Investment Grade Securities (with rating up to BBB-) with Subinvestment Grade and Non-Rated securities making up the remaining 3%. 70

71 ABS exposures CONSOLIDATED REPORT ON OPERATIONS The following information concerning ABSs is provided in relation to geographical area, segment, and vintage of underlying assets. ABS Exposure (EUR/mln) Classification Nominal Exposure Realized Unrealized Effect on Net CMBS 38,01 30,61 0,74 0,00 0,08 RMBS 190,93 180,67 0,70-3,08-0,10 Other ABS 8,03 6,93 0,17-0,01 0,00 Total 236,97 218,21 1,61-3,09-0,02 Overall, 97% of the book value refers to positions with underlying residential and commercial mortgages which make up 83% and 14% respectively. The remaining 3% includes ABS positions with underlying assets in other segments. ABS Exposure Montepaschi Group Breakdown of underlying assets by segment Commercial Mortgages 14% Residential Mortgages 83% Equip Lease 2% Other Consumer Loans 1% A geographical breakdown reveals that, in terms of book value, 40% of ABS exposures are allocated to Italian underlying assets, 33% to Dutch, 23% to British and 2% to German. A negligible residual percentage engages Spanish and Portuguese underlying assets. It should be noted that there are no positions with underlying assets originated by US vehicles. ABS Exposure Montepaschi Group Breakdown of underlying assets by geography Italy 40% Portugal 1% Netherlands 33% Spain 1% Germany 2% Great Britain 23% 71

72 CONSOLIDATED REPORT ON OPERATIONS The following table contains a vintage breakdown of ABS underlying assets. ABS Exposure Montepaschi Group Breakdown of underlying assets by vintage % % % % % % % % CDO exposures The information concerning CDOs is reported on the basis of product type and tranche seniority. CDO Exposure (EUR/mln) Classification Seniority Nominal Exposure Realized Profit/Loss Unrealized Profit/Loss Effect on Net Equity CDO di ABS SENIOR 373,97 354,75-0,20 0,00 0,00 CBO JUNIOR 4,58 3,80 0,00 0,17 0,00 CBO SENIOR 112,22 87,14-1,45 7,47 0,00 CDO3 SENIOR 19,32 10,60 0,00-0,98 0,00 CLO JUNIOR 0,00 0,00 0,15 0,00 0,00 CLO MEZZANINE 16,72 16,74 0,34 0,00 0,00 CLO SENIOR 6,17 4,98-0,73 0,00 0,85 Managed CDO MEZZANINE 0,00 0,00 0,03 0,00 0,00 Managed CDO SENIOR 37,00 14,35 0,20 7,14 0,00 SLCDO SENIOR 200,00 160,68 0,00 28,36 0,00 Total 769,98 653,04-1,66 42,16 0,85 On the whole, the main category is represented by ABS CDOs which account for 54% of the total. Next are the Synthetic Loan CDOs (SLCDO) which account for 25%. With regard to seniority, senior tranches make up approx. 97% of the entire CDO portfolio, followed by mezzanine tranches which constitute just below 3%, while junior tranches account for less than 1%. In terms of geographical breakdown of the portfolios, it should be noted that there are no positions with underlying assets originated by US vehicles. 72

73 Dynamic Managed Portfolios and SPE CLN exposures CONSOLIDATED REPORT ON OPERATIONS Both types of exposures are only contained in the banking book. In particular, the portfolio as at 31 December 2011 included investments in a nominal amount of EUR 100 mln with underlying managed portfolios (SPIs) and CLNs in a nominal amount of EUR 1, mln. Dynamic Managed Portfolio Exposure (EUR/mln) Classification Nominal Exposure Realized Profit/Loss Unrealized Profit/Loss Effect on Net Equity SPI 100,00 105,38 0,00-2,22 0,00 Total 100,00 105,38 0,00-2,22 0,00 CLN Exposure (EUR/mln) Classification Nominal Exposure Realized Profit/Loss Unrealized Profit/Loss Effect on Net Equity SPE CLN 688,86 684,74 0,00-13,41-18,82 CLN Basket 400,00 378,65 0,00 0,00 0,00 Total 1088, ,39 0,00-13,41-18,82 Description of positions in credit derivatives Details of positions in derivatives are reported below. All exposures include derivatives on standardised credit indices and are all attributable to the Trading Book. More specifically, there are positions on indices such as itraxx (European market), CDX and MCDX (US market). Positions with a negative nominal value mitigate the overall portfolio risk since they benefit from the deterioration of creditworthiness of underlying assets, as represented by the widening of related credit spreads. Overall, derivative exposures came to a notional amount of EUR mln for a book value of EUR 8.43 mln as at 31 December Trading in 2011 generated a positive P&L impact of EUR mln. Credit Index Positions (EUR/mln) Index Nominal Exposure Profit/Loss CDX NA IG 36,96-1,76-0,42 itraxx Europe 208,72-2,14-1,28 itraxx Europe Crossover 0,00 0,00-0,20 itraxx Europe Senior Financials 18,00-1,77 8,42 itraxx Europe Sovereign -173,89 14,10 5,22 itraxx Europe Subordinated Financials -10,00 0,01 2,45 itraxx High Volatility Europe 0,00 0,00 0,00 itraxx Sovereign Emerging 0,00 0,00-0,10 MCDX Municipal Single Name 0,00 0,00 0,00 Total 79,79 8,43 14,09 73

74 CONSOLIDATED REPORT ON OPERATIONS Appendix: Glossary of terms Following is a short glossary of the terms used in this paragraph, with the relevant acronyms used in the tables. Account Description Definition ABS Asset Backed Security Security which guarantees reimbursement and coupon flows based on income generated by a set of financial assets. Typically, they are broken down into RMBS and CMBS. AFS Available For Sale IAS category used to classify assets available for sale CBO Collateralized Bond Obligation CDO in which the portfolio of underlying positions primarily consists in bonds. CDO Collateralized Debt Obligation Securities issued in differentiated risk classes with payment in order of seniority (tranches), subsequent to the securitisation of a portfolio of creditrisk embedding securities. Typically characterised by a certain degree of financial leverage. CDO of ABS CDO of ABS CDO in which the portfolio of underlying positions primarily consists in ABSs. CDO2 CDO3 CLN CLN Basket CDO Squared CDO Cubed Credit Linked Note Basket Credit Linked Note CDO in which the portfolio of underlying positions primarily consists in other CDOs. CDO in which the portfolio of underlying positions primarily consists in CDO squared. Security embedding a credit derivative, typically a credit default swap (CDS). a CLN which references a basket of underlying entities (multiple single name CDSs, or one or multiple basket CDSs) CLO Collateralized Loan Obligation CDO in which the portfolio of underlying positions primarily consists in loans. CMBS Commercial Mortage Backed Securities ABS with underlying commercial mortgages. CPPI Constant Proportion Portfolio Insurance Guaranteed capital security that incorporates a dynamic trading strategy in order to participate in the performance of a certain underlying asset Dynamic Managed Portfolio Dynamic Managed Portfolio Products with dynamically managed underlying assets such as CPPI/SPI. HFT Held For Trading IAS category used to classify assets and liabilities held for trading L&R Loans & Receivables IAS category used to classify loans and receivables LSS Leveraged Super Senior CDO through which the investor becomes exposed to the entire super senior tranche through a derivative contract characterised by a leverage effect. Managed CDO Managed CDO CDO in which the portfolio of underlying positions is managed. Monoline insurer Monoline insurer Insurance companies specialised in guaranteeing payment of interests and notional of bonds in the event of issuer default. They are thus named because they generally apply to one industrial sector only. Other ABS Other Asset Backed Security Titolo che garantisce il rimborso e i flussi cedolari sulla base di proventi generati da un insieme di altre attività: prestiti al consumo e leasing, che includono solitamente prestiti finalizzati al consumo (ad esempio auto, carte di credito), prestiti agli studenti, attività di finanziamento per il leasing, ecc. RMBS Residential Mortage Backed Securities ABS with underlying residential mortgages. SCDO Synthetic CDO CDO whose portfolio of underlying positions primarily consists in credit default swaps (CDS). Seniority Seniority Level of subordination in the repayment of securities, generally broken down into Super Senior, Senior, Mezzanine and Junior. SLCDO Synthetic Loan CDO CDO whose portfolio of underlying positions primarily consists in Synthetic Loan CDS. SPE Special Purpose Entity corporate vehicle incorporated to attain specific objectives, primarily to isolate financial risks. Assets consist in a portfolio whose profits are used for the servicing of bond loans issued. SPE CLN SPE Crediti Linked Note CLN issued by a SPE. SPI Synthetic Portfolio Insurance Synthetic version of a CPPI, obtained through derivatives. Vintage Vintage Commonly understood as the year of origination for the assets underlying a structured credit product. 74

75 Organisational set-up and processes and human resource management CONSOLIDATED REPORT ON OPERATIONS Priority was given to the organisational redesigning of Banca Monte dei Paschi di Siena (approved by the Board of Directors on 17 December 2010) through a set of initiatives, carefully planned in both timing and methods of implementation, aimed at achieving significant improvements in terms of efficacy (governance, geographic footprint, competitive edge) and efficiency (streamlining central functions, shortening the operational supply chain). In addition to restructuring of the Banking Group (which included activities previously carried out by the BMPS Network division), the Network also underwent reorganisation, with the creation of the Local Market Units, which also encompassed resources previously engaged in the Regional Areas and Head Office functions (eg. Loan Labs), with a view to strengthening market coverage, enhancing relations with businesses and households and achieving expansion in the socio-economic areas of reference. Likewise, the organisational structures of the Regional Areas and Departments were improved and the new credit disbursement processes were launched. In connection with the above, the effort aimed at boosting the efficiency of the operational architecture and system continued, with the structural revision of processes - according to an industry-based logic - to contain costs, improve resource deployment and the service delivered to customers in terms of quality, speed and transparency. Within this framework, the following are noted: the acceleration of plans to streamline Head Office Units and "feed" Local Market Units accordingly, with a view to achieving balance among operational functional needs; the alignment of operating processes with the new organisational model framework, both for the Central and Network units, with the aim of sustaining the key elements of the strategy pursued (decentralisation of responsibilities, less time spent on administrative tasks, focus on business objectives); roll-out of the Programme PaschiFace with: - completion of major branch processes for Branch Managers (e.g. sales planning and monitoring, operational, lending and management approvals and controls), functional to the activities of the Affluent- and Family- customer relationship managers; - initial roll out to Network roles that perform specific support tasks (help desk and dedicated on-site contacts); - initial re-planning of additional activities assigned to Branch Managers and Relationship Managers, with a focus on the Small Business segment and its prospects (registration and management, filling in of Small Business forms, cash flow collection and payment, bills, ); further initiatives aimed at leveraging the central role of 'Branch managers', expanding their decisionmaking scope as a powerful tool for commercial development in their respective regions of operation, while also reducing time spent on "administrative" activities. continuing with the analysis and planning of Back Office rationalisation through centralisation and optimisation of operating processes, with a view to improving services, increasing efficiency of resources employed and ensuring a higher degree of control over the underlying operational risks; In keeping with the above-described approach, the second half of 2011 saw the revision of Banca Antonveneta' organisational structure for both its central and outer units, with the elimination of its Regional Areas and the establishment of Local Market Units. A similar initiative also took place for the structure of BiverBanca's head office units. 75

76 CONSOLIDATED REPORT ON OPERATIONS HEADCOUNT After a reduction of 2,693 employees in the 2008/10 12 period, mainly regarding Head Office units, HEADCOUNT OVER TIME 31/12/07 31/12/08 31/12/09 31/12/10 31/12/11 Head Office units 12,956 11,908 10,973 10,200 9,547 Distribution network 21,232 20,959 21,030 21,295 21,623 TOTAL 34,188 32,867 32,003 31,495 31,170 in 2011 the Group's headcount reported a further decline of 325 resources for the year, with effective workforce 13 totalling 31,170: HEADCOUNT FOR THE PERIOD There were 507 outflows (of which over 70% from Head Office units), 241 hirings (almost all allocated to the branches) and 59 changes in Group scope due to asset disposal 14. The table below shows a breakdown of the MPS Group workforce by operational location: 31/12/10 31/12/11 Total employees 31,495 31,170 EMPLOYEE TURNOVER From 31/12/10 to 31/12/11 Hirings 241 Outflows -507 Change in Group scope -59 TOTAL -325 EMPLOYEES BY OPERATING UNITS MACROSTRUCTURE 31/12/11 % OF TOTAL Local Business Functions 21, % Administrative and Operating Functions, of which: 8, % Headquarters Italian Banks 2, % Local market Areas % Local market units 1, % Consorzio Operativo Gruppo Montepaschi 2, % MPS Gestione Crediti Banca % Product Companies 1, % TOTAL 31, % As a result of the organisational redesign completed in July, there was a further shift from Head Office units (e.g. Loan Labs, Regional Areas, etc.) towards the Network of over 800 resources, bringing the front office to total staff ratio to almost 70%. This was also impacted by the process of workforce "reconversion" from administrative to commercial functions (approx. 295 employees since the beginning of the year). 12 Net of asset disposals, workforce decreased by 2,221 employees. 13 Value obtained by deducting from personnel on payroll (31,229) all resources seconded to non-group companies and those belonging to Professional Area Band I working short-time (17 cleaning staff). 14 Removal of the companies, Monte Paschi Monaco SAM and MPS Venture SGR S.p.A. from the Group's scope of consolidation.. 76

77 The table below shows a breakdown of the MPS Group workforce by job category: NUMBER OF EMPLOYEES BY CATEGORY CATEGORY 31/12/11 CONSOLIDATED REPORT ON OPERATIONS % OF TOTAL % IN THE BANKING SYSTEM (*) Executives % 2.2% Managers 11, % 37.9% Remaining employees 18, % 59.8% TOTAL 31, % 100% (*) The labour market in the financial industry, 2011 Report; based on data as at 31/12/2010. The average age of staff stood at around 44 years, slightly above the System average 15 (43.4) but lower than that of the leading Italian groups (44.5). OPERATING STRATEGIES HUMAN RESOURCES DEVELOPMENT AND TRAINING Within the strategic framework outlined in the introduction, the goals pursued involved developing and enhancing human resources (employees and managers), initiating processes of professional and geographical mobility (aimed at ensuring the best possible coverage of organisational positions) and industrialising knowledge (to drive business continuity plans"), while training focussed on the quality of commercial behaviour at the front end, credit monitoring and protection/pension planning, with strong, specific attention being given to the role of the Branch Manager. In the area of HR development, the following factors acquired significance during the reporting period: mapping of management positions within the Network (Heads of Local Market Units and Segments) and Head Office units with a view to outlining their "projectability" profiles; launch for staff of the Banca Monte dei Paschi di Siena network of the : annual session of the Professional Skills Review (PaschiRisorse), a fundamental planning and monitoring tool used to define the skills distinctive to each role and test individuals' competency with respect to a benchmark profile that also provides support for all of the other processes concerning human resource growth; implementation of Professional career paths 16, involving a total of approximately 1,300 resources (identified through yearly editions). It should be noted that the 2011 edition is underway, which will also see the implementation of new systems and tools for identifying suitable resources and setting out plans for their professional development; the increasing use of the Self-development Workshop, which aims to support individual aptitudes in order to reinforce individuals' behaviour, steer their professional growth and create a systematic channel to fill the Group's future management positions (the initiative has thus far involved over 1,700 resources); the introduction of a new human resources management model for Banca MPS's head office units, based on the role of the HR Director, within the HR Management function who, through the application of a segment-based approach (eg. consumer sales & distribution, credit,...), carries out structured activities aimed at increasing the level of know-how of individual employees and building pathways of professional enhancement (continuity plans). From a functional perspective, the figure responds to the Head of the related Division. the launch of an internal selection process (Internship) for resources worthy of promotion to the role of Middle Manager, within a context of professional/territorial mobility, and development of high-potential specialist profiles Report on the job market in the financial industry, referring to data as at 31/12/ Vertical paths regulate upgrading to target positions up to second-level middle managers, whereas horizontal paths encourage skill integration in same-level positions. 77

78 CONSOLIDATED REPORT ON OPERATIONS Following rollout of major operational (hirings, transfers, etc.) and administrative (payroll) processes on the new Human Resources Information System (PaschiPeople), the time & labour application was released at the end of the year. It should also be noted that, as part of this, the "Reporting Track" was also launched. All training activities, in accordance with the path established in the Plan 17, were revised in light of new needs arising from changes in the market and strategic objectives outlined in the new Business Plan Ambition Priority initiatives target the following main areas: the development of relationship skills for both roles with a commercial component (managers of affluent and small business clients, etc.) and roles of a managerial nature, in terms of a proactive approach to commercial contact with clients; strengthening the qualification levels of credit management resources both in terms of risk monitoring and in developing business opportunities, through, among other things, the certification of skills relevant to dedicated Network and Central Unit roles (the Credit Academy project). In this context, new training courses are underway for branch managers and deputy branch managers, team heads and leaders, etc. concerning the new credit management and monitoring process; texpansion of training programmes for business-critical roles (branch managers and key Network roles) and alignment of "role qualifying/compulsory" training with statutory provisions (ISVAP, money laundering, Legislative Decree 231 on Corporate Liability, Transparency, Privacy, Workplace Safety 18, Patti Chiari, etc.). On this front, mention is made of the specialised path Obiettivo Protezione ("Objective: Protection") developed in close collaboration with AXAMPS; until today, it has involved approx. 1,000 placement agents from 6 Regional Areas, to which a further 1,500 will be added in the course of the year; role-specific training, aimed at key Network positions and focused on planning, commercial effectiveness and developing leadership and team management skills through a series of classroom sessions. the launch of a detailed training plan on CSR issues 19 aimed at increasing the skills and level of internal engagement, useful to continuing the CSR strategy in the coming years For newly-appointed branch managers, a professional tutorship initiative was also launched, pivoting around the role of the "masters of the trade" (persons with extensive experience in issuing loans, managing risks and ensuring commercial coverage of local areas). At the same time, management training for Local Market Units began, with particular prominence given to the aspect of quality and consistency of behaviours of the entire structure (including Credit Coordinators and Sector Specialists) compared to governance, mentoring and coaching of Branch managers and other front end resources (Branches and Centres). The project Knowledge experience was also launched in the course of the year. Aimed at personnel of the Parent Company, especially younger resources, the project was designed to encourage the growth and enhancement of skills particularly in the realms of innovation, proactivity and self-development. The set of initiatives was also inspired by the aim to strengthen personnel engagement (intended as involvement and sense of belonging), starting by actively listening to the professional and personal needs of employees within their units of operation. Over 1.5 million hours of training 20 were delivered in total since the beginning of the year, with a Group per capita average of over 49 hours. 17 The Plan outlines all the training initiatives planned for the three-year period in terms of guidelines, objectives, timing, content, target personnel, method (classroom, on-line, structured on-the-job training), financial and organisational sustainability (man days estimated) It should be noted that MPS Capital Services, obtained certification during the year for its Occupational Health and Safety Management System in accordance with standard OHSAS The certification is in addition to those already in place since 2008 in Banca MPS and the Operating Consortium. Corporate Social Responsibility. 20 Of which approx.l 27% online. 78

79 CONSOLIDATED REPORT ON OPERATIONS On 29 April 2011, the Parent Company's Shareholders' Meeting approved the new policy regarding compensation and incentive schemes for board directors, employees and collaborators, in alignment with the new supervisory rules issued by the Bank of Italy on 31 March 2011 ("Rules on compensation and incentive policies and practices for banks and banking groups). By that means, the Shareholders' Meeting mandated the Board of Directors to implement the principles set out in the new policy and report to the Shareholders on a regular basis. Guidance contained in the supervisory regulations are aimed at favouring an appropriate balance between the fixed and variable components of compensation and having it connected with actual performance over time, no longer by implementing a medium-long term plan but using specific deferral mechanisms for all employees whose professional activity has or may have considerable impact on the risk profile (a.k.a. key employees ). In the course of operational implementation, the BoD with a special resolution approved the new structure of variable compensation for higher-profile personnel (Top Management and Risk Takers). Following the outcome of the Shareholders' meeting of 29 April 2011, a group-wide coordination activity was launched with a view to sharing with Group companies the logics that had led to the decisions contained in the document and determining with them the implementation guidelines to be adopted. Specifically, all Companies were requested to submit for the approval of their respective Shareholders, with prior submission to the BoD, the document approved at the Shareholders' meeting of the Parent Comapny. For further information, please refer to Part I of the Notes to the Financial Statements - Share-based payments. INDUSTRIAL RELATIONS AND PENSION FUNDS Since the start of 2011, the following major consultation-based procedures were set up and completed with the Unions in a close time sequence: 1. contractual procedure (pursuant to articles 15 and 18 of the National Collective Labour Agreement, it. CCNL) to be followed for major restructuring efforts (see resolution of 10/3/2011), including the aforementioned re-organisation of the Bank; 2. law procedure (law no. 223/91) enabling implementation of the 2011 Mandatory Retirement initiative for redundant personnel in Head Office units (resolution of 21/4/2011); 3. procedure aimed at reorganising Regional Areas, completed on 6 July 2011 which, at the end of a pilotphase in the area of Northern Tuscany, enabled the setting up of 100 Local Market Units. A powerful leverage to intensify market presence, these units enhance the value of relations with businesses and households and allow for the bank's 'growth in extension' in the social and economic contexts in which they operate; 4. procedure relating to the end of the pilot-phase for the Lazio Region Corporate Project, aimed at strengthening the interaction processes within the supply chains, not only at bank- level but Group-wide; 5. procedure aimed at redefining the credit organisational setup and processes, to improve risk assessment and control and reduce response time for customers. The union agreement on this procedure was signed on 28 April 2011 to make implementation possible in the afore-mentioned regional area and was endorsed on 05/07/11. Finally, it should be noted that an agreement was reached for the launch of the 1st phase of thepaschiface Platform which will, over time, supersede the applications that are currently present in the Group-wide IT system. The application of new features will be supported by specific multimedia training courses for all resources affected by the new releases. Within this context, which also involved major 'mobility chain' efforts to ensure the best filling of organisational positions and enhancement of human resources' value, the level of 'industrial relations' played an extremely important role, facilitating the implementation of such a far-reaching, complex and markedly innovative plan. Activities continued on the "Standardisation of the Company Pension Scheme" relating to the centralisation (as of 01/01/2011) of the defined-benefit supplementary pension funds for employees of Banca Toscana, Banca Agricola Mantovana and Banca Antonveneta to Banca Monte dei Paschi di Siena's company pension scheme for 79

80 CONSOLIDATED REPORT ON OPERATIONS employees. Plans were also identified for the Supplementary pension fund for Banca Toscana S.p.A. employees 21, as a "container " of the defined-benefit supplementary pension schemes of the banks that were merged. Customer Care In compliance with its Code of Ethics, the Group implements a specific policy of customer relationship management and responsible marketing through a series of measures which include: Procedures for the planning and approval of products. In particular, all investment products (including those managed on behalf of the customer) are assessed using qualitative and quantitative methodologies which take account of the various market and risk factors. A range of "multi-brand" investment products ensures customers about compliance with the principles of independence and no conflict of interest. Procedures to verify the consistency of customers' investment choices with their financial profiles and risk appetite, pursuant to the MiFID directive. The activity is also supported by an ad hoc advisory service. Programmes to increase the simplicity and transparency of product information, in conformity with Bank of Italy guidelines. Systems to limit information asymmetry and ensure the comparability of product features and costs with those of other banks. Collaboration with Consumer Associations on the most relevant aspects regarding bank-customer relationships. Specialised training for those in the sale network. Pursuit of customer satisfaction objectives. Information technology support to optimise processes in the delivery of services to customers. Almost 300 thousand new customers were acquired by the Group in 2011, with an acquisition rate of around 5%. The retention rate came to 95.8%, an increase on the previous year (95.3%), thanks to the careful tracking of customer relations and to policies consistently aimed at providing products/services that are always tailored to the needs of customers. The customer's level of satisfaction and the factors which determine this are monitored by the Group through the analysis, among other things, of key indicators such as: Loyalty (in terms of relationship length): over 60% of consumer and corporate customers have had a relationship with the Group for at least 11 years, with the portion of lower seniority (1-3 years) greater for Corporate than for Consumer, reflecting a higher turnover linked to the company's business cycle. Customer Satisfaction: Satisfaction levels in relation to quality of products and services provided by the Group are monitored through periodic surveys (including so-called internal clients, ie. branch employees) as well as the analysis of performance-operational efficiency indicators. The quality perceived by customers measured through the Customer Perception Index (CPI) - is monitored by way of telephone surveys for retail and private customers and ad hoc questionnaires for the corporate customer segments. In 2011 CPI findings involved over 41,000 retail customers across all of the Group's retail banks. In order to determine the quality perceived by "internal" customers - Employee Perception Index (EPI) - ie. the satisfaction of network employees with the instruments and conditions at their disposal to deliver service to customers - an in-house survey is carried out on line which, in 2011, saw the participation of 7,200 colleagues from the Parent Company and Banca Antonveneta. With the intent to further expand and systematise the spectrum of surveys and analyse the variables contributing to the delivery of a high-level service to customers, 2011 saw the development of the Tableau de Bord for Quality (TdB for Quality) into which the existing CPI and EPI findings also merge. The TdB Quality is formed by a set of over 40 precise indicators relating to specific areas of analysis organised according to a hierarchical structure. The indicators have the purpose of balancing the need for synthesis 21 For this purpose, the fund will have to acquire legal recognition as a Foundation and financial independence from Banca Monte dei Paschi di Siena. 80

81 CONSOLIDATED REPORT ON OPERATIONS pursued so far through existing surveys, with the need for the utmost representativeness of pivotal aspects that are closer to and distinctive of the relationship with the customer. - Relationship with the Customer; blending the commercial aspect with the perception of customers during the pre and post-sale phases. - Operating efficiency; gauging the level of quality provided by the structures of the Bank and the Network. - Human Resources; focusing on the level of quality perceived by the internal customer and on the quality factors of personnel with whom they come into contact. Claims: 10,176 complaints were reported in 2011 (approx. -10% YoY), with a decline in those relating to banking activities and financial plans and a slight increase in complaints regarding compound interest. At the end of the year, formal complaints by customers is traditionally a countertrend to the yearly contraction; this was also confirmed in Q (+13% on the previous quarter). The average response time to claims in 2011 was 24 days, falling within the limits set by the Bank of Italy in its new transparency regulations (30 days). Brand and corporate image The brand, or corporate image and reputation that it represents, is a key driver in the choices of customers and in the long-term performance of the Group. For this reason, it is at the very heart of the Group's integrated communication strategy and supports product marketing. In particular, a series of activities was undertaken in 2011 to enhance the visibility and awareness of the Group's (and its affiliates') key brands, by leveraging on the already-established brand values (history, tradition, local proximity) and an ever greater focus on the new generations. Activities included: The institutional campaigns "An Italian Story" (Interactive Key Award); The institutional campaign AXA MPS (Media Stars and Media Key Awards); Several road shows in the area to strengthen the Group's penetration in all local socio-economic contexts; The value of the 1472 brand and the positive perception of the Group are also linked to extra-bank activities (Interactive Media Award); Further consolidation of the time-honoured ties with Siena's sports teams (A.C. Siena and Mens Sana Basket) and the relative benefits in terms of visibility; The progressive use of social networks as a key strategy. The approximately one thousand corporate and product brands are registered and subject to continuous monitoring in Italy and abroad so as to safeguard their intrinsic economic value and use. The brand's importance and reputation are monitored through both quantitative and qualitative analyses of the Group's coverage in the press, television and the web, so as to verify the effectiveness of communication strategies, identify opportunities for improvement together with any protective measures that may be deemed necessary. Social added value Knowing how to combine profit targets with a correct modus operandi on the market that is attentive to the needs of stakeholders and to the interests of the community is an integral part of the Group's Corporate Social Responsibility (CSR). To this end, activities in 2011 involved all major aspects of opportunity and risk relating to the various spheres of CSR. First of all, the development of human resources (see section on Organisational set-up and processes and management of human resources ) and customer care (see section on Customer Satisfaction ). Furthermore, in the course of the year the Group also implemented a series of initiatives capable of indirectly creating additional economic value for the company and aimed at contributing to sustainable growth across all areas of interest. 81

82 CONSOLIDATED REPORT ON OPERATIONS Measures to counter the effects of the economic crisis on customers (see Financial highlights and main activities of the business segments) The offer of banking products and services under accessible terms that respond to the needs of the most vulnerable sections of society. The following were made available: Low-cost current accounts and main banking services for low-income, low-transaction customers (Basic banking services and Conto Italiano Zip- Base). An offer for the younger generation centred around the on-line channels (Conto Italiano per Me). Student loans and first home mortgages for young people (Tuttofare Giovani and Diamogli Futuro). The possibility to credit pensions to lower-cost current accounts (Conto Pensione). Dedicated offers for immigrant clients (Paschi without Frontiers, serving 239 thousand customers coming from high-emigration countries; +7% in one year) and non-profit organisations (55 specialised centres across the country, serving approximately 25 thousand customers). Microcredit A total of 869 microloans were disbursed for an approximate EUR 4 mln overall. Key solutions proposed: Microcredito di Solidarietà Spa, 40% owned by the bank, which offers financially troubled and non-bankable individuals the possibility to obtain a loan of up to EUR 7,500 euro, without collateral, repayable over 5 years at an interest rate of 2%. The Company operates in Siena and other Tuscan provinces. The Fondo Nuovi Nati (New-born Fund) to support family expenses related to the birth/adoption of a child through the provision of a controlled rate loan for up to EUR 5 thousand that is 50% guaranteed by a special national fund. Joining the national microcredit program defined through the agreement between the Italian banking Association and the Italian Bishops Conference. Financial education projects The following initiatives were carried out to help raise the levels of consumer financial education and build awareness of banking products and services in young people: Collaboration with consumer groups (ConsumerLab) in the rollout of the project, BancAscuola, (12 meetings/events held in Italian high schools in the course of the year) to organise a series of open discussions with customers addressing the more "heartfelt" banking and financial concerns and manage the various branch information desks. The Byt notebook, a game book to help children explore the world of economics and finance (over 16 thousand copies of the book were distributed). The project, Sicura Mente, in partnership with Axa, to teach children and teenagers some simple rules when it comes to everyday household safety. Our offer of socially responsible investment products The Group has characterised its offer in terms of socio-environmental impact through the following operating procedures: A specific catalogue of ethical funds. An ESG (Environment, Society, Governance) assessment of all major funds in the catalogue with the possibility of indicating to customers those which exceed a preset threshold value. As at , 84 out of the 239 products assessed had such criteria. 82

83 CONSOLIDATED REPORT ON OPERATIONS The placement of investment products linked to the performances of companies with the best sustainability achievements (2011 saw the issue of the Credit Suisse Green Economy structured bond and the fund Prima Protetto 100 Energia Pulita Clean Energy ). Restricted involvement in the armaments sector with the implementation of a specific policy. In 2011 in particular, there was a further reduction in flows traded by the Group for the import/export of armament materials permitted under Law 185/90. The management of supplementary company pension funds integrates traditional investment assessments with ESG parameters. This involves the use of periodic ratings provided by the specialist company Vigeo in relation to securities in the portfolio. The average ESG rating of the bank's two funds was 46.1 as at , above the benchmarks monitored by Vigeo. Grants and donations for social development EUR 44.1 million in subsidies was issued to organisations and initiatives in the areas of culture, science, sports in addition to social and environmental projects, through: Sponsorships and contributions to local institutions for social projects at local level. Donations to charities. The promotion of fundraising through branches, ATMs, the use of prepaid cards, internet banking and other online resources, covering a variety of solidarity projects both in Italy and abroad. The promotion of social and environmental performances of business customers and suppliers Specific internal procedures were used to identify potential environmental risks inherent in project financing transactions and in lending processes for credit to larger businesses, for funding volumes of approx. EUR 20 bln. In the course of the year, under the agreement between the Italian Banking Association, Confindustria and the Ministry for Economic Development, the Group collaborated towards the definition of metrics that also take into account the sustainability profile of loans to small and medium businesses. Within the general process of vendor assessment and qualification, CSR management methods and the performances achieved by 200 companies (which account for 60% of total spending) were analysed in partnership with the specialised company, Ecovadis. The average CSR rating stood at 4.6 as at , confirming itself above the benchmarks monitored by Ecovadis. Implementation of the Group's environmental policy Within an organisational framework that has conformed to standard ISO14001 since 2002, Group actions included: Efficient monitoring of the environmental impact of internal operations (management of real estate used in the business, maintenance of equipment and facilities, development of information systems, management of the corporate fleet) which, in 2011, achieved reductions of approx. 2% in energy consumption, 13% in paper, 32% in toner consumption, 4% in water and 38% in waste and refuse. Greenhouse gas emissions were confirmed at levels registered in 2010, a sharp decrease on previous years as a result of a number of initiatives which continue to be ongoing and are gradually expanding. Purchase of eco-sustainable products and services, such as: electrical energy from renewable sources, use of ecological paper, business trips by train, high energy-efficiency hardware, use of hotels with efficient environmental management, etc. In 2011, these types of expenses totalled EUR 56.7 million (approx. 5% of total spending). Offer of environmentally responsible products and services (1,351 million in loans in 2011; +31% YoY). In the course of the year, the Group's offer was extended with new lending products directed at green construction, purchase of eco-cars as well as construction of alternative power-generation facilities other than PV plants for which a specific range of products has been in place for some time. (Mutuo Natura, Tuttofare Natura, Montepaschi Energie Pulite). 83

84 CONSOLIDATED REPORT ON OPERATIONS Market values and Investor Relations SHARE PRICES was characterised by high volatility for all major stock markets: performance was good in the first months of the year but began to dip as of the third quarter due to heightened tensions relating to the sustainability of sovereign debt. All major stock indices reported values as at 30 December 2011 (last day of trading for the year) that were below those registered at the end of 2010 (FTSE MIB -25,2%, CAC -17%, DAX -14,7%, IBEX -13,1% e FTSE -5,6%). A negative sign was registered for the banking sector by the Italian index, FTSE IT BANKS and the European index, DJ EURO STOXX BANKS, which closed the year at -45.1% and -37.6% respectively. Within this framework, BMPS stock closed 2011 at euro, down 65% on the end of 2010, compared to an average loss of 51% for other major Italian banks listed on the Milan Bourse. BMPS SHARE PRICES (from 31/12/10 to 31/12/11) Volumes in millions (lx) Price in (rx) Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec BMPS SHARE PRICE: STATISTICAL SUMMARY (from 31/12/2010 to 31/12/2011) Average 0.56 Lowest 0.24 Highest 0.86 In 2011 the number of BMPS shares traded on a daily basis averaged approx. 53 million with a peak of million in July and a low of 10.2 million in May. 22 An adjustment factor of was applied to BMPS share prices following completion of the pre-emptive rights issue relating to the capital increase approved by the Board of Directors of Banca Monte dei Paschi di Siena on 7 and 16 June 2011, by virtue of the authority granted to the Board of Directors by the Extraordinary Shareholders' Meeting of 6 June 2011, and completed with the total subscription of shares offered on 20 July 2011 (for further information, please refer to the dedicated section in the corporate website 84

85 CONSOLIDATED REPORT ON OPERATIONS MONTHLY VOLUMES OF SHARES TRADED 2011 volumes summary ( /mln) January 602 February 767 March 730 April 692 May 463 June 2,211 July 2,312 August 1,251 September 813 October 1,231 November 1,177 December 1,419 Rating Following are the credit ratings assigned as at 31 December 2011: Rating Agencies Short-term debt Long-term debt Moody's Investors Service P - 2 Baa1 Standard & Poor's A - 2 BBB+ Fitch Ratings F - 2 BBB+ On 5 October 2011, following downgrade of Italy s long-term sovereign debt rating from Aa2 to A2 with a negative outlook, the international ratings agency Moody s Investor Service lowered its rating on Banca Monte dei Paschi from A2/P-1 to Baa1/P-2 with a stable outlook. The Bank Financial Strength Rating (BFSR) was confirmed at D+. Following Italy's downgrade on 7 October from AA- / F1+ to A+ / F1 with negative outlook, on 17 October 2011 the international ratings agency Fitch Ratings lowered BMPS's long-term rating from A- to BBB+ and its individual rating from B/C to C,confirming, however, its short-term rating of F2. Subsequently, following the decision taken by the agency to place Italy on Rating Watch Negative (RWN), on 20 December 2011, the Parent Company's long-term and short-term ratings ( BBB+ / F2 ), Viability Rating (bbb+) and Support Rating Floor ( BBB ) were also placed on RWN. Following downgrade of Italy's sovereign debt rating, on 18 October 2011 the international rating agency S&P s lowered its long-term rating of Banca Monte dei Paschi di Siena from A- to BBB+. The short-term rating was confirmed at 'A-2'. Subsequently, following the decision taken by the Agency to place Italy on Credit Watch Negative, on 7 December 2011 BMPS's ratings ( BBB+ / A-2 ) were placed on Watch Negative. The following are the more significant events occurring after the closure of the 2011 financial year: On 13 January 2012, the agency Standard & Poor s Rating Services lowered its Italian sovereign debt rating from A / A-1 to BBB+ / A-2 with negative outlook. On 27 January 2012, the agency Fitch Ratings lowered its Italian sovereign debt rating from A+ / F1 to A- / F2 with negative outlook. On 2 February 2012, the rating agency Moody s placed Banca Monte dei Paschi di Siena on creditwatch for possible downgrade, more specifically: individual rating D+ ( Bank Financial Strength Rating or BFSR), long.term rating Baa1 and short-term rating Prime-2. 85

86 CONSOLIDATED REPORT ON OPERATIONS Following downgrade of Italy's sovereign debt rating, on 6 February 2012 the agency, Fitch Ratings, lowered BMPS's long-term rating from BBB+ to BBB, its short-term rating from F2 to F3 and its individual rating (Viability rating) from bbb+ to bbb-, with a stable outlook. Following Italy's downgrade, on 10 February 2012 Standard & Poor s revised downward its rating on MPS. In particular, S&P's lowered the bank's long-term rating from BBB+' to 'BBB', confirming, however, its A- 2 short-term rating. Outlook was negative. INVESTOR RELATIONS in 2011 Following on from 2010, in 2011 the Investor Relation team s interaction with the financial community was highly proactive. Since the start of the year, over 80 days of meetings were held between the top management of the Montepaschi Group and institutional investors from 21 different countries. Following is a geographical breakdown (in %) of days dedicated to roadshows/marketing up to 31 December 2011: Europe (excluding Italy) 46% Italy 29% America 11% Asia 14% Guidance on MPS shares With regard to guidance on BMPS shares as at 30 December 2010, 77% of analysts covering BMPS shares maintained a positive/neutral outlook whereas 23% expressed a negative one. 23% 77% Neutral / positive Negative 86

87 CONSOLIDATED REPORT ON OPERATIONS Corporate Governance and other information The corporate governance system chosen by the Group is a key framework that has guided both our business approach and our relations with stakeholders. In line with the Corporate Governance Code for Listed Companies, the system is characterised in particular by a clear-cut distinction of roles and responsibilities, an appropriate balance of powers and level composition of corporate bodies while its organisational basis rests on the effectiveness of controls, management of corporate risk, adequacy of information flows and corporate social responsibility. The information relating to the Corporate Governance system and to the ownership structure of Banca Monte dei Paschi di Siena prepared in accordance with art. 123 bis of the Consolidated Law of Finance may be found in the separate Report on Corporate Governance, published in conjunction with the current Annual Report on the Bank s internet site under the section Investors & Research > Corporate Governance. With regard to Related-party transactions, the Regulations containing provisions relating to transactions with related parties (the Regulation) was adopted by Consob in 2010 with Resolution no of 12 March 2010 and later amended by Resolution no of 23 June The new framework combines into a new and comprehensive Regulation all principles regarding prompt and periodic disclosure obligations pursuant to articles 114 and 154-ter of the Consolidated Law on Finance and superseding the rules already set out by Consob s Issuer Regulations, and principles pursuant to Article 2391-bis of the Civil Code. Banca Monte dei Paschi di Siena has complied with the new regulations as set forth in the Procedures for Relatedparty transactions, published on the bank's internet site at: Errore. Riferimento a collegamento ipertestuale non valido.. Under paragraph 26 of Annex B to Legislative Decree no. 196 of 30 June 2003 (Code for the protection of personal data), it is stated that, in accordance with art. 34, paragraph 1g) of the aforementioned Code, the Security Policy Document (SPD) of Banca Monte dei Paschi di Siena SpA as at 31 December 2011 was prepared in compliance with paragraph19 of the aforementioned Annex B. 87

88 CONSOLIDATED REPORT ON OPERATIONS Events after the balance sheet date Below is a summary of the more significant events of the Montepaschi Group after the 2011 balance sheet: Management At its session on 12 January 2012, the Board of Directors of the Parent Company formalised the departure, by mutual consent, of the Group General Manger, Antonio Vigni, as already announced to the market on 31 December In the same meeting, the BoD also appointed Fabrizio Viola as the new General Manager. Shareholders' equity and capital base The Extraordinary Shareholders' meeting of 1 February 2012 approved the allocation to equity of part of the "Share Premium Reserve" for a sum equal to the premium on 295,236,070 ordinary BMPS shares underlying the F.R.E.S.H notes issued by The Bank of New York for an amount of EUR 752,261, in April In the same meeting, approval was also given to the conversion of 18,864,340 savings shares into ordinary shares for a total of EUR 12,639, The easing of tensions regarding the credit spread on Italian Government Bonds, registered in the early months of 2012, led to an increase in the value of the Group's securities and derivatives portfolio with the consequence of a significant reduction in the negative AFS equity reserve which returned to better levels than those recorded at 30 September Bond issuances In early March 2012 a 2-year senior bond issuance was launched for a total of EUR 1.25 bln as part of Banca Monte dei Paschi di Siena's Euro Medium Term Notes Programme intended for professional investors and international financial intermediaries. The bond is listed on the Luxembourg Stock Exchange and in the over-the counter market. The bond was structured and placed by Banca IMI, MPS Capital Services, J.P. Morgan and Natixix as joint lead managers. Ratings The further downgrade of Italy's sovereign debt rating, announced in January 2012, had repercussions on the ratings assigned to Banca Monte dei Paschi di Siena. In particular: Fitch lowered the bank's long- and short-term Issuer Default Ratings from BBB+ / F2 to BBB / F3 with a stable outlook; S&P s lowered the bank's long-term rating from BBB+ to BBB while the short-term rating remained unchanged ( A-2 ). The outlook was negative. Furthermore, Moody s placed the following on creditwatch for possible downgrade: individual rating D+ ( Bank Financial Strength Rating or BFSR), long.term rating Baa1 and short-term rating Prime-2. The ratings agency also put other companies belonging to the Group under creditwatch for possible downgrade. 88

89 CONSOLIDATED REPORT ON OPERATIONS Outlook on operations The macroeconomic environment in which the Group operates continues to be particularly complex and there still remains a strong element of uncertainty over possible future developments, even in the short term. Weighted down by the fall in internal demand and the countercyclical effects from maneuvers to stabilise public finance, the domestic economy entered into recession. The significant improvement in Italy's spread, however, offers reassuring signs of a possible abatement in tensions on the financial markets and hints at a brighter economic picture, despite the call for caution by European authorities and major research institutes on the grounds that important issues still need to be defined, especially on a political level. Against this backdrop, the Montepaschi Group intends to pursue all practicable solutions to strengthen business development and recover corporate profitability. For this reason, the Group's business plan is currently under review with a view to updating strategic guidelines in relation to the changing scenario. With regard to the indications contained in Document no. 2 of 6 February 2009, issued jointly by the Bank of Italy, Consob and Isvap as later amended, the Group reasonably expects to continue operating in the foreseeable future and has therefore prepared the consolidated annual report on the assumption of business continuity since the uncertain climate arising from the current economic scenario affords no doubt as to the company's ability to continue operating as a going concern. 89

90 CONSOLIDATED REPORT ON OPERATIONS Annexes MONTEPASCHI GROUP RECONCILIATION BETWEEN OPERATIONAL FIGURES AND FINANCIAL STATEMENTS 90

91 Montepaschi Group - Reconciliation between Profit and Loss Statement reclassified as at 31 December 2011 and related accounting tables 20 Interest expense and similar charges -3, Net interest income 3, ,500.2 Net interest income CONSOLIDATED REPORT ON OPERATIONS 60 Net fee and commission income 1, ,801.0 Net fee and commission income 5,301.2 Income from banking activities 70 Div idends and similar income Div idends, similar income and gains (losses) on inv estments Net profit (loss) from trading 90 Net profit (loss) from hedging Net profit (loss) from hedging 120 Net interest and other banking income 5, ,507.2 Income from financial and insurance activities 130 Net impairment losses(reversals) on -1, ,464.0 Net impairment losses (reversals) on: a) loans -1, ,310.8 a) loans b) financial assets available for sale Net income from banking activities 3, b) financial assets 170 Net income from financial and insurance activities 3, ,043.2 Net income from financial and insurance activities 180 Administrativ e expenses: -3, ,307.0 Administrativ e expenses a) personnel expenses -2, ,194.9 a) Personnel expenses b) other administrative expenses -1, ,112.2 b) Other administrative expenses 210 Net adjustments to (recov eries on) intangible assets Operating expenses -4, ,502.5 Operating expenses Net losses/rev ersal on impairment on property, plant and equipment / Net adjustments to (recov eries on) intangible assets Net operating income Net prov isions for risks and charges and other operating expenses/income 240 Gains (losses) on investments Gains (losses) on investments Integration costs / one-off charges 260 Impairment on goodwill -4, , Impairment on goodwill 270 Gains (losses) on disposal of investments Gains (losses) from disposal of investments 280 Profit (loss) before tax from continuing operations -4, , Profit (loss) before tax from continuing operations 300 Profit (loss) after tax from continuing operations -4, , Profit (loss) after tax from continuing operations 320 Profit (loss) for the period -4, , Net profit (loss) for the period including non-controlling interests 340 Parent company's net profit (loss) for the period -4, , Profit (loss) for the period before PPA, impairment on goodwill, intangibles and writedown of investment in AM Holding PPA (Purchase Price Allocation) -4, ,514.0 Impairment on goodwill, intangibles and writedown of inv estment in AM Holding -4,685.3 Parent company's net profit (loss) for the period ECONOMIC Impairment of ECONOMIC EFFECTS FROM ECONOMIC ECONOMIC Reclassification Reclassification goodwill, PORTION OF Reclassification for Reclassification of RECOVERY OF EFFECTS FROM ALLOCATION OF EFFECTS FROM EFFECTS FROM of personnel of div idends Accounts in the Profit and Loss Statement - 31/12/2011 intangibles PROFIT FROM impairment of Greek losses from COSTS RELATING TO STAMP DUTY AND ALLOCATION OF BAV ALLOCATION OF ALLOCATION OF 31/12/2011 Accounts in Reclassified Profit and Loss Statement - Montepaschi Tax litigation expenses: early on treasury Montepaschi Group Accounting and writedown EQUITY Gov ernment bond disposal of loans FINANCIAL PLANS CUSTOMERS BAV ACQUISITION BAV BIVERBANCA Reclassified Group retirement stock of inv estment INVESTMENTS classified as L&R (Consum.it) EXPENSES ACQUISITION COSTS TO MPS ACQUISITION ACQUISITION charges transactions in AM Holding COSTS TO BMPS IMMOBILIARE COSTS COSTS (PPA EX BAV REAL ESTATE) 10 Interest income and similar rev enues 7, Fee and commission income 2, Fee and commission expense Net profit (loss) from trading Gains/losses on disposal/repurchase of: 22.2 a) loans b) financial assets available for sale 71.6 c) held to maturity investments d) financial liabilities Net profit (loss) from financial assets and liabilities designated at fair value 3.4 c) held to maturity investments d) other financial transactions Net premiums 160 Other income/expenses (net) from insurance activ ities 200 Net losses/rev ersal on impairment on property, plant and equipment Net prov isions for risks and charges Other operating expenses/income Net gain (losses) on tangible and intangible assets measured at fair v alue Net result of the tangible and intangible assets measured at fair v alue 290 Tax expense (recov ery) on income from continuing operations Tax expense (recovery) on income from continuing operations 310 Profit (loss) after tax from groups of assets held for sale and discontinued operations Profit (loss) after tax from groups of assets held for sale and discontinued operations 330 Profit (loss) for the period attributable to noncontrolling interests Net profit (loss) attributable to non-controlling interests 91

92 Montepaschi Group - Reconciliation between Profit and Loss Statement reclassified as at 31 December 2010 and related accounting tables 30 Net interest income 3, ,587.9 Net interest income 60 Net fee and commission income 1, ,915.3 Net fee and commission income 31/12/2010 Reclassified Accounts in Reclassified Profit and Loss Statement - Montepaschi Group 5,503.2 Income from banking activities 70 Div idends and similar income Div idends, similar income and gains (losses) on inv estments Net profit (loss) from trading 90 Net profit (loss) from hedging Net profit (loss) from hedging 120 Net interest and other banking income 5, ,571.3 Income from financial and insurance activities 130 Net impairment losses(reversals) on -1, ,194.3 Net impairment losses (reversals) on: a) loans -1, ,155.6 a) loans b) financial assets 170 Net income from financial and insurance activities 4, ,377.0 Net income from financial and insurance activities 180 Administrativ e expenses: -3, ,255.9 Administrativ e expenses a) personnel expenses -2, ,211.2 a) Personnel expenses b) other administrative expenses -1, ,044.7 b) Other administrative expenses 230 Operating expenses -3, ,431.1 Operating expenses Net losses/rev ersal on impairment on property, plant and equipment / Net adjustments to (recov eries on) intangible assets Net operating income 240 Gains (losses) on investments Gains (losses) on investments Net prov isions for risks and charges and other operating expenses/income Integration costs / one-off charges P&L figures for branches sold 260 Impairment on goodwill Impairment on goodwill 270 Gains (losses) on disposal of investments Gains (losses) from disposal of investments 280 Profit (loss) before tax from continuing operations 1, ,488.9 Profit (loss) before tax from continuing operations 300 Profit (loss) after tax from continuing operations ,096.0 Profit (loss) after tax from continuing operations 320 Profit (loss) for the period ,097.6 Net profit (loss) for the period including non-controlling interests PPA (Purchase Price Allocation) Profit (loss) for the period before PPA, impairment on goodwill, intangibles and writedown of investment in AM Holding Parent company's net profit (loss) for the period CONSOLIDATED REPORT ON OPERATIONS Accounts in the Profit and Loss Statement - Montepaschi Group 31/12/2010 Accounting Branch disposal effects (22 Reclassification PORTION OF branches to of losses from PROFIT FROM CARIGE and 50 disposal of EQUITY to Intesa- loans INVESTMENTS SanPaolo Group) LOSS ON DISPOSAL OF LOANS COSTS RELATING TO FINANCIAL PLANS RECOVERY OF STAMP DUTY AND CUSTOMERS EXPENSES ECONOMIC EFFECTS ECONOMIC FROM ALLOCATION OF ECONOMIC EFFECTS ECONOMIC EFFECTS Reclassification EFFECTS FROM BAV ACQUISITION FROM ALLOCATION FROM ALLOCATION of integration ALLOCATION OF COSTS TO MPS OF BAV ACQUISITION OF BIVERBANCA costs BAV ACQUISITION IMMOBILIARE (PPA EX COSTS ACQUISITION COSTS COSTS TO BMPS BAV REAL ESTATE) 10 Interest income and similar rev enues 6, Interest expense and similar charges -2, Fee and commission income 2, Fee and commission expense Net profit (loss) from trading Gains/losses on disposal/repurchase 23.2 of: 36.3 a) loans b) financial assets available for sale 63.1 c) held to maturity investments d) financial liabilities Net profit (loss) from financial assets and liabilities designated at fair value b) financial assets available for sale c) held to maturity investments d) other financial transactions Net income from banking activities 4, Net premiums 160 Other income/expenses (net) from insurance activ ities 200 Net losses/rev ersal on impairment on property, plant and equipment Net adjustments to (recov eries on) intangible assets Net prov isions for risks and charges Other operating expenses/income Net gain (losses) on tangible and intangible assets measured at fair v alue Net result of the tangible and intangible assets measured at fair v alue 290 Tax expense (recov ery) on income from continuing operations Tax expense (recovery) on income from continuing operations 310 Profit (loss) after tax from groups of assets held for sale and discontinued operations Profit (loss) after tax from groups of assets held for sale and discontinued operations 330 Profit (loss) for the period attributable to noncontrolling interests Net profit (loss) attributable to non-controlling interests 340 Parent company's net profit (loss) for the period ,

93 Consolidated financial statements - Consolidated statement of comprehensive income Balance-sheet Items - Assets 31/12/11 31/12/10 Reclassified balance-sheet items - Assets 878 2,411 Cash and cash equivalents Item 10 Cash and cash equivalents 878 2,411 Loans and receivables 146, ,329 a) Loans to customers Item 70 Loans to customers 146, ,329 20,695 8,810 b) Loans to banks Item 60 Loans to banks 20,695 8,810 55,482 52,664 Held to maturity investments Item 20 Financial assets held for trading 32,539 30,615 Item 30 Financial assets designated at fair value Item 40 Financial assets available for sale 22,905 21, Financial assets held to maturity Item 50 Held to maturity investments Investments Item 100 Equity investments Reinsurers' technical reserves Item 110 Reinsurers's technical reserves - - 4,365 8,959 Property, plant and equipment / Intangible assets Item 120 Property, plant and equipment 1,385 1,407 Item 130 Intangible assets 2,980 7,552 11,779 10,081 Other assets Item 80 Hedging Derivatives Item 90 Change in value of macro-hedged financial assets (+/-) Item 140 Tax assets 7,223 4,784 Item 150 Non-current assets held for sale and discontinued operations Item 160 Other assets 4,114 4,805 Total Assets 240, ,162 Total Assets Balance-sheet Items - Liabilities 31/12/11 31/12/10 Reclassified balance-sheet items - Liabilities Deposits 146, ,593 a) Deposits from customers and securities issued Item 20 Deposits from customers 84,011 96,877 Item 30 Securities issued 39,815 35,247 Item 50 Financial liabilities designated at fair value 22,499 25,469 46,793 27,419 b) Deposits from banks Item 10 Deposits from banks 46,793 27,419 26,329 27,075 Financial liabilities held for trading Item 40 Financial liabilities held for trading 26,329 27,075 Provisions for specific use Item 110 Provision for employee severance pay Item Provisions for risks and charges - a) pension and similar obligations Item Provisions for risks and charges - b) other provisions 1, ,760 8,043 Other liabilities Item 60 Hedging Derivatives 4,359 1,737 Item 70 Change in value of macro-hedged financial liabilities (+/-) - - Item 80 Tax liabilities Item 90 Liabilities associated to disposal groups held for sale 213 Item 100 Other liabilities 4,117 5,860 Insurance reserves Item 130 Insurance Reserves 10,765 17,156 Group portion of shareholders' equity Item 140 Valuation reserves -3, a) Valuation reserves Item 150 Redeemable shares - - b) Redeemable shares Item 160 Equity instruments 1,903 1,949 c) Capital instruments Item 170 Reserves 6,577 5,900 d) Reserves Item 180 Share premium reserve 4,118 3,990 e) Share premium reserves Item 190 Share Capital 6,732 4,502 f) Share capital Item 200 Treasury shares (-) g) Treasury shares (-) Item 220 Profit (loss) for the period (+/-) -4, h) Profit (loss) for the period Non-controlling interests in shareholders' equity Item 210 Non-controlling interests (+/-) Total liabilities and shareholders' equity 240, ,162 Total liabilities and shareholders' equity 93

94 Consolidated financial statements - Consolidated balance sheet CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheet Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated Cash Flow Statement indirect method

95 Consolidated financial statements - Consolidated statement of comprehensive income Consolidated balance sheet (in units of EUR) Assets 31/12/ /12/ Cash and cash equivalents 877,783,821 2,411,030, Financial assets held for trading 32,539,183,984 30,615,440, Financial assets designated at fair value 38,230, ,143, Financial assets available for sale 22,904,656,193 21,801,514, Financial assets held to maturity 2,377 3, Loans to banks 20,695,446,791 8,809,711, Loans to customers 146,607,895, ,329,325, Hedging derivatives 363,351, ,412, Change in value of macro-hedged financial assets (+/-) 76,309,634 17,655, Equity investments 894,641, ,528, Property, plant and equipment 1,384,965,354 1,407,077, Intangible assets 2,980,416,086 7,551,613,476 of which: goodwill 2,216,339,302 6,473,778, Tax assets 7,223,340,311 4,783,787,667 a) current 550,693, ,908,700 b) deferred 6,672,646,592 4,113,878, Non-current assets and groups of assets held for sale and discontinued operations 2,158, ,772, Other assets 4,113,588,637 4,804,736,576 Total Assets 240,701,970, ,161,753, comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender. Recalculation entailed a reduction in certain items on the assets side of the balance sheet with respect to data reported in the annual accounts for 2010; this reduction was offset by a reduction for the same amount in certain liabilities items, which had no impact on 2010 equity and profit for the year (details are provided in the notes to the consolidated balance sheet, liabilities). The following 2010 balance sheet asset items were recalculated: balance of item 20 Financial assets held for trading was reduced by EUR 3,308.8 mln; balance of item 60 Loans to banks was reduced by EUR mln; balance of item 70 Loans to customers was reduced by EUR mln. 95

96 Consolidated financial statements - Consolidated income statement continued: Consolidated balance sheet (in units of EUR) Liabilities and Shareholders' Equity 31/12/ /12/ Deposits from banks 46,792,932,275 27,419,008, Deposits from customers 84,010,670,749 96,876,568, Debt securities issued 39,814,649,166 35,246,717, Financial liabilities held for trading 26,329,375,892 27,074,740, Financial liabilities designated at fair value 22,498,694,008 25,469,490, Hedging derivatives 4,359,399,684 1,736,529, Tax liabilities 283,460, ,879,224 a) current 182,596, ,725,497 b) deferred 100,864, ,153, Liabilities associated with non-current assets held for sale and discontinued operations - 213,399, Other liabilities 4,116,878,800 5,859,531, Provision for employee severance pay 265,905, ,475, Provisions for risks and charges: 1,248,267,144 1,318,361,942 a) post-employment benefits 192,595, ,918,857 b) other provisions 1,055,671, ,443, Valuation reserves (3,854,000,697) (146,164,752) 160 Equity instruments carried at equity 1,903,002,406 1,949,365, Reserves 6,577,151,062 5,900,424, Share premium 4,117,870,216 3,989,501, Share capital 6,732,246,665 4,502,410, Treasury shares (-) (26,460,508) (24,612,663) 210 Non-controlling interests (+/-) 217,201, ,628, Profit (loss) for the period (+/-) (4,685,274,102) 985,497,320 Total Liabilities and Shareholders' Equity 240,701,970, ,161,753, comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender. Recalculation entailed a reduction in certain items on the liabilities side of the balance sheet with respect to data reported in the annual accounts for 2010; this reduction was offset by a reduction for the same amount in certain assets items, which had no impact on 2010 equity and profit for the year (details are provided in the notes to the consolidated balance sheet, liabilities). The following 2010 balance sheet liabilities items were recalculated: balance of item 10 Deposits from banks was reduced by EUR mln; balance of item 20 Deposits from customers was reduced by EUR mln; balance of item 40 Financial liabilities held for trading was reduced by EUR 3,308.8 mln. 96

97 Consolidated income statement Consolidated financial statements - Consolidated statement of comprehensive income 97 (in units of EUR) 31/12/ /12/ Interest income and similar revenues 7,343,019,566 6,466,633, Interest expense and similar charges (3,926,578,892) (2,929,745,752) 30 Net interest income 3,416,440,674 3,536,887, Fee and commission income 2,116,794,680 2,174,911, Fee and commission expense (315,749,431) (241,964,677) 60 Net fee and commission income 1,801,045,249 1,932,946, Dividends and similar income 107,043, ,053, Net profit (loss) from trading (108,654,251) (322,116,994) 90 Net profit (loss) from hedging (32,004,148) (608,432) 100 Gains/losses on disposal/repurchase of: 149,471,143 23,169,576 a) loans 11,591,164 (19,617,709) b) financial assets available for sale 71,577,854 63,124,584 d) financial liabilities 66,302,125 (20,337,299) 110 Net profit (loss) from financial assets and liabilities designated at fair value 3,446,826 (30,379,893) 120 Net interest and other banking income 5,336,788,936 5,417,951, Net impairment losses(reversals) on (1,445,569,749) (1,166,615,062) a) loans (1,309,188,083) (1,125,508,512) b) financial assets available for sale (121,718,922) (30,481,195) d) other financial transactions (14,662,744) (10,625,355) 140 Net income from banking activities 3,891,219,187 4,251,336, Administrative expenses: (3,618,888,279) (3,626,177,798) a) personnel expenses (2,220,662,728) (2,224,738,245) b) other administrative expenses (1,398,225,551) (1,401,439,553) 190 Net provisions for risks and charges (247,633,995) (61,390,382) 200 Net losses/reversals on impairment of property, plant and equipment (84,683,036) (101,586,182) 210 Net adjustments to (recoveries on) intangible assets (520,844,750) (155,968,128) 220 Other operating expenses/income 68,686, ,234, Operating expenses (4,403,363,691) (3,741,888,034) 240 Gains (losses) on investments 5,184, ,337, Impairment on goodwill (4,257,439,591) Gains (losses) on disposal of investments 34,633, ,394, Profit (loss) before tax from continuing operations (4,729,766,173) 1,327,180, Tax expense (recovery) on income from continuing operations 23,352,705 (341,849,903) 300 Profit (loss) after tax from continuing operations (4,706,413,468) 985,331, Profit (loss) after tax from groups of assets held for sale and discontinued operations 17,674,737 1,651, Profit (loss) for the period (4,688,738,731) 986,982, Profit (loss) for the period attributable to non-controlling interests (3,464,629) 1,485, Parent company's net profit (loss) for the period (4,685,274,102) 985,497,320 31/12/11 31/12/10 Basic Earnings per Share (Basic EPS) of continuing operations of groups of assets held for sale and discontinued operations Diluted Earnings per Share (Diluted EPS) of continuing operations of groups of assets held for sale and discontinued operations

98 Consolidated financial statements - Consolidated income statement 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender. Recalculation entailed the reclassification of EUR 5.0 mln from item 10 Interest income and similar revenues to item 40 Fee and commission income and EUR 1.2 mln from item 20 interest expense and similar charges to item 50 Fee and commission expense, with no impact on the profit for

99 Consolidated financial statements - Consolidated statement of comprehensive income Consolidated statement of comprehensive income (in units of EUR) Items Profit (loss) for the period (4,688,738,731) 986,982,791 Other comprehensive income, net of tax 20 Financial assets available for sale (3,685,514,847) (845,330,261) 60 Cash flow hedges (33,612,177) 2,750, Foreign exchange differences 1,417,003 2,998, Non-current assets and groups of assets held for sale and discontinued operations (201,495) 201, Share of valuation reserves connected with investments carried at equity (30,482,826) (37,772,417) 110 Total other comprehensive income, net of tax (3,748,394,342) (877,151,709) 120 Total comprehensive income (Account ) (8,437,133,073) 109,831, Consolidated comprehensive income attributable to non-controlling interests (44,023,615) (4,172,202) 140 Consolidated comprehensive income attributable to Parent Company (8,393,109,458) 114,003,284 99

100 As at 31 December 2011 the Group s net equity, including profit for the year, amounted to EUR 10,764.5 mln as compared to EUR 17,156.4 mln at the end of Here follows a list of the most significant events which had an impact on equity, besides profit for the year: 1. a EUR 2,151.9 mln capital increase was completed in July, entailing a EUR 2,151.9 mln increase in the amount of Share capital and a EUR 31.4 mln decrease in Share premium due to the costs incurred for the transaction; 2. the public tender offer for purchase of the F.R.E.S.H. convertible preferred securities closed in July, for a nominal amount of EUR mln, entailing a EUR 16.0 mln reduction in Equity instruments 3. again in July 2011, coupons on Tremonti bonds were paid for an amount of EUR mln, with a consequent same-amount reduction in Reserves a) from profits (column Changes in reserves ); 4.. In 2011, the item Share premium (column Changes in reserves ) was allocated EUR 51.2 mln in fees paid to JP Morgan against dividend entitlement acquisition on ordinary shares by the Bank in 2008; 5. Convertible Preferred Securities (F.R.E.S.H.) were converted for a nominal amount of EUR mln in December 2011, against the issuance of 136,698,112 ordinary shares. The conversion had the following main effects: a EUR 78.0 mln increase in item Share capital ; a EUR mln increase in item Share premium ; EUR 30.4 mln reclassified from item Equity instruments to item Reserves a) from profits. 6. in the second half of the year, widening spreads on Italian government debt, combined with a reduction in the benchmark rates for the Eurozone market, led to a EUR 3,748.4 mln increase in the negative balance of Valuation reserves. 7. in June 2011, 450,000,000 preferred shares were converted into the same number of ordinary shares for a nominal amount of EUR mln, with no impact on the overall share capital value. consolidated financial statements - Consolidated Cash Flow Statement indirect method Consolidated statement of changes in equity 100

101 As at 31 December 2010, the Group s equity including profit for the year came to EUR 17,156 mln, as compared to EUR 17,174.7 mln at the end of Profit for 2009, totalling EUR mln of which mln for the Group and EUR 4.5 mln for non-controlling shareholders, was paid out as dividends for an amount of EUR 2.6 mln, of which EUR 0.2 mln by the Parent Company, as per profit distribution approved by the Shareholders Meeting on 27 April 2010 and EUR 1.6 mln in donations by one of the subsidiaries. The overall change in reserves, amounting to mln, is primarily accounted for by capitalised profits (EUR mln) net of the EUR 80.9 mln coupon paid on the Tremonti bond issuance. Revenue reserves include EUR 24.6 mln in restricted reserves for an amount equal to the total of treasury shares. Treasury shares saw a reduction by EUR 7.5 mln; p trading income (loss) is included in the share premium which also incorporates the EUR 52.1 mln fee paid to JPMorgan on account of the dividend entitlement acquired by the Parent Company on the ordinary shares in Valuation reserves register an overall negative change amounting to EUR mln, of which EUR 883 mln (negative) in valuation reserves of available-for-sale assets following the widening of credit spreads for debt securities, a positive change of EUR 2.7 mln in valuation reserves for cash flow hedges, a positive change of EUR 3 mln in other valuation reserves primarily accounted for by foreign exchange differences. Non-controlling interests came to approx. EUR 12 mln less than in the previous year due to payout of dividend and as a result of the demerger of consortium company 'Consorzio Perimetro Gestione Proprietà Immobiliari'.. 101

102 consolidated financial statements - Consolidated Cash Flow Statement indirect method Consolidated Cash Flow Statement indirect method (in units of EUR) A. OPERATING ACTIVITIES Cash flows from operations 1,598,341,749 2,224,458,403 profit (loss) for the period (+/-) (4,688,738,731) 986,982,791 capital gains/losses on financial assets held for trading and on assets/liabilities designated at fair value (+/-) (374,914,578) (324,515,109) Net profit (loss) from hedging 32,004, ,432 net impairment losses/reversals (+/-) 5,824,727,405 1,302,520,117 net losses/reversals on impairment on property, plant and equipment and on intangible assets (+/-) 605,527, ,554,310 net provisions for risks and charges and other costs/revenues (+/-) 284,013, ,007,772 net premiums to be collected - - other insurance revenues/charges to be collected - - Tax expense (recovery) on income from continuing operations (23,352,705) 341,849,903 net losses/reversals on impairment on groups of assets held for sale and discontinued operations, after tax (+/-) 1,645,547 2,585,681 other adjustments (62,570,639) (448,135,494) 2. Cash flows from (used in) financial assets (4,849,181,135) (24,197,454,097) financial assets held for trading 1,720,670,499 (10,007,051,636) financial assets designated at fair value 1,269,315 13,275,236 financial assets available for sale (4,286,334,889) (8,159,032,893) sales/repayment of financial assets held to maturity loans to banks: on demand (10,984,532,024) 584,287,879 loans to banks: other - - loans to customers 8,200,101,775 (7,301,724,847) hedging derivatives - - other assets 499,643, ,792, Cash flows from (used in) financial liabilities 225,076,297 21,828,747,947 deposits from banks: on demand 18,458,496,243 6,515,704,631 deposits from banks: other - - deposits from customers (13,469,094,265) 8,028,836,224 debt securities issued 4,567,931,803 (7,295,111,036) financial liabilities held for trading (3,951,343,281) 10,949,087,472 financial liabilities designated at fair value (3,034,316,980) 3,637,205,375 hedging derivatives - - other liabilities (2,346,597,223) (6,974,719) of which technical reserves - - Net cash flows from (used in) operating activities (3,025,763,089) (144,247,747) 102

103 B. INVESTMENT ACTIVITIES 1. Cash flows from: 44,486,908 1,802,215,252 sales of equity investments - 154,806,418 dividends collected on equity investments 19,116,000 52,415,600 sales/repayment of financial assets held to maturity - - sales of property, plant and equipment 6,159,496 28,914,761 sales of intangible assets (318,588) 5,050,788 sales of subsidiaries and undertakings 19,530,000 1,561,027, Cash flows used in (278,179,080) (399,814,092) purchase of equity investments - (154,820,017) purchase of financial assets held to maturity - - purchase of property, plant and equipment (70,779,635) (48,589,652) purchase of intangible assets (207,399,445) (196,404,423) purchase of subsidiaries and undertakings - - Net cash flows from (used in) investment activities (233,692,172) 1,402,401,160 C. FUNDING ACTIVITIES issue/purchase of treasury shares (11,653,410) 7,466,696 issue/purchase of equity instruments carried at equity - - dividend payout and other (421,790,715) (142,396,271) issue of new shares 2,151,872,590 - Net cash flows from (used in) funding activities 1,718,428,465 (134,929,575) NET CASH FLOWs FROM (USED IN) OPERATING, INVESTMENT AND FUNDING ACTIVITIES DURING THE PERIOD (1,541,026,796) 1,123,223,838 Reconciliation (in units of EUR) Accounts Cash and cash equivalents at beginning of period 2,418,810,617 1,295,586,779 Net increase (decrease) in cash and cash equivalents (1,541,026,796) 1,123,223,838 Cash and cash equivalents: foreign exchange effects - - Cash and cash equivalents at end of period 877,783,821 2,418,810,617 Cash and cash equivalents at beginning of period, amounting to EUR 2,418,811,617 includes the balance as at of item 10 of the balance sheet Cash and cash equivalents for an amount of EUR 2,411,031,277 and other cash and cash equivalents for an amount of EUR 7,779,746 Euro, included in the balance as at of balance sheet item 150 Non-current assets held for sale and discontinued operations. 103

104 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 Consolidated Statement of Comprehensive Income Part E Information on risks and relative hedging policies Part F Information on consolidated shareholders equity Part G Business combinations Part H Related-party transactions Part I Share-based payments Part L Segment reporting

105 Notes to the Consolidated Financial Statements - Part A Accounting policies Part A Accounting policies A.1 General Section 1 Statement of compliance with international accounting principles Section 2 Preparation criteria Section 3 Scope and methods of consolidation Section 4 Events after the Reporting Period Section 5 Other matters A.2 The main items of the accounts Accounting standards Financial assets held for trading Financial assets available for sale Financial assets held to maturity Loans Financial assets valued at fair value Hedging transactions Equity investments Property, plant and equipment Intangible assets Non current assets held for sale and discontinued operations Current and deferred tax Provisions for risks and charges Liabilities and debt securities issued Financial liabilities held for trading Financial liabilities designated at fair value Foreign-currency transactions Other information A.3 Information on fair value A.3.1 Portfolio transfers A.3.2 Fair Value Hierarchy A.3.3 Information on "day one profit/loss"

106 Notes to the Consolidated Financial Statements - Part A Accounting policies A.1 General Section 1 - Statement of compliance with international accounting principles Pursuant to Legislative Decree no. 38 of 28 February2005, the MPS Group consolidated accounts were prepared in accordance with the international accounting principles issued by the International Accounting Standards Board (IASB) including interpretations by the International Financial Reporting Interpretations Committee (IFRIC), as endorsed by the European Commission, pursuant to EC Regulation no of 19 July 2002 which was effective as at 31 December The international accounting principles were applied following the indications set forth in the Framework for the Preparation and Presentation of Financial Statements (the Framework). Failing a principle or an interpretation specifically applicable to a certain transaction, event or circumstance, the Bank s Management used its own judgment in developing and applying the accounting principles for the purpose of providing a report which is: relevant for the purpose of economic decision-making by the users; reliable so that the Financial Statements: - result in a true and fair view of the Group s assets, financial position, profit and loss and cash flows; - reflect the economic substance -and not merely the juridical form- of transactions, other events and circumstances; - are neutral, that is with no prejudice; - are conservative; - are complete in all relevant respects. In its judgment, the Bank s Management made reference to and took account of the enforceability of the following provisions, listed in a hierarchically decreasing order: the provisions and implementation guidance contained in the principles and interpretations dealing with similar or related cases; the definitions, recognition and measurement criteria for the accounting of assets, liabilities, income and expenses contained in the Framework. In delivering its judgment, the Bank s Management may also take account of: the most recent provisions set forth by other entities in charge of establishing the accounting principles which use a conceptually similar Framework for the purpose of developing the accounting principles; other accounting literature; consolidated practices of the banking industry. In compliance with art. 5 of Legislative Decree no. 38 of 28 February 2005, if in exceptional cases the application of a provision set forth in the international accounting principles proved to be non-compliant with a true and fair view of the Group s balance-sheet, financial situation and profit and loss statement, then such provision would not be applied. The reasons for deviation and its impact on the representation of the balance-sheet, financial situation and profit and loss statement, would in such case be explained in the notes to the financial statements. In the separate financial statements of each company any profits arising from this deviation are posted to a reserve which is only distributable in proportion to the value recovered. 106

107 Notes to the Consolidated Financial Statements - Part A Accounting policies Section 2 - Preparation Criteria The Balance Sheet has been prepared in accordance with the IAS/IFRS International accounting standards issued by the International Accounting Standards Board (IASB) including the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), as endorsed by the European Union and mandatorily applied in the 2011 financial year. The provisions contained in Circular Letter No. 262 issued by the Bank of Italy concerning the layout and rules for preparing separate and consolidated financial statements for the banks and the Group were also applied, as amended by the first addendum of 18 November The consolidated financial statements consist of the: Balance-Sheet; Consolidated Income Statement; Consolidated Statement of Comprehensive Income; Consolidated Statement of Changes in Equity; Consolidated Cash Flow Statement; Notes to the Consolidated Financial Statements. The Consolidated Financial Statements are integrated with the Directors Report on Group Operations. The Consolidated Financial Statements are prepared with transparency and provide a true and fair view of the balancesheet, financial position and profit and loss statement for the year. The notes to the consolidated financial statements contain all information required by the international accounting standards and provisions contained in Bank of Italy Circular Letter no. 262, together with other non-mandatory information deemed necessary to provide a true and fair, relevant, reliable, comparable and intelligible view of the Group s performance. The balance-sheet, profit and loss statement and statement of consolidated comprehensive income consist of items (marked with numbers), sub-items (marked with letters) and further details, under including in the items and subitems. Items, sub-items and their details are part of the financial statements. Each item of the balance-sheet, profit and loss statement and statement of consolidated comprehensive income also indicates prior year s amounts. If the items cannot be compared, the items in relation to the prior year are reclassified; non-comparability, reclassification or impossible reclassification are pointed out and commented in the notes to the financial statements. Assets and liabilities, expenses and income cannot be mutually offset, unless this is permitted or required by the international accounting standards or the provisions set forth in Circular no. 262 of the Bank of Italy. The consolidated balance-sheet, profit and loss statement and statement of consolidated comprehensive income do not indicate the items which do not show any amounts for the year of reference of the financial statements or prior year. If an item of the assets or liabilities is part of several items of the balance-sheet, the notes to the financial statements indicate whenever this is necessary for the purpose of intelligibility that this component may also be referred to items other than the one it is posted to. Income is posted with no sign in the profit and loss statement and the respective section of the notes, whereas expenses are indicated in brackets. Negative amounts are indicated in brackets in the statement of comprehensive income. In compliance with the provisions of art. 5 of Legislative Decree no. 38 of 28 February 2005, the consolidated financial statements have been prepared using the Euro as the accounting currency: the tables in the consolidated financial statements are denominated in units of Euro, while the tables in the consolidated notes are denominated in thousands of Euro. The consolidated financial statements have been prepared based on a going concern assumption, according to the generally accepted principles of accrual accounting, relevance and materiality of information, priority of substance over form and with a view to encouraging consistency with future statements. Items of a different nature or with different allocation were recognised separately, unless they were considered irrelevant. All amounts shown in the consolidated financial statements were adjusted so as to reflect any events subsequent to the date of closing which, according to IAS 10, make it mandatory to make an adjustment (adjusting events). Non-adjusting events reflecting circumstances that occurred after the reporting date should be disclosed as part of the Notes to the Financial Statements, section 4, if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. 107

108 Notes to the Consolidated Financial Statements - Part A Accounting policies Section 3 Scope and methods of consolidation Scope of consolidation The consolidated financial statements include the balance sheet and income statement results of the Parent Company and its direct and indirect subsidiaries. In particular, the scope of consolidation, as specifically set out in the IAS/IFRS, includes all subsidiaries, irrespective of their legal status, of business activity pursued in sectors other than the Parent Company s core business, of them being going concerns or wound-up companies, or of whether the equity investment consists in a merchant banking transaction. Similarly, special purpose entities/vehicles (SPEs/SPVs) are included when the requirement of actual control recurs, even if there is no stake in the company. Companies are assumed to be subsidiaries when the Parent Company, directly or indirectly, holds more than half of their voting rights, unless clearly proved otherwise. However, control may also exist in those cases where the Parent Company, though holding half or less than half of the voting rights, has the power to appoint the majority of directors of the investee or determine the financial or operating policies of an entity for the purpose of obtaining benefits from its activity. In assessing whether a company has the power to determine the financial or operating policies of another company, account is also taken of potential rights when they are currently exercisable or convertible in actual voting rights. In accordance with SIC 12, the consolidation of special purpose entities has the same effect as full consolidation. Equity interests held by third parties in a special purpose entity consolidated in accordance with SIC 12 are recognised under non-controlling interests. Companies are considered as joint ventures, i.e subject to joint control when the voting rights and the control of the economic activities of the investee are equally shared by the Parent Company, directly or indirectly, and an external entity. Furthermore, an investment is considered as subject to joint control even when voting rights are not equally shared if control over the economic activities and the strategies of the investee is shared, based on contractual agreements, with other entities. Companies are considered associates, that is subject to significant influence, when the Parent Company, directly or indirectly, holds at least 20 per cent of their voting rights (including potential voting rights as described above) and has the power to participate in determining their financial and operating policies. Similarly, companies are considered associates also when the Parent Company despite a lower percentage of voting rights has the power of participating in the determination of the financial and operating policies of the investee on account of specific legal agreements such as the participation in shareholders agreements. Minor entities are not included in the scope if their consolidation proves immaterial for the purpose of the consolidated financial statements. Methods of consolidation With reference to the consolidation methods, subsidiaries are consolidated on a line-by-line basis, interests in jointly controlled companies are recognised using the proportionate consolidation and investments in companies subject to the Group s significant influence are valued with the equity method. Line-by-line consolidation consists in the line-by-line acquisition of the balance-sheet and profit and loss statement aggregates of the subsidiaries. After the assignment to third parties, under a separate item, of their portions of equity and profit/loss, the value of the investment is eliminated against the recognition of the value of the subsidiary s equity. Intragroup assets, liabilities, income and expenses are eliminated. The income and expenses of a subsidiary purchased during the period are included in the consolidated financial statements as of the date of purchase. On the other hand, the income and expenses of a subsidiary sold are included in the consolidated financial statements up to the date of disposal, i.e. when the Parent ceases to control the subsidiary. At the date when control is lost, the controlling entity: derecognises the assets (including any goodwill) and liabilities of (and non-controlling interests in) the former subsidiary at their carrying amounts; recognises the fair value of the consideration received and of any investment retained in the former subsidiary; reclassifies to consolidated profit or loss any amounts previously recognised in the subsidiary's statement of comprehensive income as if the assets or liabilities had been transferred; recognises any resulting difference in consolidated profit or loss. 108

109 Notes to the Consolidated Financial Statements - Part A Accounting policies Interests in jointly controlled companies are recognised using the proportionate consolidation method. Those companies over which the Group exercises significant influence (associates), or over which it has the right to participate in the determination of financial and operating decisions without having control or joint control, are valued using the equity method. This method contemplates the initial posting of the investment at cost. This value is subsequently adjusted to reflect: the Group's share of profit (loss) on the investment for the period is recognised in item 240 Gains (losses) on investments of the consolidated profit and loss statement. the Group's share of changes recognised in the Consolidated Statement of Comprehensive Income If an investor s share of losses of an associate equals or exceeds its interest in the associate, the investor discontinues recognising its share of further losses unless the investor has incurred specific legal obligations or made payments in favour of the associate. Profits resulting from transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associate. Losses resulting from transactions between the Group and its associates are eliminated as well, unless the transaction provides evidence of an impairment of the asset transferred. The financial statements processed for line-by-line and proportionate consolidation include the financial statements as at 31 December 2011, as approved by the Boards of Directors of the respective companies. The companies subject to the Group s significant influence are valued by applying the equity method on the basis of the latest financial statements or reports available. In the course of 2011, the following changes to the scope of consolidation were made by: the Parent Company: the vehicle company, Siena Mortgages 03-4 S.r.l., became part of the scope of consolidation in the third quarter with, as per shareholders' agreement, the acquisition of all shares by the Parent Company upon closure of the related securitisation; other Group companies: through the subsidiary MPS Gestione Crediti, the companies, AIACE Reoco s.r.l. and ENEA Reoco s.r.l., have become part of the scope of consolidation. The companies were established in April and were fully owned by the subsidiary; the indirect subsidiary Monte Paschi Monaco S.A.M. is no longer part of the scope of consolidation since it was sold on 30 June 2011; the sale of 22% of MPS Venture (then re-named MPS Venture SGR ) was completed in October; it was previously 70% owned and consolidated in its entirety. The remaining 48% stake was classified among investments under significant influence at a value equal to its fair value as at loss-of-control date. As at it was consolidated at equity. As regards disclosure of business combinations within the Group, please refer to Part G of the Notes to the Financial Statements. 109

110 Notes to the Consolidated Financial Statements - Part A Accounting policies Investments in associates and joint ventures (proportionate consolidation) 110

111 Notes to the Consolidated Financial Statements - Part A Accounting policies (*) Type of relationship: 1 majority of voting rights at ordinary shareholders meetings 2 dominant influence at ordinary shareholders meetings 3 agreements with other shareholders 4 other forms of control 5 unified management under art of Leg. Decree 87/92 6 unified management under art of Leg. Decree 87/92 7 joint control 8 significant influence (**) Voting rights are disclosed only if different from the percentage of ownership. Any changes to the Group set-up arising from business combinations are reported in part G Business combinations of the Notes to the Consolidated Financial Statements. 111

112 Notes to the Consolidated Financial Statements - Part A Accounting policies Section 4 Events after the Reporting Period No events are reported pursuant to IAS 10 Events after the Reporting Period. The Consolidated Annual Report was prepared based on a going concern assumption. With regard to the indications contained in Document no. 4 of 3 March 2010, issued jointly by the Bank of Italy, Consob and Isvap, and following amendments, the Parent Company reasonably expects to continue operating in the foreseeable future and has therefore prepared the consolidated annual report based on the assumption of business continuity since the uncertain climate arising from the current economic scenario does not give rise to any doubts with regard to the company s ability to continue operating as a going concern. The assessment criteria adopted are consistent with this assumption and reflect the generally accepted principles of accrual accounting, relevance and materiality of information and priority of economic substance over juridical form. These criteria did not undergo any amendments with respect to previous financial year report. More detailed information on the main difficulties and variables of the financial market is disclosed in the Directors Report on Operations. 112

113 Notes to the Consolidated Financial Statements - Part A Accounting policies Section 5 Other Matters List of key IAS/IFRS international accounting principles and related SIC/IFRIC interpretations for mandatory application as of the 2011 financial statements Reported below are the key amendments to the accounting standards and intepretations which are mandatorily effective as of financial year With the exception of revised IAS 24, these amendments did not have any significant impact on the preparation of the Consolidated Annual Report. IAS 24 Related Party Disclosures. The revised principle issued by IASB in November 2009 was endorsed by the European Commission under Regulation no. 632/2010 on 20 July The main novelties introduced by the new principle, which supersedes the currently effective one, include: the principle of symmetrical relationships between each of the related parties financial statements; same rules applied to natural persons and corporate entities for the purpose of related party transactions; commitments are required to be included among outstanding balances with related parties; clarification was given that related parties include an associate s subsidiaries and the subsidiaries of a jointly controlled entity; the scope of parties related to parent companies includes the subsidiaries of the investor that has significant influence over the associate; government-related entities are exempt from certain disclosure requirements. With a view to guaranteeing consistency between the international accounting principles, the adoption of IAS 24 (as revised) entails amendments to IFRS 8 Operating Segments. The new principle is effective for annual periods beginning on or after 1 January These amendments were applied to this Report. IAS 32 Financial Instruments: Presentation In October 2009, the IASB issued an amendment stating that rights issued on a pro-rata basis to all existing shareholders of the same class for a fixed amount of currency should be classed as equity, regardless of the currency in which the exercise price is denominated. The amendment, approved by the European Commission under Regulation 1293/2009 of 23 December 2009, is applicable to financial statements for financial years beginning on or after 1 February IFRS 1 Limited Exemption from Comparative IFRS 7 disclosures for first-time adopters. On 28 January 2010 the IASB issued an amendment to IFRS 1 Limited Exemption from Comparative IFRS 7 Disclosures for First-Time Adopters, IFRS first-time adoption companies would be required to restate comparative information under IFRS 7 about fair value measurements and liquidity risk for periods ending 31 December The amendment to IFRS 1 is intended to prevent the potential use of elements that become known at a later point of time and ensure that first-time adopters are not disadvantaged as compared with current IFRS preparers, enabling them to use the same transitional provisions that Amendments to IFRS 7 Improving Disclosures about Financial Instruments (introduced in March 2009) provide to current IFRS preparers. The adoption of the amendment to IFRS 1 entails amendments to IFRS 7 Financial Instruments - Additional disclosures for the purpose of consistency. Regulation no. 574/2010 of 30 June 2010 requires the entity to apply this amendment as of financial reports beginning on or after 1 July On 15 November 2009, the International Financial Reporting Interpretations Committee (IFRIC) published amendments to IFRIC 14 - Prepayments of a Minimum Funding Requirement. The aim of the amendments is to remove an unintended consequence of IFRIC 14 in cases where an entity subject to a minimum funding requirement makes an early payment of contributions where under certain circumstances the entity making such a prepayment would be required to recognise an expense. In the case where a defined benefit plan is subject to a minimum funding requirement, the amendment to IFRIC 14 prescribes to treat this prepayment, like any other prepayment, as an asset. Endorsed by the European Commission under Regulation no. 633/2010 of 19 July 2010, this interpretation will be effective for annual periods beginning on or after 1 January On 26 November 2009, the International Financial Reporting Interpretations Committee (IFRIC) published interpretation IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments. The IASB clarified procedures for recognizing in a debtor s balance sheet those transactions in which debtor renegotiates the terms of its debt by totally, or partially, extinguishing the liability through the issuance of equity instruments subscribed for by the creditor (these transactions are often known as debt for equity swaps ). The interpretation does not apply to transactions in which the creditor is a direct or indirect shareholder of the debtor, in which the creditor and the debtor are controlled by the same entity before and after the transaction or in which the transaction was planned for in the original clauses of the contract. The 113

114 Notes to the Consolidated Financial Statements - Part A Accounting policies interpretation clarifies that equity instruments issued must be measured at fair value and that they represent the consideration paid to extinguish the liabilities; the difference between the fair value of the equity instruments issued and the book value of the liability extinguished must be accounted for through profit and loss. The adoption of IFRIC 19 entails amendments to IFRS 1 First-time adoption of International Financial Reporting Standards for the purpose of consistency. Endorsed by the European Commission under Regulation no. 662/2010 of 23 July 2010, this interpretation must be applied in annual periods beginning on or after 1 July Improvements to the international accounting standards (2010). Within the scope of this project, the IASB issued a set of amendments to the IFRSs on 6 May The amendments indicated by the IASB as involving a change in the presentation, recognition and measurement of balance sheet items are listed below, leaving aside, however, those that will only result in terminological or publication changes with minimal effects in terms of accounting. These amendments were endorsed by the European Commission under Regulation 149/2011 of 18 February IFRS 1 Changes in accounting policies upon IFR first time adoption. If during the period covered by its first IFRS financial statements an entity changes its accounting policies or its use of the exemptions, it shall explain the changes and it shall update the reconciliations between previous principles and IFRSs. IAS 8 s requirements about changes in accounting policies do not apply in an entity s first IFRS financial statements. IFRS 1 First-time adoption of IFRSs: use of event-driven fair value measurements as deemed cost In accordance with IFRS 1, a first-time adopter may use as deemed cost the event-driven fair value measurements (arising from an event such as an initial public offering) that local regulations admit for financial statement purposes. The event must occur at or before the date of transition to IFRSs. The amendment allows for the event-driven fair value measurement to be used as deemed cost even when it occurs after the date of transition to IFRSs but during the period covered by the first IFRS financial statements. An entity shall recognise the resulting book value adjustments to equity. IFRS 1 First-time adoption of IFRSs: deemed cost for assets used in operations subject to rate regulation For items of property, plant and equipment or intangible assets used in operations subject to rate regulation, first-time adopters may use the carrying amount determined under previous accounting principles as deemed cost. The carrying amount shall be tested for impairment in accordance with IAS 36. An entity applying this option shall disclose it in its financial statements. IFRS 3 Business combinations: measurement of non-controlling interests. IFRS 3 sets out that noncontrolling interests may be measured at either fair value or based on the proportionate share in the recognised amounts of the acquiree s identifiable net assets. The amendment modifies the principle by restricting the option only to non-controlling interests that are "present ownership interests" and entitle their holders to a proportionate share of the entity s net assets in the event of liquidation. IFRS 3 Business Combinations: Un-replaced and voluntarily replaced share-based payment awards The amendment clarifies that the provisions set out for the acquirer's awards exchanged for acquiree's awards also apply to share-based payments of the acquiree that are not replaced. The amendment specifies that when share-based payment awards are replaced in a business combination, the requirements set out for the allocation of market-based measures of replacement awards, between consideration transferred and post-combination remuneration cost, apply to all replacement awards regardless of whether the acquirer is obliged to replace awards or not. IFRS 3 - Business Combinations: Contingent Consideration The amendment clarifies that IAS 32, IAS 39 and IFRS 7 do not apply to contingent liabilities arising from business combinations with an acquisition date prior to the application of IFRS 3 (2008). IFRS 7 Financial Instruments: Disclosures The amendment emphasises the interaction between quantitative and qualitative disclosures for users to provide a comprehensive overview of the nature and extent of risks associated with financial instruments. It was also clarified that the requirement to provide disclosure of the amount that represents the maximum exposure of financial instruments to credit risk has been removed for financial assets whose carrying amount best reflects the maximum exposure to credit risk. Finally, the amendment has removed the requirement to specifically disclose the carrying amount of financial assets whose terms have been renegotiated to avoid becoming impaired. 114

115 Notes to the Consolidated Financial Statements - Part A Accounting policies IAS 1 Statement of Changes in Equity. The amendment clarifies that an entity shall present, for each component of other comprehensive income, a reconciliation between the carrying amount at the beginning and the end of the period in the statement of changes in equity or in the notes to the financial statements. IAS 27 Consolidated and Separate Financial Statements: Transition requirements arising as a result of amendments to IAS 27 (2008) The amendment clarifies that an entity shall apply amendments to IAS 21, IAS 28 and IAS 31 arising as a result of IAS 27 (2008) prospectively, with the exception of paragraph 35 of IAS 28 and paragraph 46 of IAS 31 which shall be applied retrospectively. IAS 34 Interim Financial Reporting: significant events and transactions. The amendment emphasises the principle set out in IAS 34 according to which disclosure on significant events and transactions during interim periods should include an update on the relevant information presented in the most recent annual financial report. It also provides guidance on how this principle should be applied with respect to financial instruments and their fair value. IFRIC 13 Customer loyalty programmes: fair value of award credits. The amendment clarifies that the fair value of the award credits shall take into account, as appropriate: i) the amount of the discounts or incentives that would otherwise be offered to customers who have not earned award credits from an initial sale; and ii) the proportion of award credits that are not expected to be redeemed by customers. IAS/IFRS international accounting standards and related SIC/IFRIC interpretations endorsed by the European Commission, the application of which is mandatory as of 31 December Pursuant to IAS 8 paragraphs 30 and 31, it is noted that up to 28 February 2012 the European Commission approved some principles and interpretations issued by the IASB, the application of which is required as of 31 December In these cases the Group did not opt for early application, in any of the possible instances. These principles and interpretations are shown below. IFRS 7 Financial instruments: additional disclosures The amendment issued by IASB on 7 October 2010 strengthens disclosure requirements for transactions involving transfers of financial assets. The amendments increase disclosure requirements where an asset is transferred but is not derecognised and introduce new disclosures for assets that are derecognised but the entity continues to have a continuing exposure to the asset after the sale. The amendment will allow users to better understand the potential risks from transferred financial assets that remain on the transferor's balance sheet. The former IAS 39 implementation guidance on derecognition of financial assets remains unaltered. The amendment was endorsed by the European Commission on 22 November 2011 under Regulation no. 1205/2011 and is effective for annual periods beginning on or after 30 June The Group did not opt for early application; since these amendments only have an impact on disclosure requirements, future application will not affect the Group s capital, economic and financial situation. Accounting standards, amendments and interpretations issued by the IASB and still awaiting endorsement from the European Commission. These standards and interpretations are applied as of the start date envisaged for mandatory application by the IASB which is, in any event, after 31 December It should be noted that, for companies resident in EU member states, the start date for mandatory application shall be the date indicated in the endorsement regulations. IFRS 9 Financial instruments Replacement Project. In response to requests to simplify accounting standards applicable to financial instruments from both political organisations and international institutions, the IASB has launched a project to replace the current IAS 39. The project in question has been broken down into three separate phases: 1) classification and measurement of financial assets, 2) amortised cost and impairment, 3) hedge accounting. With regard to the first phase, on 12 November 2009, the IASB issued the accounting standard "IFRS 9 Financial instruments". The new accounting standard relates to the classification and measurement of financial assets. Portfolio categories were reduced to three (amortised cost, fair value with changes to profit and loss, and fair value through other comprehensive income). HTM and AFS categories were removed. Rules for classifying the three categories in question 115

116 Notes to the Consolidated Financial Statements - Part A Accounting policies were changed, including those relating to the Fair Value Option (FVO). IFRS 9 uses a unique method to determine whether a financial asset should be measured at amortised cost or at fair value. The method is based on the entity s business model and on the contractual features of the cash flow of the financial assets. On 28 October 2010, the International Accounting Standards Board (IASB) completed IFRS 9 with a section on classification and measurement of financial liabilities. The IASB substantially decided to maintain the existing framework of IAS 39. It therefore maintained the existing requirement for separate accounting of derivatives embedded in a financial host. For instruments other than derivatives, measurement of all fair value changes through profit or loss only applies to financial liabilities held for trading. For financial liabilities designated under the fair value option, the amount of change in the fair value that is attributable to changes in the credit risk of the liability, shall be presented directly in other comprehensive income, unless it creates/increases an accounting mismatch, in which case the entire change in fair value shall be presented within profit and loss. The amount that is recognised in other comprehensive income is not transferred from OCI to P&L ("recycled") when the liability is settled or extinguished. As regards Project phase 2 "Amortised Cost and Impairment" and phase 3 "Hedge accounting", the IASB has not published any principles yet, but only three Exposure Drafts: in connection with phase 2, "Amortised Cost and Impairment", the IASB published Exposure Draft 2009/12 "Financial Instruments: amortised cost and impairment" and the addendum to ED 2009/12 "Financial Instruments: impairment"; as for phase 3, "Hedge accounting", the IASB published ED 2010/13 Hedge accounting. In December 2010, the International Accounting Standard Board (IASB) published an amendment to IAS 12 "Deferred Tax: Recovery of Underlying Assets". Under IAS 12, the measurement of deferred tax assets and liabilities should be based on the expected manner of recovery of the carrying amount of the underlying asset through use or sale. The manner in which an entity recovers the carrying amount of an asset or liability (for example through use or sale) may affect either or both of the tax rate applicable when the entity recovers the amount and the tax base of the asset (liability). An entity measures deferred tax liabilities and deferred tax assets using the tax rate and the tax base that are consistent with the expected manner of recovery or settlement. In order to reduce the elements of subjectivity involved in determining the expected manner of recovering the carrying amount of the underlying asset, the amendment has introduced a 'rebuttable presumption' that assets measured using the fair value model inias 40 will be recovered entirely by sale. This presumption is rebutted if the investment property is depreciable and is held within a business model whose objective is to consume the investment property s economic benefits over time. The amendment also incorporates into IAS 12 guidance previously contained in SIC 21 "Income Taxes Recovery of Revalued Non-Depreciable Assets". The amendment is mandatorily effective for annual periods beginning on or after 1 January Two amendments to IFRS 1 First-time adoption of International Financial Reporting Standards were published by the IASB in December The first replaced fixed date references (1 January 2004) with the date of transition to IFRSs, thus exempting first time adopters of IFRSs from having to reconstruct transactions that occurred prior to their date of transition to IFRSs. The second amendment includes guidance on how an entity should resume presenting (or present for the first time) financial statements in accordance with IFRSs after a period where the entity s functional currency was subject to severe hyperinflation. The amendment is mandatorily effective for annual periods beginning on or after 1 July The new accounting principles IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of interests in other entities. were published by the IASB in May The publication of IFRS 10 was intended to combine into a converged standard the consolidation principles previously contained in IAS 27 'Consolidated and Separate Financial Staments' and SIC 12 'Consolidation - Special Purpose Entities'; IFRS 10 requirements now apply to all entities. IFRS 10 introduces a new concept of control: an investor has control over an entity when he has exposure, or rights, to variable returns from the activities of the entity in which he has invested and has the ability to use his power over the investment to affect the amount of returns received. IFRS 10 led to the revision of IAS 27 Consolidated and Separate Financial Statements (reissued as IAS 27 Separate Financial Statements ), which sets the accounting standards and disclosure requirements for separate financial statements to be applied to investments in subsidiaries, joint ventures and associates. IFRS 11 "Joint Arrangements" replaces IAS 31 "Interests in Joint Ventures". The standard requires an entity to determine the type of joint arrangement in which it is involved by assessing its rights and obligations arising from the joint arrangement; if the entity is involved in a joint venture, it shall recognise and account for its investment in the joint venture using the equity method in accordance with IAS 28, Investments in Associates and Joint Ventures. Proportionate consolidation is no longer permitted for joint ventures. The new standards, IFRS 10, IFRS 11 and IFRS 12, and revised standards IAS 27 and IAS 28 are mandatorily for annual periods beginning on or after 1 January

117 Notes to the Consolidated Financial Statements - Part A Accounting policies In May 2011, the IASB also published IFRS 13 Fair Value Measurement. IFRS 13 establishes a single source of guidance for all fair value measurements so far required by the IFRSs, eliminating existing inconsistencies. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (exit price). The notion introduced by IFRS 13 is that fair value is a market based rather than an entity specific measurement. The amendment is mandatorily to be applied for annual periods beginning on or after 1 January Revisions to IAS 19 Employee Benefits were published by the IASB in June A key purpose of the revised standard was to increase comparability and quality of disclosure of post-employment benefits. Among the amendments are: methods for recognition of changes in defined benefit related assets and liabilities; treatment of plan amendments, curtailments and settlements; disclosure for defined benefit plans; other minor issues. The amendment is mandatorily to be applied for annual periods beginning on or after 1 January In June 2011, the International Accounting Standard Board (IASB) published the amendment to IAS 1 "Presentation of Items of Other Comprehensive Income". The major amendment to IAS 1 introduces the requirement to present separately in OCI items that could be reclassified (or 'recycled') to profit or loss under certain circumstances (sale, impairment) from items which will never be reclassified. The amendment is mandatorily to be applied for annual periods beginning on or after 1 July In December 2011, the IASB issued amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities, introducing a few paragraphs in the application guidance to clarify the application of the existing requirements under paragraph 42 of IAS 32) for offsetting financial assets and financial liabilities in the balance sheet. The amendment is mandatorily effective for annual periods beginning on or after 1 January An amendment to IFRS 7 Disclosures Offsetting Financial Assets and Financial Liabilities was also published by the IASB in December The amendment introduces new disclosure requirements for financial assets and liabilities which are offset under paragraph 42 of IAS 32. The amendment is mandatorily to be applied for annual periods beginning on or after 1 January

118 Notes to the Consolidated Financial Statements - Part A Accounting policies A.2 The main items of the accounts Accounting standards This chapter contains the Accounting standards in relation to the main assets and liabilities in the balance sheet, which were adopted for the preparation of the consolidated financial statements as at 31 December Financial assets held for trading a) recognition criteria Initial recognition of financial assets occurs at settlement date, for debt securities and equities and at trade date for derivative contracts. Upon initial recognition, financial assets held for trading are recognised at fair value, which usually corresponds to the amount paid, without considering transaction costs or revenues directly attributable to the instrument, which are directly posted to the profit and loss statement. Any embedded derivatives in combined financial instruments not directly connected to the latter and with the characteristics to meet the definition of a derivative are recorded separately from the host contract at fair value. The applicable accounting criteria are administered to the primary contract. b) classification criteria This category includes debt securities and equities purchased mainly for the purpose of obtaining short-term profits arising from price changes and the positive value of derivative contracts other than those designated as hedging instruments. Derivative contracts include those embedded in combined financial instruments which were subject to separate accounting. c) measurement criteria After initial recognition, financial assets held for trading are recorded at fair value, with value changes recognised in profit or loss. For a description of criteria used to determine the fair value of financial instruments, please see section " A.3.2 Fair Value Hierarchy of this Part A. Equity instruments and derivatives indexed to such equity instruments, for which it is not possible to determine a reliable fair value according to the guidelines listed above, keep being measured at cost less impairment. Such impairment losses are not reversed. d) derecognition criteria Financial assets are derecognised upon maturity of the contractual rights on the cash flows resulting from the assets or when the financial assets are sold and all related risks/rewards are transferred. Securities received within the scope of a transaction that contractually provides for subsequent sale are not recorded in the financial statements, and securities delivered within the scope of a transaction that contractually provides for subsequent buyback are not derecognised from the financial statements. Consequently, in the case of securities acquired with an agreement for resale, the amount paid is recorded in the financial statements as loans to customers or banks, while in the case of securities transferred with an agreement for repurchase, the liability is recorded under deposits from banks or deposits from customers or under other liabilities. e) revenue recognition criteria Gains and losses arising from any changes in the fair value of a financial asset are recognised in profit and loss under item 80 Net trading income (expenses), except for gains and losses on receivable derivatives linked with the fair value option which are classified under item 110 Net gains / losses on financial assets and liabilities designated at fair value. 118

119 Notes to the Consolidated Financial Statements - Part A Accounting policies 2 Financial assets available for sale a) recognition criteria Financial assets are initially recognised on the date of settlement, with reference to debt or equity instruments, and on the date of disbursement, with reference to loans and receivables. On initial recognition, the assets are reported at their fair value which normally corresponds to the price paid, inclusive of transaction costs or income directly attributable to the instrument. If recognition occurs following the reclassification from assets held to maturity, the recognition value is the fair value as at the time of transfer. In the case of debt instruments, any difference between the initial value and the value of repayment is spread out over the life of the debt instrument in accordance with the method of amortised cost. b) classification criteria This category includes non-derivative financial assets which are not classified as loans, financial assets designated at fair value through profit and loss or financial assets held to maturity. In particular, this category also comprises strategic equity investments which are not managed for trading purposes and cannot be defined as controlling interest, significant influence and joint control, and bonds which are not subject to trading. Such investments may be transferred for any reason, such as liquidity requirements or variations in interest rates, exchange rates, or stock price. c) measurement criteria After initial recognition, financial assets available for sale are measured at fair value, with interest being recognised in the income statement as resulting from the application of the amortised cost and with appropriation to a specific equity reserve of the gains or losses arising from changes in fair value net of the related tax effect, except losses due to impairment. Foreign exchange fluctuations in relation to equity instruments are posted to the specific equity reserve, whereas changes in loans/receivables and debt instruments are allocated to profit and loss. Equity instruments, for which it is not possible to determine a reliable fair value, are maintained at cost, adjusted for any impairment losses. Financial assets available for sale are reviewed for objective evidence of impairment at each balance sheet and interim reporting date. Indicators of a likely impairment are, for instance, significant financial difficulty of the issuer, nonfulfilment or defaults in payments of interest or principal, the possibility that the borrower is declared bankrupt or submitted to other forms of insolvency proceedings, the disappearance of an active market for the assets. In particular, as far as equity instruments that have a quoted market price in an active market are concerned, a market price as at the date of the financial statements lower than the original purchasing cost of at least 30% or a market value lower than the cost lasting more than 12 months are considered an objective evidence of value reduction. If further reductions take place in subsequent financial years, these are charged directly to the profit and loss statement. With regard to debt securities, regardless of whether or not these are listed on active markets, any impairment loss is recognised in the profit and loss statement strictly in relation to the issuer s ability to fulfil its obligations and therefore make the necessary payments and repay capital at maturity. Therefore, it needs to be established whether there are indications of a loss event which could have a negative impact on estimated future cash flows. Where there are no actual losses, no loss is recognised on the stock, and any capital loss is recognised in the negative equity reserve. The amount of any value adjustment shown following the impairment test is recorded in the profit and loss statement as an expense for the year. If the reasons for impairment cease to exist, following an event which occurred after recognition of impairment, reversals are recognised in equity in the case of equity instruments, and through profit and loss in the case of debt securities. d) derecognition criteria Financial assets are derecognised upon maturity of the contractual rights on the cash flows resulting from the assets or when the financial assets are sold and all related risks/rewards are transferred. Securities received within the scope of a transaction that contractually provides for subsequent sale are not recognised in the financial statements, and securities delivered within the scope of a transaction that contractually provides for subsequent repurchase are not derecognised from the financial statements. Consequently, in the case of securities acquired with an agreement for resale, the amount paid is recognised in the financial statements as loans to customers or banks, while in the case of securities transferred with an agreement for repurchase, the liability is shown under deposits from customers or deposits from banks or under other liabilities. 119

120 Notes to the Consolidated Financial Statements - Part A Accounting policies e) revenue recognition criteria Upon disposal, exchange with other financial instruments or measurement of a loss of value following impairment testing, the fair value results accrued to the reserve for assets available for sale are reversed to profit and loss under: item 100 Gains/Losses on disposal/repurchase of: b) financial assets available for sale", in the case of disposal; item "130 - Net impairment losses/reversals on: b) financial assets available for sale", in the case of recognition of impairment. If the reasons for impairment cease to exist, following an event which occurred after the impairment was recognised, the impairment loss is reversed: through profit and loss in the case of loans or debt securities, and through equity in the case of equity instruments. 3 Financial assets held to maturity a) recognition criteria Initial recognition of the financial asset occurs on the settlement date. On initial recognition, the assets are measured at their fair value which normally corresponds to the price paid, inclusive of transaction costs or income directly attributable to the instrument. If inclusion in this category occurs following reclassification from available-for-sale financial assets, the fair value of the asset as at the date of reclassification is used as the new amortised cost of the asset. b) classification criteria This category includes non-derivative financial assets with fixed or determinable payments and fixed maturity, which the Group has the positive intention and ability to hold to maturity. If it is no longer appropriate to keep an investment to maturity as a result of a change in the Group s intention and ability to hold it as such, the investment is reclassified among assets available for sale and, for the following two years, it will not be possible to add to the category "Financial assets held to maturity". Whenever the sales or reclassifications are qualitatively and quantitatively irrelevant, any investment held to residual maturity shall be reclassified as available for sale. c) revenue recognition criteria After initial recognition at its fair value, a held-to-maturity financial asset is measured at amortised cost using the effective interest method, adjusted so as to take account of the effects resulting from any impairment losses. The result of the application of this method is posted through profit and loss under item 10 Interest income and similar revenues. Gains or losses from the sale of these assets are recognised in profit or loss under item "100 - Gains (losses) on disposal or repurchase of: c) investments held to maturity". Assets are tested for impairment at annual and interim reporting dates. If evidence of an impairment loss exists, the loss is measured as the difference between the carrying value of the asset and the current value of the estimated future cash flows, discounted at the original effective interest rate. The loss is recorded in the income statement under item 130 Net impairment losses/reversals on: c) held-to-maturity investments". If the reasons for impairment cease to exist following an event occurring after the impairment loss was recognised, recoveries are posted to the income statement under the same item 130. d) derecognition criteria Financial assets are derecognised upon maturity of the contractual rights on the cash flows resulting from the assets or when the financial assets are sold and all related risks/rewards are transferred. As at 31 December 2010, in compliance with the guidelines adopted with a specific Framework resolution, the Group holds a negligible quantity of financial instruments classified in this category. 120

121 Notes to the Consolidated Financial Statements - Part A Accounting policies 4. Loans a) recognition criteria Recognition in the financial statements occurs: for a receivable: on the date of disbursement; when the creditor acquires the right to payment of the amounts contractually agreed upon; for a debt security: on the date of settlement. The initial value is determined on the basis of the fair value of the financial instrument (which is normally equal to the amount disbursed or price of underwriting), inclusive of the expenses/income directly related to the individual instruments and determinable as of the transaction date, even if such expenses/income are settled at a later date. This does not include costs which have these characteristics but are subject to repayment by the debtor or which can be encompassed in ordinary internal administrative expenses. Swaps and repo contracts under agreement to re-sell are posted as lending transactions. In particular, the latter are reported as receivables in the sum of the spot amount paid. b) classification criteria Receivables include loans to customers and banks, whether disbursed directly or purchased from third parties, with fixed or determinable payments, which are not quoted in an active market and were not initially classified among availablefor-sale financial assets and financial assets at fair value through profit or loss. They also incorporate trade receivables, repurchase agreements, receivables arising from financial leasing transactions and securities purchased in a subscription or private placement, with fixed or determinable payments, not quoted in active markets. Also included among receivables are junior securities coming from own securitisations completed prior to first-time adoption. c) revenue recognition criteria After initial recognition, receivables are valued at amortised cost, which is the initial recognition amount decreased/increased by principal repayments, write-downs/write-backs and the amortisation calculated using the effective interest rate method of the difference between the amount disbursed and the amount repayable upon maturity, typically attributable to the costs/income directly charged to each receivable. The effective interest rate is the interest rate which makes the current value of future flows of the receivable, in principal and interest, estimated over the expected life of the receivable, equal to the amount disbursed, inclusive of any costs/income attributable to the receivable. Therefore, the economic effect of costs and income is spread over the expected residual life of the receivable. The amortised cost method is not used for short-term receivables, for which the effect of applying a discounting logic is negligible. Similar valuation criteria are adopted for receivables with no specific maturity or subject to revocation. Non performing exposures (e.g. doubtful, substandard, restructured and past-due loans) are classified into different risk categories in accordance with the regulations issued by the Bank of Italy, supplemented with internal provisions which set automatic criteria and rules for the transfer of receivables between different risk categories. Substandard loans include loans that have been past due for over 270 days. Classification is carried out by the relevant units independently, except for loans more than 180 days past due and substandard loans more than 270 days past due, which are measured using automated procedures. In order to determine adjustments to the carrying value of receivables, and taking into account the different impairment levels, analytical or collective valuation is used, as outlined hereunder. Doubtful, substandard and restructured loans are subject to analytical valuation; loans more than 180 days past due, loans subject to country risk and performing loans are subject to collective valuation. In accordance with the Bank of Italy s recent amendment to Circular 262/2005, however, data for loans more than 180 days past due are subject to analytical valuation in the tables in the notes to the financial statements. For loans subject to analytical assessment, the amount of value adjustment for each loan is equal to the difference between the loan book value at the time of valuation (amortised cost) and the current value of estimated future cash flows, as calculated by applying the original effective interest rate. 121

122 Notes to the Consolidated Financial Statements - Part A Accounting policies Expected cash flows take account of the expected repayment schedule, the expected recovery value of the collaterals, if any, as well as the costs expected to be incurred for the recovery of the credit exposure. The value adjustments are booked to the profit and loss statement to Item Net impairment losses (reversals)". The adjustment component attributable to the discounting of cash flows is calculated on an accrual basis in accordance with the effective interest rate method and posted under reversals. If the quality of the non performing receivable has improved to such a point that there is reasonable certainty of timely recovery of the principal and interest, its initial value is recycled in the following years to the extent in which the reasons determining the adjustment disappear, provided that such valuation can be objectively linked with an event which occurred after the adjustment. The reversal is posted to the profit and loss statement and may not in any case exceed the amortised cost that the receivable would have had without prior adjustments. Receivables with no objective evidence of loss are subject to a collective assessment of impairment. Such assessment, developed on the basis of a risk management model, is carried out by category, with receivables grouped together according to credit risk, and the relative loss percentages are estimated taking into account historical series based on elements observed on the date of assessment which allow the value of latent loss in each category to be estimated. The model, for this type of valuation, involves the following steps: Segmentation of the loan portfolio by: - client segment (turnover); - economic sectors of activity; - geographical location; determination of the loss rate of individual portfolio segments, using the historical experience of the Group as reference. Value adjustments determined collectively are posted to the profit and loss statement. Any additional write-downs or write-backs are recalculated on a differential basis, at year-end or on the dates of interim reports, with reference to the entire loan portfolio on the same date. d) derecognition criteria Any receivables sold are derecognised from the assets on the balance sheet only if their disposal implied the substantial transfer of all associated risks and rewards. However, if the risks and rewards associated with the receivables sold have been maintained, they continue to be posted among the assets on the balance sheet, even if legal ownership has been transferred. If it is not possible to ascertain a substantial transfer of risks and rewards, the receivables are derecognised when control of the assets has been surrendered. If such control has been maintained, even partly, the receivables should continue to be recognised to the extent of residual involvement, as measured by the exposure to the changes in value of the receivables sold and to the changes in their cash flows. Finally, receivables sold are derecognised if the contractual rights to receive the cash flows from the assets maintained and a contractual obligation to pay only said flows to third parties is simultaneously undertaken. are 5 Financial assets measured at fair value: a) recognition criteria Financial assets are initially recognised on the date of settlement, with reference to debt or equity instruments, and on the date of disbursement, with reference to loans and receivables. Upon initial recognition, financial assets are measured at fair value, which usually equals the consideration paid, without adding directly attributable transaction costs or fees earned, which are posted to profit and loss. The Fair Value Option (FVO) applies to all financial assets and liabilities which would have caused misrepresentation on the profit and loss statement and balance sheet had they been otherwise classified, and to all instruments which are managed and measured using a fair value approach. As at 31 December 2011, the Group held in this category only financial instruments servicing internal pension funds. b) classification criteria 122

123 Notes to the Consolidated Financial Statements - Part A Accounting policies This category includes the financial assets intended for measurement at fair value through profit or loss (except for equity instruments with no reliable fair value) when: 1. the designation at fair value eliminates or reduces significant accounting mismatches in the reporting of financial assets in the profit and loss statement and balance sheet; or 2. the management and/or measurement of a group of financial assets at fair value through profit or loss is consistent with an investment or risk management strategy documented as such by senior management; or 3. a host instrument embeds a derivative which significantly modifies the cash flows of the host and should otherwise be accounted for separately. c) measurement criteria Subsequent to initial recognition, the assets are measured at fair value. For a description of criteria used to determine the fair value of financial instruments, please see section " A.3.2 Fair Value Hierarchy of this Part A. d) derecognition criteria Financial assets are derecognised upon maturity of the contractual rights on the cash flows resulting from the assets or when the financial assets are sold and all related risks/rewards are transferred. Securities received within the scope of a transaction that contractually provides for subsequent sale are not recognised in the financial statements, and securities delivered within the scope of a transaction that contractually provides for subsequent repurchase are not derecognised from the financial statements. Consequently, in the case of securities acquired with an agreement for resale, the amount paid is recognised in the financial statements as loans to customers or banks, while in the case of securities transferred with an agreement for repurchase, the liability is shown under deposits from customers or deposits from banks. e) revenue recognition criteria The impact of derivative receivables associated with the fair value option is recorded under item 110 Net gains / losses on financial assets and liabilities measured at fair value. 6. Hedging transactions a) recognition criteria purpose Risk-hedging transactions are aimed at offsetting any potential losses on a certain element or group of elements that may arise from a specific risk, with the profits made on a different element or group of elements, should that particular risk occur. b) classification criteria types of hedging IAS 39 provides for the following types of hedging: fair value hedges, which are intended to hedge the exposure to changes in fair value of a recognised asset or liability, that are attributable to a particular risk; cash flow hedges, which are intended to hedge the exposure to variability in future cash flows attributable to particular risks associated with a recognised asset or liability; hedges of a net investment in a foreign operation, which refers to hedging the risks of an investment in a foreign operation denominated in a foreign currency. To conclude the chapter on the accounting principles, a specific section is added to provide further insight into the application issues and policies adopted by the Group with regard to hedging transactions. These issues are also addressed in section E of the notes to the financial statements relating to risk management, as well as in sections B and C relating to the balance sheet and profit and loss statement. The hedging policies adopted by the Group are explained, with a special focus on the applicability of the natural hedges provided for by the Fair Value Option as an alternative to hedge accounting in some major instances. In particular, Fair Value Option and cash flow hedging were adopted mainly to account for hedges of liabilities, while Fair Value Hedging was adopted mainly to account for hedges of assets, i.e both micro-hedges on fixed-rate debt securities/mortgages and macro-hedges on fixed-rate loans. c) revenue recognition criteria 123

124 Notes to the Consolidated Financial Statements - Part A Accounting policies Hedging derivatives are measured at fair value. In particular: in the case of fair value hedging, the changes in the fair value of the hedged asset are offset by the changes in the fair value of the hedging instrument. Offsetting gains and losses are recognised in profit or loss under Item 90 Net profit (loss) from hedging through recognition of value changes, with reference both to the hedged item (as regards changes produced by the underlying hedged risk factor) and the hedging instrument. Any difference, i.e. partial ineffectiveness of the hedging derivatives, reflects their net P&L impact; in the case of cash flow hedging, the changes in fair value of the derivative are posted to a specific shareholders equity reserve with reference to the effective portion of the hedge, and are posted to the profit and loss statement under item 90 Net gain/loss on hedging operations only when the changes in fair value of the hedging instrument do not offset the changes in the cash flows of the hedged item; hedges of foreign currency investments are accounted for similarly to cash flow hedges. A hedging transaction should be reflective of a pre-determined risk management strategy and consistent with risk management policies in use. In addition, a derivative is designated as a hedging instrument if the relationship between the hedged item and the hedging instrument is formally documented, and provided that the hedging relationship is -and is expected to be- effective both at inception and, prospectively, throughout its life. Hedge effectiveness depends on the extent to which changes in the fair value or expected cash flows of the hedged item are offset by corresponding changes in the hedging instrument. Therefore, effectiveness is measured by comparing said changes, while taking into account the company's intent at hedge inception. With reference to the hedged risk, the hedging is effective (within the 80% to 125% window) when the changes in fair value (or in the cash flows) of the hedging instrument offset the changes in the hedged item almost entirely. Effectiveness is assessed at year-end by using: prospective tests, which justify continuing hedge accounting since they show its expected effectiveness; retrospective tests, which show how effective the hedging relationship has been in the period under review. Derivatives which are considered as hedging instruments from an economic viewpoint because they are operationally linked with financial liabilities measured at fair value (Fair Value Option) are classified among trading derivatives; the respective positive and negative differentials or margins accrued until the end of the reporting period are recognised, in accordance with their hedging purpose, as interest income and interest expense, while valuation gains and losses are posted under Item 110 of the profit and loss statement, Net gains / losses on financial assets and liabilities measured at fair value. d) derecognition criteria ineffectiveness If tests do not confirm hedge effectiveness, both retrospectively and prospectively, hedge accounting is discontinued and, unless it has expired or has been terminated, the hedging derivative contract is reclassified as a held-for-trading instrument, whereas the hedged item reverts to the accounting treatment based on its original classification. If a fair value hedge relationship is discontinued, any positive or negative adjustments made to the carrying amount of the hedged item until the last date on which compliance with hedge effectiveness was demonstrated are recycled into profit and loss. In particular, if the hedged item has not been derecognised, transfer to profit or loss is made using the effective interest method over the remaining life of the hedged instrument; if the hedged debt instrument is derecognised (for example due to early redemption), any gain or loss shall be entirely reclassified to profit or loss when the hedge relationship ceases. Any amounts accumulated in cash flow hedge reserves are recycled to profit or loss when the hedged item affects profit or loss. Conversely, the reserve is immediately recycled to profit or loss when the hedged item is discharged, cancelled or expires. 7 Equity investments a) recognition criteria The item includes equity investments held in associates; the investments are initially recognised at purchase cost. b) classification criteria 124

125 Notes to the Consolidated Financial Statements - Part A Accounting policies Associates include (i) companies where a share of 20% or higher of voting rights is held, and (ii) companies which owing to specific legal ties such as the participation in shareholders pacts have to be considered as subject to significant influence. The classification of investments is made regardless of legal status and the computation of voting rights includes any potential voting rights currently exercisable. c) revenue recognition criteria In consideration of the above, this item broadly contains the valuation of equity investments using the equity method; this method provides for initial recognition of the investment at cost and its subsequent adjustment on the basis of the share of the investee's profits and losses made after the date of purchase. The pro-rata amount of the profit/loss for the period of the investee is posted to item 240 Gains/losses on investments in the consolidated profit and loss statement. If evidence of impairment indicates that there may have been a loss in value of an equity investment, then the recoverable value of the investment (which is the higher of the fair value, less costs to sell, and the value in use) should be estimated. The value in use is the present value of the future cash flows expected to be derived from the investment, including those arising from its final disposal. Should the recoverable value be less than its carrying value, the difference is recognised immediately in profit or loss under Item "240 - Gains (losses) on investments". Should the reasons for impairment no longer apply as a result of an event occurring after the impairment was recognised, reversals of impairment losses are credited to the same item in profit and loss. The profit related to the equity investments is booked to profit and loss of the Parent Company regardless of whether it was generated by the investee before or after the date of purchase. Dividends relating to these investments are recognised in the Parent Company s profit and loss, regardless of them having been generated by the investee prior or subsequent to the date of acquisition. In the consolidated financial statements, dividends received are deducted from the investee s book value portati a riduzione del valore contabile della partecipata; should, after dividend recognition, the investee s book value in the separate financial statements exceed the book value (in the consolidated financial statementsof the investee s net assets, including goodwill, or should dividend payout exceed the investee s total profit, then the Group will determine the recoverable value of the investment to verify whether there has been a loss in its value. When a subsidiary becomes an associate because the Parent Company has lost control over it following changes in the percentage of interest, the residual investment will have to be posted to the item Equity investments at its fair value as at the loss of control date; this value then becomes the starting value for using the equity method. derecognition criteria Investments are derecognised upon maturity of the contractual rights on the cash flows resulting from the assets or when the financial assets are sold and all related risks/rewards are transferred. If a company is committed to a plan to sell a subsidiary that involves loss of control over said subsidiary, all the subsidiary s assets and liabilities should be reclassified as assets held for sale, regardless of whether the company will retain a non-controlling interest after the sale. 8. Property, plant and equipment a) recognition criteria Property, plant and equipment are originally posted at cost, which includes the purchase price and any additional charges directly attributable to the purchase and installation of the assets. Non-recurring expenditures for maintenance which involve an increase in future economic rewards are booked as an increase in the value of the assets, while expenses for ordinary maintenance are booked to the profit and loss statement. Financial expenses are recorded in accordance with IAS 23. b) classification criteria 125

126 Notes to the Consolidated Financial Statements - Part A Accounting policies Fixed assets include land, operating properties, investment properties, systems, furnishings and fixtures, and equipment of any type. Operating properties are properties owned by the Group and used in production and in the supply of services or for administrative purposes, whereas investment properties are those owned by the Group for the purpose of collecting rents and/or held for appreciation of capital invested. This item also includes any assets used in financial lease contracts, although their legal ownership rests with the leasing company, and any improvements and incremental expenses incurred in relation to third-party assets when they refer to identifiable and separable property, plant and equipment from which future economic rewards are expected. As regards real estate, components relating to land and buildings are separate assets for accounting purposes and are measured separately upon acquisition. c) revenue recognition criteria Property, plant and equipment, including non-operating real estate, are valued at cost less any accrued depreciation and impairment. They are systematically depreciated over their useful life on a straight-line basis, except for land and works of art which have an indefinite useful life and cannot be depreciated. The useful life of the fixed assets subject to depreciation is periodically reviewed and, in the event of any adjustments to the initial estimate, a change is also made in the related depreciation rate. The depreciation rates and subsequent useful life expected for the main categories of assets are reported in the specific sections of the notes to the financial statements. The presence of any signs of impairment, or indications that assets might have lost value, shall be tested at the end of each reporting period. Should there be indications of impairment of value, a comparison is made between the book value of the asset and the asset's recoverable value, i.e. the higher of the fair value, less costs to sell, and the value in use, which is the present value of the future cash flows generated by the asset. Any adjustments are posted to the profit and loss statement under item 170 Net impairment losses/reversals on property, plant and equipment. Periodic depreciation is reported in the same item. Where the reasons for impairment cease to exist, a reversal is made, which shall not exceed the carrying amount that would have been determined (net of depreciation or amortization) had no impairmentloss been recognised for the asset in prior periods. d) derecognition criteria Property, plant and equipment are derecognised from the balance sheet upon their disposal or when the assets are permanently withdrawn from use and no future economic rewards are expected as a result of their disposal. 9 Intangible assets a) recognition criteria Intangible assets are identifiable, non-monetary assets without physical substance that are held for use over several years or indefinitely. They are posted at cost, adjusted by any additional charges only if it is probable that the future economic rewards that are attributable to the asset will flow to the entity and if the cost of the asset can be measured reliably. The cost of intangible assets is otherwise posted to the profit and loss statement in the reporting period it was incurred. Relevant intangible assets for the Group include: c) technology-related intangible assets including software licenses, internal capitalised costs, projects and licenses under development; in particular, internally incurred costs for software project development are intangibles recognised as assets if, and only if : a) the cost for development can be measured reliably, b) the entity intends and is financially and technically able to complete the intangible asset and either use it or sell it, c) the entity is able to demonstrate that the asset will generate future economic rewards. Capitalised costs for software development only include the expenses that are directly attributable to the development process. d) customer relationship intangible assets, represented by the value of assets under management/custody and core deposits in the event of business combinations; e) marketing-related intangible assets representing the value of trademarks in business combinations. 126

127 Notes to the Consolidated Financial Statements - Part A Accounting policies Goodwill is posted among assets when it results from a business combination transaction in accordance with the principles of determination indicated by IFRS 3, as a residual surplus between the overall cost incurred for the transaction and the net fair value of the assets and liabilities purchased (i.e. companies or business units). Should the cost incurred be less than the fair value of the assets and liabilities acquired, the difference (badwill) is directly recognised in profit or loss. b) revenue recognition criteria The cost of intangible fixed assets is amortised on a straight-line basis over their useful life. An intangible asset with an indefinite useful life should not be amortised but assessed for impairment periodically. Intangible assets arising from an internally developed software purchased from third parties are amortised on a straight-line basis starting from completion and roll-out of the applications based on their useful life. Intangible assets reflective of customer relationships or associated with trademarks, which are taken over during business combinations, are amortised on a straight-line basis. Where there is evidence of impairment, the recoverable amount of the assets is estimated at year-end. The amount of the loss recognised in profit and loss is equal to the difference between the carrying value and the recoverable amount of the assets. The goodwill recognised is not subject to amortisation, but its book value is tested annually (or more frequently) when there are signs of impairment. To this end, the cash flow generating units to which goodwill is attributable are identified. The amount of the impairment loss is determined by the difference between the book value of goodwill and its recoverable amount, if lower. Said recoverable amount is the higher of the cash-generating unit's fair value, less costs to sell, and its value in use. Value in use is the present value of future cash flows expected to arise from the years of operation of the cash-generating unit and its disposal at the end of its useful life. The resulting value adjustments are posted to the profit and loss statement under item 210 Net adjustments to (recoveries on) intangible assets. Periodic depreciation is reported in the same item. An impairment loss recognised for goodwill shall not be reversed in a subsequent period. c) derecognition criteria Intangible assets are derecognised from the balance sheet upon disposal and when no future economic rewards are expected. 10. Non-current assets held for sale and discontinued operations a) recognition criteria Non-current assets held for sale and discontinued operations are initially valued at the lower of the book value and the fair value less costs to sell. b) classification criteria This item includes non-current assets held for sale and discontinued operations when the book value is to be recovered mainly through a highly likely sale rather than continuous use. c) revenue recognition criteria Following initial recognition, non-current assets held for sale and discontinued operations are valued at the lower of the book value and the fair value net of selling costs. Related income and expenses, net of tax, are shown in the P&L statement under a separate item if they relate to discontinued operations. In this specific case (discontinued operations), it is also necessary to disclose again the same economic information in a separate item for the previous periods presented in the financial statements, reclassifying the profit and loss statements accordingly. Amortisation is discontinued at the date the non-current asset is classified as a non-current asset held for sale. d) derecognition criteria Non-current assets held for sale and discontinued operations are derecognised from the balance sheet upon disposal. 127

128 Notes to the Consolidated Financial Statements - Part A Accounting policies 11. Current and deferred tax a) recognition criteria The effects of current and deferred taxation calculated in compliance with Italian tax laws are posted on an accrual basis, in accordance with the measurement methods of the income and expenses which generated them, by administering the applicable tax rates. Income taxes are posted to profit and loss, excluding those relating to items directly credited or charged to equity. Income tax provisions are determined on the basis of a prudential forecast of current tax expense, deferred tax assets and liabilities. Current tax includes the net balance of current tax liabilities for the year and current tax assets with the Financial Administration, comprising tax advances, tax credit arising from prior tax returns and other withholding tax receivables. In addition, current tax includes tax credit for which reimbursement has been requested from the relevant tax authorities. Tax receivables transferred as a guarantee of own debts shall also be recorded within this scope. Deferred tax assets and liabilities are determined on the basis of the temporary differences with no time limits between the value assigned to the assets or liabilities in accordance with statutory principles and the corresponding values for tax purposes, applying the so-called balance sheet liability method. Deferred tax assets are shown in the balance sheet for the extent to which they are likely to be recovered on the basis of the capacity of the company involved or all of the participating companies as a result of exercising the option concerning fiscal consolidation to generate a positive taxable profit on an ongoing basis. Recovery of deferred tax assets relating to goodwill, other intangibles and write-downs on loans is to be considered automatically probable because of existing regulations that provide for conversion into tax credits, if a statutory and/or tax loss is incurred. In particular: if the financial statements filed by the company show a statutory loss for the year, deferred tax assets relating to goodwill, other intangibile assets and loan write-downs will be subject to partial conversion into tax credits pursuant to the provisions set out in art. 2, par. 55 of Legislative Decree no. 225 of 29 December 2010, as amended by Law no. 10 of 26 February The conversion into tax credits becomes effective as of the date when the lossincurring separate financial staments are approved by the Shareholders Meeting, as provided for by art. 2, par. 56 of aforementioned Legislative Decree no. 225/2010. If a tax loss is incurred for the year, the part of deferred tax assets generated by deductions on goodwill, other intangibile assets and loan writedowns will be transformed into tax credits pursuant to the provisions of art. 2, par. 56-bis of Legislative Decree no. 225 /2010, introduced by art. 9 of Legislative Decree no. 201 of 6 December 2011as amendedby law no. 214 of 22 december The conversion into tax credits becomes effective as of the date of filing of the tax return for the year in which the loss is incurred. Deferred tax liabilities are shown in the balance sheet, with the sole exception of reserves subject to tax deferral, since the volume of available reserves already subjected to taxation reasonably implies that no tax-inducing transactions will be carried out. Deferred tax assets and liabilities are posted to the balance sheet by offsetting each tax for each year, taking account of the expected repayment schedule. Prepaid taxes for the years in which deductible temporary differences are higher than taxable temporary differences are posted to the assets side of the balance sheet, under deferred tax assets. Deferred taxes for the years in which taxable temporary differences are higher than deductible temporary differences are posted to the liabilities side of the balance sheet, under deferred tax liabilities. b) classification and measurement criteria Deferred tax assets and liabilities are systematically measured to take account of any changes in regulations or tax rates and of any different subjective situations of Group companies. In addition, the tax reserve is adjusted to cover the charges which might result from already notified tax assessments or litigation pending with the tax authorities. With reference to fiscal consolidation of the Parent Company and participating subsidiaries, contracts have been stipulated to regulate offsetting flows in relation to the transfers of tax profits and losses. Such flows are determined by administering the applicable IRES tax rate to the taxable income of participating companies. The offsetting flow for companies with tax losses calculated as above is posted by the consolidating to the consolidated company insofar as the consolidated company, had it not been a participant of fiscal consolidation, might have used the losses to offset its taxable income. Offsetting flows so determined are posted as receivables and payables with companies participating in 128

129 Notes to the Consolidated Financial Statements - Part A Accounting policies fiscal consolidation, classified under other assets and other liabilities, offsetting item 290 Tax expense (recovery) on income from continuing operations. c) revenue recognition criteria Where deferred tax assets and liabilities refer to components which affected the profit and loss statement, they are offset by income tax. When deferred tax assets and liabilities refer to transactions which directly affected shareholders equity without impacting the profit and loss statement (e.g. valuations of available-for-sale financial instruments or cash flow hedging derivatives), they are posted as a contra entry to shareholders equity, involving the special reserves if required. 12. Provisions for risks and charges Provisions to the reserve for risks and charges are made only when: there is a current (legal or implicit) obligation resulting from a past event; an outflow of resources producing economic rewards is likely to be necessary in order to settle the obligation; and the amount of the obligation can be estimated reliably Whenever timing is important, the provisions are discounted back. Provisions to the reserve are posted to the profit and loss statement, in addition to interest expense accrued on the reserves which were subject to discounting. No provision is shown for contingent and unlikely liabilities, but information is provided in the notes to the financial statements, except in cases where the probability of an outflow of resources to settle the amount is remote or the amount is not significant. Sub-item 120 Provisions for risks and charges: post-employment benefits includes appropriations in compliance with IAS 19 Employee benefits for the purpose of settling the technical deficit of defined-benefit supplementary pension funds. Pension plans are either defined-benefit or defined-contribution schemes. The charges borne by the employer for defined-contribution plans are pre-determined; charges for defined-benefit schemes are estimated and shall take account of any shortfall in contributions or poor investment performance of defined-benefit plan assets. For defined-benefit plans, the actuarial values required by the application of the above principle are determined by an external actuary in accordance with the Projected Unit Credit Method. In particular, the obligation is calculated as the sum of the following values: average current value of pension benefits (determined for employees in service only on the basis of completed years of service and taking account of possible future salary increases); less the current value of any assets servicing the scheme; less (or plus) any actuarial gains and losses not recognised in the balance sheet, on the basis of the so-called corridor method. According to the corridor method, the actuarial gains and/or losses defined as the difference between the book value of the liabilities and the present value of the Bank s commitments at the end of the period shall be recognised in the balance sheet only when they exceed the higher value between 10% of the average present value of pension benefit obligations and 10% of the current value of the assets of the pension fund. Any surplus is posted to the profit and loss statement in line with the average residual working life of the workforce, or during the year in the case of retired employees. The provision for the year posted to the profit and loss statement equals the sum of annual interest accrued on the average present value of pension benefit obligations at the beginning of the year, the average current value of benefits accrued by active employees during the year, and actuarial gains and losses in compliance with the corridor method, net of the expected annual return on plan assets Sub-item 120 Provisions for risks and charges: other provisions includes any appropriations to cover expected losses for actions filed against the Bank, including clawback actions, estimated expenses in relation to customers claims for securities brokerage, and other estimated expenses in relation to legal or implicit obligations existing at the end of the period. 129

130 Notes to the Consolidated Financial Statements - Part A Accounting policies 13. Liabilities and debt securities in issue a) recognition criteria These financial liabilities are first recognised upon receipt of the sums collected or at the time of issuance of debt securities. Liabilities are initially recognised at their fair value, which is generally equal to the amount received or the issue price, increased by any additional income/expense directly attributable to the funding or issuing transaction and not reimbursed by the creditors. Internal administrative costs are excluded. The fair value of financial liabilities (if any) issued at conditions other than market conditions is calculated by using a specific valuation technique, and the difference with respect to the consideration received is booked directly to profit and loss only when the conditions provided for by IAS 39 have been met., i.e. when the fair value of the instrument issued can be established by using either quoted market prices for similar instruments or a valuation technique that makes maximum use of market inputs. b) classification criteria Deposits from banks and customers and securities issued include different types of funding (both interbank and from customers) and funds raised through certificates of deposit and outstanding bonds, net of any repurchase. Debt securities in issue include all securities that are not subject to natural hedging through derivatives and that are classified as liabilities measured at fair value. The item also incorporates payables booked by the lessee in relation to any stipulated financial lease transactions. c) revenue recognition criteria Following initial recognition, financial liabilities are valued at amortised cost using the effective interest method. Short-term liabilities for which time effect is immaterial are an exception, and are recognised at the amount collected. Should the requirements provided for by IAS 39 be met in the case of structured instruments, the embedded derivative is separated from the host contract and reported at fair value as a trading asset or liability. In this case, the host contract is recognised at amortised cost. d) derecognition criteria Financial liabilities are derecognised upon maturity or extinction. Derecognition also occurs if previously issued securities have been repurchased. The difference between the book value of the liabilities and the amount paid to repurchase them is recorded in the profit and loss statement. A new placement in the market of own securities after their repurchase is considered as a new issue and posted at the new price of placement, with no impact on the profit and loss statement. In compliance with the provisions of IAS 32, any potential commitment to buy treasury shares as a result of the issuance of put options is shown in the balance sheet under financial liabilities, offset by the reduction in equity by the amount of the current value of the contractual repayment sum. At the end of 2011, there were no put options sold on treasury shares of the Parent Company. 14. Financial liabilities held for trading a) recognition criteria Financial liabilities held for trading are initially posted on the date of issue for debt securities, and on the date of subscription for derivatives. Upon initial recognition, they are measured at fair value, which usually corresponds to the amount collected net of any transaction costs or income directly attributable to the instrument itself, which are directly posted to the profit and loss statement. Any embedded derivatives in combined financial instruments not directly connected to the latter and with the characteristics to meet the definition of a derivative are recognised separately from the host contract at fair value. The applicable accounting criteria are administered to the primary contract. 130

131 Notes to the Consolidated Financial Statements - Part A Accounting policies b) classification criteria This category includes debt securities issued mainly for the purpose of obtaining short-term profits and the negative value of derivative contracts excluding those designated as hedging instruments. Derivative contracts include those embedded in combined financial instruments which were subject to separate accounting. The sub-items Deposits from banks and Deposits from customers also incorporate uncovered short positions on securities. c) measurement criteria Following initial recognition, financial liabilities held for trading are measured at fair value, with changes being posted as a contra entry in the profit and loss statement. For a description of criteria used to determine the fair value of financial instruments, please see section A.3.2 Fair Value Hierarchy of this Part A. d) derecognition criteria Financial liabilities are derecognised upon maturity or extinction. Derecognition also occurs if previously issued securities have been repurchased. The difference between the book value of the liabilities and the amount paid to repurchase them is booked in the profit and loss statement. e) revenue recognition criteria Profits and losses arising from any changes in the fair value of financial liabilities are recognised in profit and loss under item 80 Net trading income (loss), except for gains and losses on derivative payables linked with the fair value option which are classified under item 110 Net gains/losses on financial assets and liabilities designated at fair value. 15 Financial liabilities designated at fair value a) recognition criteria Financial liabilities measured at fair value are initially posted on the date of issuance for debt securities. Upon initial recognition, they are measured at fair value, which usually corresponds to the amount collected net of any transaction costs or income directly attributable to the instrument itself, which are directly posted to the profit and loss statement. The Fair Value Option (FVO) applies to all financial assets and liabilities which would have caused misrepresentation on the profit and loss statement and balance sheet had they been otherwise classified, and to all instruments which are managed and measured using a fair value approach. In particular, liabilities measured at fair value include fixed-rate and structured funding instruments whose market risk is subject to systematic hedging through derivative contracts. The fair value of financial liabilities issued at conditions other than market conditions (if any) is calculated by using a specific valuation technique, and the difference with respect to the consideration received is booked directly to profit and loss only when the conditions provided for by IAS 39 have been met, i.e. when the fair value of the instrument issued can be established by using either quoted market prices for similar instruments or a valuation technique that makes maximum use of market inputs. Should these conditions not be available, the fair value used for valuations after the issuance of instruments is cleared of the initial difference between the fair value upon issuance and the consideration received. This difference is recognised in profit and loss only if it ensues from changes in the factors (including time), which market traders would consider for price determination. b) classification criteria This category includes financial liabilities intended for measurement at fair value through profit or loss when: 1. the determination of fair value allows for the elimination or reduction of significant misrepresentations of the financial instruments in the profit and loss statement and balance sheet; or 2. the management and/or measurement of a group of financial instruments at fair value through profit or loss is consistent with an investment or risk management strategy documented as such by senior management; or 3. a host instrument embeds a derivative which significantly modifies the cash flows of the host and should otherwise be accounted for separately In particular, the Parent Company has recognized under this item the financial liabilities that are subject to natural hedging through derivative instruments. These financial liabilities include structured and fixed-rate certificates of deposit and bonds, for which the market risk is subject to systematic hedging through derivative contracts, with the exception of 131

132 Notes to the Consolidated Financial Statements - Part A Accounting policies securities issued at a floating rate subject to cash flow hedging, which are instead classified under debt securities in issue. In order to further enhance reporting and transparency on how the fair value option is used, specific detailed tables are provided in the corresponding sections of the notes to the financial statements, both for the profit and loss statement and the balance sheet, which further illustrate the methods and strategies of use of the fair value option by the Parent Company. For item 17 Other information, a specific section is also included to provide insight into the technical hedging methods, with a special focus on the use of the fair value option. c) measurement criteria Following initial recognition, financial liabilities are measured at fair value. For a description of criteria used to determine the fair value of financial instruments, please see section A.3.2 Fair Value Hierarchy of this Part A. d) derecognition criteria Financial liabilities are derecognised upon maturity or extinction. Derecognition also occurs if previously issued securities have been repurchased. The difference between the book value of the liabilities and the amount paid to purchase them is recorded in the profit and loss statement under item 110 Net gains / losses on financial assets and liabilities designated at fair value. e) revenue recognition criteria Gains and losses arising from any changes in the fair value of a financial asset are recognised in profit and loss under item 110 Net gains / losses on financial assets and liabilities designated at fair value ; same treatment applies to derivatives payable linked with the fair value option which are classified under item 110 Net gains / losses on financial assets and liabilities designated at fair value. 16. Foreign-currency transactions a) a) recognition criteria Upon initial recognition, foreign-currency transactions are recognised in the currency of account using the foreignexchange rates on the date of the transaction. b) revenue recognition and derecognition criteria Financial statement entries denominated in foreign currencies are valued at the end of each reporting period as follows: monetary entries are converted using the exchange rate on the closing date; non-monetary entries valued at historical cost are converted using the exchange rate on the date of the transaction; non-monetary entries that are measured at fair value in a foreign currency are translated at the closing date rate. Any exchange-rate differences resulting from the settlement of monetary elements, or from the conversion of monetary elements at rates other than those used for initial conversion or conversion in the previous financial statements, are posted to the profit and loss statement for the period in which they arise. When a profit or a loss on a non-monetary element is shown under shareholders equity, the exchange-rate difference in relation to said element is also posted to equity. However, when a profit or a loss is posted to the profit and loss statement, the relative exchange-rate difference is also posted there. The accounting position of foreign branches with different operating currencies is converted into Euros by using the exchange rates at the end of the reporting period. Any exchange-rate differences attributable to investments in such foreign branches, and those resulting from the conversion into Euros of their accounting position, are posted in equity reserves and transferred to the profit and loss statement only in the year when the investment is disposed of or reduced. 18 Other information a) Other significant items Other significant items from the Group s financial statements are described below. 132

133 Notes to the Consolidated Financial Statements - Part A Accounting policies Cash and cash equivalents This item includes currencies that are legal tender, including foreign banknotes and coins and demand deposits with the central bank of the country or countries in which the Group operates with its own branches. The item is posted at face value. For foreign currencies, the face value is converted into Euros at year-end exchange rate. Value adjustment of macrohedged financial assets and liabilities These items show, respectively, the balance, whether positive or negative, of the changes in value of the macrohedged assets and the balance, whether positive or negative, of the changes in value of liabilities macrohedged against interestrate risk, pursuant to IAS 39, paragraph 89. Other assets This item shows assets not attributable to the other items on the asset side of the balance sheet. It may include, for example: gold, silver and precious metals; accrued income other than that which is capitalised to the related financial assets; any inventories according to the definition of IAS 2; improvements and incremental expenses incurred on third-party real estate other than those attributable to property, plant and equipment and therefore not independently identifiable and separable. The costs in the latter bullet point are posted to other assets, since the user company exercises control of the assets for the purpose of the tenancy agreement and can obtain future economic benefits from them. Said costs are posted to Item 220 Other operating expenses (income) on the profit and loss statement according to the shorter of the period in which the improvements and expenses can be used and the remaining term of the contract. Severance pay Employee severance pay is a defined-benefit allowance subsequent to the employment relationship; therefore its actuarial value must be estimated for the purpose of the financial statements. This estimate is carried out using the Projected Unit Credit method, which predicts future disbursements on the basis of statistical historical analysis and the demographic curve, and the financial discounting of such flows according to market interest rates. The costs accrued during the year for servicing the plan are posted to the profit and loss statement under Item 180 a) Personnel expenses as the net amount of contributions paid, non-posted contributions pertaining to previous years, financial charges and actuarial profits/losses. Actuarial profits and losses the difference between the balance-sheet value of the liabilities and the present value of the obligation at the end of the year are computed using the corridor method, which means the excess of accrued actuarial profits/losses at the end of the previous year compared with the higher of 10% of the present value of the benefits generated by the plan and 10% of the fair value of the assets servicing the plan. Such excess is also compared to the expected average working life of the participants in the plan. After the reform of supplementary pension funds as per Legislative Decree No. 252 of 5 December 2005, severance pay quotas accrued to 31 December 2006 remain with each company of the Group, while severance pay quotas accrued after 1 January 2007, at the discretion of the employee, are assigned to supplementary pension funds or maintained with the individual companies, which will provide for their transfer to the Treasury Fund managed by the Italian National Social Security Institute, INPS. Other liabilities This item shows liabilities not attributable to other items on the liability side of the balance sheet. It includes, for example: a) payment agreements that must be classified as debit entries according to IFRS 2; b) debit entries connected with payment for provision of goods and services; c) accrued liabilities other than those to be capitalised to the respective financial liabilities. 133

134 Notes to the Consolidated Financial Statements - Part A Accounting policies b) Other significant accounting practices Details on significant accounting criteria for purposes of understanding the financial statements are shown below. Treasury shares Any shares held by Parent Bank Banca Monte dei Paschi di Siena S.p.A. are recorded in their own item and deducted directly from equity. No profits or losses are posted to the profit and loss statement upon the purchase, sale, issue or cancellation of the Parent Bank s equity instruments. Any amount paid or received is posted directly to equity. Share-based payments The existing stock-granting plan provides for the purchase and allocation to employees of a certain number of shares of Gruppo Monte dei Paschi di Siena S.p.A. on an annual basis, for a value corresponding to the amount recognised as part of the company s bonus structure. Such value is posted as personnel expenses on an accrual basis. Dividends and income/cost recognition Revenues are recognised upon attainment, or: in the case of selling goods or products, when it is likely that future benefits will be received and said benefits can be reliably quantified; in the case of services, when these are provided. In particular: interest is booked pro rata temporis on the basis of contractual interest rate or the effective interest rate in the event of application of the amortised cost; interest on arrears is posted to the profit and loss statement only upon actual collection; dividends are shown in the profit and loss statement upon resolution of their payout, i.e. when their payment is due; commissions for service income are posted in the period when said services were rendered, on the basis of existing contractual agreements; revenues from trading or from issuance of financial instruments, as determined by the difference between the transaction price and the fair value of the instrument, are booked to the profit and loss statement upon reporting of the transaction if the fair value can be determined with reference to parameters or recent transactions observable on the same market in which the instrument is traded; otherwise, they are distributed over time, taking into account the duration and the nature of the instrument. portfolio management fees are recognised based on the duration of service; expenditures are booked to profit and loss during the periods in which the related revenues are booked. Expenditures that cannot be associated with income are booked immediately to the profit and loss statement. Business combinations A business combination is defined as the transfer of control of a company (or of a group of assets and integrated goods, conducted and managed as a unit). For this purpose, control is considered to have been transferred, either when more than half of the voting rights are acquired, or in the event that, even without acquiring more than half of the voting rights of another entity, control of the latter is obtained, since, as a result of the combination, power is held: 1. over more than half of the voting rights of the other entity by virtue of agreements with other investors; 2. to make the management and financial decisions of the entity by virtue of the articles of association or an agreement; 3. to appoint or remove the majority of board members; 4. to obtain the majority of voting rights at board meetings. A business combination may give rise to an investment link between the acquiring Parent Company and the acquired subsidiary. In these cases, the acquirer applies IFRS 3 to the consolidated financial statements while posting the acquired interest to its separate financial statements as an equity interest in a subsidiary, consequently applying IAS 27 Consolidated and separate financial statements. 134

135 Notes to the Consolidated Financial Statements - Part A Accounting policies A business combination may also provide for the acquisition of the net assets of another entity, including any goodwill, or the acquisition of the share capital of another entity (for example mergers, splits, acquisitions of business units). Such a business combination is not an investment link like the one between a Parent Company and subsidiary, and therefore in these cases IFRS 3 is also applied to the individual financial statements. Based on the provisions of IFRS 3, an acquirer must be specified for all combination transactions. It is identified as the subject that obtains control over another entity or group of assets. The acquisition must be posted to the accounts on the date when the acquirer effectively obtains control over the entity or assets acquired. The cost of a business combination must be determined as the sum of: 1. the fair value, on the date of exchange, of: the assets sold; the liabilities incurred or assumed; and the equity instruments issued by the acquirer in exchange for control; 2. any ancillary expense directly attributable to the business combination. In cash transactions (or when payment is provided for using cash-equivalent financial instruments), the price is the consideration agreed upon, possibly discounted in the event of a medium- or long-term instalment plan; in the event that payment occurs by means of instruments other than cash, thus by issuing equity instruments, the price is equal to the fair value of the means of payment net of costs directly attributable to the equity issuance. Included in the price of the business combination are the acquisition-date fair value of arrangements. 135 contingent consideration Business combination transactions are recorded using the acquisition method, which provides for posting to the financial statements: the assets, liabilities and contingent liabilities of the acquired entity at their respective fair values on the date of acquisition, including any identifiable intangible assets not already posted to the financial statements of the acquired entity; the goodwill determined as the difference between the cost of the business combination and the net fair value of the assets, liabilities and identifiable contingent liabilities; any positive surplus between the net fair value of the assets, liabilities and contingent liabilities acquired and the cost of the business combination is posted to the profit and loss statement. In addition, if a company does not acquire a 100% interest, non-controlling interests shares of net equity may be valued at fair value (full goodwill). The fair value of the assets, liabilities and contingent liabilities of the acquired entity may be determined provisionally by the end of the first reporting period in which the combination occurs and must be completed within twelve months of the date of acquisition. The obligation to measure the controlled entity's individual assets and liabilities at fair value upon each subsequent step acquisition was recently eliminated for business combinations that are achieved in stages ('step acquisitions'). Business combinations do not include transactions aimed at control of one or more entities that do not constitute a business activity, or aimed at temporary control, or finally, if the business combination is realised for restructuring purposes, thus among two or more entities or business activities already part of the MPS Group, and not involving changes to the control structures regardless of the percentage of rights of third parties before and after the transaction (so-called business combinations of entities under common control). As of 2010, the obligation to value subsidiaries individual assets and liabilities at fair value in any subsequent acquisition has been removed in the event of step acquisitions of subsidiaries. In addition, if a company does not acquire a 100% interest, non-controlling interests shares of equity may either be valued at fair value (full goodwill), or using the method currently provided for by IFRS 3. The revised version of the standard also provides for all business combination-related costs to be posted to the profit and loss account and liabilities for contingent payments to be recognised on the acquisition date. Business combinations under common control Business combinations between entities under common control do not fall under IFRS 3. In the absence of a standard of reference, as indicated in Section 1 Declaration of conformity with international accounting standards, these transactions are posted to the accounts by making reference to preliminary guidance from the Italian Association of

136 Notes to the Consolidated Financial Statements - Part A Accounting policies Auditors (Orientamenti Preliminari, OPI no. 1 "Accounting treatment of "business combinations of entities under common control in separate and consolidated financial statements" and OPI no. 2 "Accounting treatment of mergers in financial statements"). These guidelines consider the economic significance of business combinations on the basis of cash flow impact on the Group. Transactions, which had no significant influence on future cash flows, were recognised using the pooling of interest method. Therefore, in the financial statements of the seller, the difference between the sale price and the book value is posted as an increase/decrease in equity. Exclusively in the event of acquisition or transfer of a controlling interest, the equity investment is posted at acquisition cost in the acquirer/transferee s financial statements for the year; Amortised cost The amortised cost of financial assets or liabilities is the value at which it was measured upon initial recognition, net of principal repayments, plus or minus overall amortisation calculated using the effective interest method, on the differences between the initial value and that at maturity and net of any permanent impairment. The effective interest rate is the rate which makes the present value of future contractual payment or collection cash flows, until maturity or a subsequent price recalculation date, equal to the net book value of the financial assets or liabilities. To calculate the current value, the effective interest rate is applied to estimated future collection or payment flows over the entire useful life of the financial assets or liabilities or for a shorter period if certain conditions are met (for example, a change to market rates). The effective interest rate shall be redetermined where the financial assets or liabilities have been subject to fair value hedging that has ceased to exist. In cases in which it is not possible to estimate the cash flows or expected life in a reliable manner, the Bank uses the cash flows contractually envisaged for the entire contractual term. Following initial recognition, the amortised cost makes it possible to allocate income and costs reducing or increasing the instrument over its entire expected life by means of the amortisation process. The determination of the amortised cost is different depending on whether the financial assets/liabilities are subject to valuation at a fixed or variable rate. For fixed-rate instruments, future cash flows are quantified based on the known interest rate during the term of the financing. For floating-rate financial assets/liabilities, whose variability is not known beforehand (because, for example, it is tied to an index), cash flows are determined on the basis of the last known rate. At every rate review date, the amortisation schedule and the actual rate of return over the entire useful life of the instrument, i.e. until maturity, are recalculated. The adjustment is recognised as cost or income in the profit and loss statement. Valuation at amortised cost is applied to receivables, held-to-maturity financial assets, available-for-sale financial assets, liabilities and debt securities in issue; for debt securities classified under assets available for sale, amortised cost is calculated for the only purpose to post interest (based on the effective interest rate) to profit and loss; the dfference between fair value and amortised cost is allocated to a specific equity reserve. Financial assets and liabilities traded at market conditions are initially recognised at their fair value, which normally corresponds to the amount disbursed or paid inclusive -in the case of instruments valued at amortized cost- of transaction costs and commissions directly attributable to the assets and liabilities (such as fees and commissions paid to agents, consultants, intermediaries and dealers), as well as contributions withheld by regulatory bodies and securities exchanges, taxes, and transfer charges. These expenses, which must be directly attributable to the individual financial assets or liabilities, impact the original actual return and make the effective interest rate associated with the transaction different from the contractual interest rate. Calculation of the amortised cost does not include costs that the Group must incur regardless of the transaction (for example, administrative, stationery and advertising costs), which, even though they are specifically attributable to the transaction, occur in the normal practice of managing loans (for example, activities aimed at disbursement). With particular reference to receivables, lump-sum reimbursements of expenses incurred by the Group for the provision of a service must not be attributed in a way that lowers the cost of disbursing the loan, but since they may be considered as other operating income, the related costs must be posted to a separate item in the profit and loss statement. Guarantees issued Adjustments due to any deterioration in the guarantees issued are posted to Item 100 Other liabilities. Impairment losses are posted to Item 130 d) Net impairment losses/reversals on other financial transactions in the profit and loss statement. 136

137 Notes to the Consolidated Financial Statements - Part A Accounting policies c) Significant accounting choices made while preparing the financial statements (with particular reference to the provisions of IAS 1, paragraph 122, and document nos. 4 of 3 March 2010 and 2 of 6 February 2009, issued jointly by the Bank of Italy/Consob/Isvap). Decisions by senior management having a significant effect on amounts in the financial statements, other than those relating to estimates, made when applying accounting principles, are shown below. Transaction for value creation from part of the Group's real estate properties used in the business (the Transaction) In July 2009, the Group launched the Transaction aimed at creating value from part of its real estate used in the business, reorganise and rationalise production and industrial processes related to properties used in the business and, at the same time, strengthen its capital structure while maintaining the properties for use as bank branches through 24-year lease contracts with the purchaser. The Transaction was structured into 4 phases: a) disbursement by the Parent Company to MPS Immobiliare S.p.A. ( MPS Immobiliare or MPS RE ), a real estate company of the Group, of a mortgage loan on MPS Immobiliare owned properties leased to Group companies; b) incorporation of consortium joint-stock company Perimetro Gestione Proprietà Immobiliari S.C.p.A.( Consortium or PGPI ) pursuant to art ter of the Italian civil code and definition of its ownership and governance structure; c) transfer to the Consortium of the Group's real estate business, consisting in: 1) the real estate portfolio, including 683 buildings used in the banking business (61% of total real estate assets), concentrated in the subsidiary, MPS Immobiliare, and valued at EUR 1,718 mln; 2) the EUR 1,673 mln mortgage loan granted by the Parent to MPS Immobiliare on 7 July 2009; 3) the buildings' lease contracts by and between MPS Immobiliare and the companies of the Group for a period of 24 years and adjusted to fair market values as at Transaction date. d) subsequent securitisation of the mortgage loan existing between the Parent Company and the Consortium to the securitisation vehicle Casaforte S.r.l. ( Casaforte ). In consideration of the complexity of the transaction, an analysis of its accounting aspects starts from an assessment of how it qualifies in its substance so as to later identify the applicable IAS/IFRSs. Firstly, it is noted that on 20 July 2010, the Parent Company requested Consob to express an opinion with regard to the accounting requirements for the Transaction. On 23 December, Consob replied to the Bank's request with a note containing the guidelines for the Transaction accounting 'qualification' and, consequently, the identification of the applicable International Accounting standards. In particular, the essential point in the request for Consob's opinion lied in asking the Authority whether, in its judgment, the conditions were in place for considering the Transaction as "true sale", that is actual disposal of Group real estate transferred to the Consortium. In particular, for the purpose of assessing whether the Transaction may, as a whole, be considered as a "true sale" Consob gained insight in the three qualifying profiles of the transaction, namely whether : 1) the lease agreements entered into by the Consortium with the companies of the Group are operating or finance leases under IAS 17, Leasing ( IAS 17 ); 2) control by the Group over the real estate acquiring Consortium may be presumed, that is to say whether the conditions are in place in this case for the Consortium to be 'deconsolidated' pursuant to the relevant international accounting standards (IAS 27, Consolidated and Separate Financial Statements; "IAS 27" and SIC 12); 3) the requirements for derecognition of the securitised mortgage loan are met pursuant to IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39"). It should be emphasised that Consob considered an assessment of the afore-mentioned requirements necessary though not sufficient to qualify the Transaction as a "true sale" of the Group's real estate transferred to the Consortium. Having regard to the provisions set out in par. 3 of SIC 27, Consob recalled the principle whereby A series of transactions that involve the legal form of a lease is linked, and therefore should be accounted for as one transaction, when the overall economic effect cannot be understood without reference to the series of transactions as a whole. This is 137

138 Notes to the Consolidated Financial Statements - Part A Accounting policies the case, for example, when the series of transactions are closely interrelated, negotiated as a single transaction, and takes place concurrently or in a continuous sequence. Which, in Consob's scope of interpretation of the International Accounting Standards, means that, after having evaluated, in substance: compliance of condition 1) with the provisions of IAS 17 on operating leases; compliance of condition 2) with the principles for 'deconsolidation' under IAS 27 and SIC 12; and compliance of condition 3) with the criteria for derecognition under IAS 39, the Parent Company's Directors need to "carefully consider all circumstances and forwardlooking elements that may influence the occurrence or non-occurrence of the afore-mentioned conditions, disclosing in the notes to the financial statements all information necessary for a thorough assessment of the transactions at issue". Having said this, the Parent Company's Board of Directors proceeded with an assessment of whether the conditions were in place for the Transaction to be considered as a "true sale" of the Group's real estate transferred to the Consortium. To this end, the Parent Company's Board of Directors, assisted by an external expert, verified whether - from an accounting-technical standpoint- the conditions as at 31 December 2010 were in place for the assumptions under 1), 2) and 3) above to be deemed individually applicable in terms of compliance with the International Accounting Standards of reference. Considering that the Transaction was structured into the four previously described phases, the assessment was completed on the basis of the following international accounting standards: IAS 18, Revenue ( IAS 18 ), on the accounting treatment of revenue arising from the transfer/disposal of assets to third parties; IAS 17 and SIC 27, on leases; IAS 27 and SIC 12 on the accounting treatment ('deconsolidation') of equity investments; IAS 39 on recognition and measurement of financial instruments. In particular, IAS 18, IAS 17 and SIC 27 were relevant for the purpose of ascertaining the applicability of condition 1), i.e. the operating nature of lease agreements entered into by and between Group Companies and the Consortium; IAS 27 and SIC 12 were relevant for the purpose of ascertaining the applicability of condition 2), i.e. 'deconsolidation' of the interest in the Consortium; IAS 39 was relevant for the purpose of ascertaining the applicability of condition 3), i.e. derecognition of the securitised mortgage loan. The assessment by the Parent Company's Board of Directors highlighted that the conditions of the Transaction's individual phases that qualify the Transaction as a "true sale" (as per the definition contained in Consob note of 23 December 2010) were met prior to the closing date of fiscal year 2010 For all intents and purposes, the following conditions were assessed by the end of the year: a) the real estate sale and lease back transaction between the Group and the Consortium proved to qualify as operating sale & lease-back having regard to the requirements set forth in IAS17; and hence the derecognition of properties from the Group's consolidated financial statements; b) ownership of Consortium class A shares to an extent of less than 8% of capital proved to be an essential condition to assume that Group control over the Consortium ceased to exist as at the closing date of the fiscal year. An interest of less than 8% would not have enabled the Group to appoint any members to the BoD and exert any influence on the company's financial and operating policies. Since, for accounting purposes, the Consortium qualifies as a special purpose entity (SIC 12), deconsolidation may not have applied if the Group had retained -by virtue of other contractual relationships- the risks and rewards arising from properties transferred and, specifically, from ownership of the majority of equity instruments issued by the Consortium 23. On this connection, the Group continued to hold no equity instruments in the books of its companies as at 31 December Consequently, it may be affirmed that the risks/rewards arising from properties are not retained by the Group as they were transferred to the owners of the equity instruments; c) Following the securitisation, conditions were met to believe for the Parent Company to derecognise from its balance sheet the amount receivable from the Consortium as a consequence of the fact that this receivable was 23 The Consortium's Articles of Association provided for the possibility to issue equity instruments pursuant to art of the Italian civil code, which were issued against consideration on 22 December These instruments were entirely subscribed for by institutional investors for a total amount of EUR 69.9 mln. These equity instruments entitle holders to certain rights, including the right to participate in the net profits arising from disposal of PGPI properties. The real estate risk associated with the deal for value creation from properties transferred to the Consortium is limited to the holders of equity instruments alone. 138

139 Notes to the Consolidated Financial Statements - Part A Accounting policies transferred to the securitisation vehicle Casaforte. In effect, the Group held no class B and Z notes issued by Casaforte as at the end of Liquidity support in relation to class A notes issued by Casaforte, for which MPS Capital Services committed to repurchasing 100% of class A notes keeping the spread at issuance unaltered, entails the retention of a risk associated with repurchase of the transferred loan. For this reason, it was necessary to evaluate whether the majority of risks and rewards arising from the transferred loan had been transferred substantially pursuant to par. 22 of IAS 39. The assessment was made by quantifying the exposure to variability in net cash flows before and after the transfer, taking account of the possibility of option exercise by class A note holders. An assessment was also made on the basis of both historical data for comparable issuances and forward looking estimates that consider future developments in the issuer's creditworthiness based on different scenarios of financial market volatility. The ratio of exposure to variability in the present value of net future cash flows after transfer and exposure before transfer was approximately 6% at the date of deconsolidation. An assessment of whether control over the securitised loan was retained or not was also carried out pursuant to par. 20c) of IAS 39, which revealed that no contractual or regulatory restriction or limitation exists in terms of the loan being fully available to the transferee by the Parent Company (transferor). The assessment of the Transaction as a whole and of its closely inter-related individual phases by the Parent Company's Board of Directors, corroborated that, from a substantial standpoint, the "true sale" of the Group's real estate was deemed met as at 31 December In any case, although all afore-mentioned conditions are met, it is noted that, having regard to the characteristics of the Transaction and as indicated by Consob in its note of 23 December 2010, the decision regarding the derecognition of properties transferred to the Consortium is motivated by the explicit will of the Parent Company's Board of Directors to ensure conditions are maintained and kept stable over time and the related capital gain is accounted for. The Parent Company's Directors carefully considered all circumstances and forward looking elements that may have an influence on the Transaction's conditions being maintained and kept stable, and reported in these Notes to the Financial statements the most relevant information necessary for a thorough assessment of the various transactions carried out with a view to completing the Transaction. Based on the above-described assessments, the Parent Company's Directors maintained that conditions were in place at 31 December 2010 for the Transaction to be considered as a "true sale" of the Group's real estate transferred to the Consortium, thus making it possible to proceed with Consortium's 'deconsolidation' and recognise the capital gain arising from the Transaction (EUR mln) also in the Group's 2010 consolidated financial statements (item 240 Gains (losses) on equity investments of the profit and loss account). In August 2011, for the purpose of stabilising the capital gain posted to the 2010 consolidated financial statements within the Group's regulatory capital, MPS Capital Services and the Parent Company entered into a backup liquidity provider contract for the Casaforte class A securities with a leading banking institution. Securitisations Securitised loans completed prior to the first-time adoption (FTA) of international accounting standards are not reported in the financial statements inasmuch as the Parent Company has made use of the optional exemption provided for by IFRS 1, which permits not re-posting financial assets/liabilities sold or derecognised prior to 1 January The relative junior securities underwritten have been classified among receivables. For transactions completed later than this date, where receivables were sold to vehicle companies and in which - even with formal transfer of legal ownership of the receivables - control over the cashflows deriving therefrom and most risks and rewards are maintained, the loans that are the object of the transaction are not eliminated from the transferor's balance sheet. In this case, a payable is posted with the vehicle company net of the securities issued by the company and repurchased by the seller. The profit and loss statement also reflects the same accounting criteria. The only exception among securitisations completed after FTA and outstanding as at is Casaforte S.r.l., whose underlying receivables are fully derecognised from the Parent Company s balance sheet, since the associated risks and rewards were -both formally and substantially- transferred to the vehicle. Substitute tax and recognition of tax value of goodwill Goodwill is an asset that, if posted in the financial statements as a result of merger, transfer or spin-off transactions, is not recognised for tax purposes. Given the residual nature of goodwill, IFRS 3 Business Combinations expressly forbids the posting of deferred tax liabilities against the difference between the book value and the tax value of goodwill upon initial 139

140 Notes to the Consolidated Financial Statements - Part A Accounting policies recognition. This said, Legislative Decree 185/2008 provides for recognising goodwill for tax purposes by paying a substitute tax at a rate of 16%. Payment of the substitute tax reconciles the tax value to the book value and allows for tax amortisation of goodwill over nine years. International accounting standards do not explicitly cover this issue. Therefore, as indicated in Section 1 Statement of compliance with the international accounting standards, senior management had to define an accounting policy in accordance with the criteria established and essentially aimed at ensuring substantial representation of the effects of the transaction. Upon conclusion of this process, the Parent Company recorded the substitute tax (cost) and the tax deduction (revenue) as a one-off payment in the profit and loss statement for The balance-sheet revenue contra-entry is an asset subsequently amortised through profit or loss, thereby eliminating any interference with the tax rate applied in the financial statements. The accounting principle adopted is among those set out in document no. 1 of February 2009 issued by the Italian standard setter, Organismo Italiano di Contabilità (OIC). During 2009, subsidiary Banca Antonveneta S.p.A. resolved to partially deduct the goodwill posted following the transfer of banking business by the Parent Company on 1 January This transaction, which was accounted for using the method described above, partly affected the 2009 and partly the 2010 consolidated profit and loss accounts. In 2011, the Parent Company took additional deductions of goodwill and other intangible assets posted in the consolidated financial statements and embedded in the value of its stakes in Banca Antonveneta and Cassa di Risparmio di Biella e Vercelli Biverbanca, pursuant to art. 23 paragraphs of Legislative Decree no. 98/2011, transposed, as amended, into law no. 111 of 15 July The deduction taken in 2011 affected the 2011 consolidated profit and loss for an overall net amount of EUR mln. Accounting for hedge transactions adoption of the fair value option In its financial risk management policy, relating to financial instruments included in the banking book, the Bank has preferred using the fair value option accounting technique with respect to the alternative methods of hedging provided for by IAS 39, particularly fair value hedging and cash flow hedging. This decision is strictly linked to the actual methods with which the Group implements its own hedging policies, tending to do so by assets, managing the overall exposure to the market. More specifically, the fair value option was adopted to represent operational hedges realised by trading derivative financial instruments to hedge fixed-rate certificates of deposit and fixed-rate or structured bonds, both on an individual and consolidated basis (accounting mismatch). In fact, the operations of the Group provide for the issuing companies of the MPS Group to stipulate microhedging derivative contracts for funding instruments issued with subsidiary MPS Capital Services S.p.A., which in turn manages by assets the Group s overall exposure to the market. This approach does not enable a direct relationship to be maintained between the derivative stipulated between Group companies and that traded to the market. This management can be faithfully represented in the financial statements by adopting the fair value option introduced by the new international accounting standards, designating a group of financial assets or financial liabilities managed at fair value through profit or loss. The scope of application of the fair value option, for the most part, concerns three types of financial debt instruments: plain vanilla issues represented by bonds and fixed-rate certificates of deposit; structured issues represented by bonds whose payoff is tied to an equity component; structured issues represented by bonds whose payoff is determined by interest rate- or inflation-linked derivatives. The use of the fair value option, while best representing the hedge activities performed by the Group, has introduced certain elements of greater complexity compared with the other forms of hedging provided for by IAS 39, such as the need to manage the creditworthiness of the issuer and to define and specify methodologies for determining the fair value of the issued securities. In accordance with IAS 39, adopting the fair value option necessitates the liabilities being measured at fair value while also taking into account changes in own creditworthiness. This element is considered in the valuation process; to this end, the portfolio of financial instruments designated for the purpose of the fair value option has been determined using methods consistent with those adopted for all other financial instruments owned by the Group and measured at fair value, as described in detail in the following paragraph. From the perspective of prudential supervision, the fair value option was subject to attention from supervisory bodies, oriented towards controlling the potential mismatches deriving from posting to the profit and loss statement changes in the issuer s own creditworthiness and, consequently, in the quality of equity. These reflections led the Supervisory Authorities to identify and isolate the effects deriving from changes in own creditworthiness, which are expressly 140

141 Notes to the Consolidated Financial Statements - Part A Accounting policies excluded from the calculation of regulatory capital. Consequently, the Group shall ensure that its own regulatory capital is cleansed of effects deriving from changes in own creditworthiness, in compliance with the instructions provided by the Bank of Italy regarding prudential filters. IAS 39 provides for financial instruments to be irrevocably posted among assets or liabilities measured at fair value upon initial recognition. The fair value option cannot therefore be used for hedges on funding instruments issued prior to the decision that the hedge be undertaken; hedge accounting must be used in these cases. There are, moreover, portfolios and asset classes for which using the fair value option would make it harder to manage and measure the items, for example in relation to the hedging of assets. With reference to these cases, therefore, the Group considered it more appropriate and consistent to adopt formal Hedge Accounting relations than use the Fair Value Option. In particular the Group has used the technique of Micro Fair Value Hedging to hedge quotas of commercial assets valued at amortised cost (loans, mortgages) and the (available for sale) securities portfolio, while using Macro Fair Value Hedging for certain hedges of commercial assets and Cash Flow Hedging to hedge a limited portion of variable-rate funding instruments. The fair value option on the asset side of the balance sheet was therefore only marginally adopted with respect to the securities portfolio of the defined-contribution internal pension fund of the former Banca Toscana, which was merged by the Parent Bank in the first half of In the Operating Guide no. 4 of the OIC on accounting management of reserves and profit distribution pursuant to Legislative Decree no. 38 of 28 February 2008, the supervisory authorities (Banca d Italia/Consob/Isvap) identify as nondistributable capital gains those that are posted to the profit and loss statement using the fair value option and not yet realised. The Group has followed this rule to the letter, considering only capital gains and not capital losses, underlining that all the Group s liability operations are exclusively for the purposes of hedging. d) Using estimates and assumptions when preparing financial statements. Main causes of uncertainty (with particular reference to the provisions of IAS 1, paragraph 125, and document nos. 4 of 3 March 2010 and 2 of 6 February 2009, issued jointly by Banca d Italia/Consob/Isvap). The financial crisis which has gradually set in to further compound the economic crisis has had many consequences for companies, notably on their financial planning (i.e. on business plans for their loans). The huge volatility on the stillactive financial markets, the reduction in transactions on inactive financial markets and the lack of future prospects created specific conditions that influenced the preparation of the financial statements, especially in relation to estimates required by accounting standards that can have a significant impact on the balance sheet and profit and loss statement, as well as on disclosure of contingent assets and liabilities reported in the financial statements. The production of these estimates involves the use of available information and adoption of subjective assessments. By their nature, the estimates and assumptions utilised may vary from one period to another and, therefore, it cannot be ruled out that in subsequent periods the present values entered in the accounts may differ, even to a significant extent, as a result of changes in subjective assessments made. These estimates and valuations are thus complex and bring about inevitable elements of uncertainty, even in stable macroeconomic conditions. The main cases in which subjective valuations are mostly opted for by Management include: a) the use of valuation models to measure the fair value of financial instruments not listed in active markets; b) the quantification of impairment losses on loans and, more generally, other financial assets; c) the assessment of the fairness of the value of equity investments, goodwill, other intangible assets and property, plant and equipment. For a description of item a), please see section "A.3.2 Fair Value Hierarchy ; in relation to items b) and c), the most important qualitative issues subject to elements of discretion are described below. The actual technical and conceptual solutions used by the Group are analysed in more detail in the individual sections of the notes to the balance sheet and the profit and loss statement, where the contents of each item in the financial statements are described. 141

142 Notes to the Consolidated Financial Statements - Part A Accounting policies Methods for determining impairment losses on loans and, more generally, other financial assets At the end of every reporting period, the financial assets not classified as held-for-trading financial assets or assets at fair value are evaluated to check whether there is objective evidence of impairment that might render the book value of these assets not entirely recoverable. A financial asset has suffered a reduction in value and the impairment losses must be posted to the financial statements if, and only if, there is objective evidence of a reduction in future cash flows compared with those originally estimated as a result of one or more specific events that have occurred after initial recognition; the loss should be determined reliably and in relation with recent events. The reduction in value may also be caused not by a single separate event but by the combined effect of several events. The objective evidence that a financial asset or group of financial assets has suffered a reduction in value includes measurable data that arise from the following events: (a) significant financial difficulty of the issuer or debtor; (b) (c) (d) (e) (f) breach of contract, for example non-fulfilment or failure to pay interest or principal; granting to the beneficiary of a facility that the Group has taken into consideration primarily for economic or legal reasons related to the former s financial difficulties and that would not have been granted otherwise; a reasonable probability that the beneficiary will file for bankruptcy or other financial restructuring procedures; disappearance of an active market for that financial asset due to financial difficulties. Nevertheless, the disappearance of an active market due to the fact that the financial instruments of the company are no longer publicly traded is not evidence of a reduction in value; measurable data which indicate the existence of a significant drop in the estimated future cash flows for a group of financial assets from the time of their initial recognition, even though the reduction cannot yet be matched to the individual financial assets of the Group, including: - unfavourable changes in the status of payments of the beneficiaries within the group; or local or national economic conditions that are associated with non-fulfilment related to internal Group assets Objective evidence of reduction in value for an investment in an equity instrument includes information regarding important changes with an adverse effect that have occurred in the technological, market, economic or legal environment in which the issuer operates and indicates that the cost of the investment may not be recovered. The impairment test is performed on an analytical basis with respect to financial assets that show objective evidence of impairment and on a collective basis with respect to financial assets for which such objective evidence does not exist or for which the individual analytical valuation did not give rise to a value adjustment. Collective valuation is based on identifying homogenous risk classes of financial assets with reference to the characteristics of the debtor/issuer, economic sector, geographic area, presence of any guarantees and other relevant factors. Loans to customers and banks are individually analysed whenever they are classified as nonperforming, substandard or restructured receivables as per the Bank of Italy definitions. The amount of the loss is equal to the difference between the book value of the receivable upon valuation (amortised cost) and the current value of expected future cash flows, calculated using the original effective interest rate; expected cash flows take into account expected recovery times, presumable salvage value of any guarantees as well as costs likely to be incurred for the recovery of credit exposure. The amount of the loss is indicated in the profit and loss statement under Item 130 a) Net impairment losses/reversals on loans. The individual valuation of the aforementioned non performing loans requires defining repayment schedules for each position, in order to determine the cash flows deemed to be recoverable. In this respect, with the valuation process adopted by the Company, thresholds have been identified in terms of amounts of receivables, under which plans for recovering the exposures are defined on an automated basis. Such thresholds are set in accordance with bands characterised by limited exposure in relation to the total and by a large number of positions. Receivables with no individually identified objective evidence of impairment loss are subject to collective valuation. This valuation occurs by credit-risk homogenous categories of receivables, indicative of the debtor's ability to repay sums contractually owed. The segmentation drivers used for this purpose consist of: Economic sector, geographic location and customer segments (billing); on the basis of the latter indicator, the main segments of the portfolio are differentiated as follows: 142

143 Notes to the Consolidated Financial Statements - Part A Accounting policies Retail; Small and Medium Enterprises - Retail; Small and Medium Enterprises - Corporate Corporate; Large Corporate; Banks; Other. The rate of loss is determined for each portfolio segment by identifying the largest possible synergies (as allowed by various regulations) using the supervisory approach of the Basel II New capital accord. In particular, the impairment for the year of each loan belonging to a particular category is given by the difference between the book value and the recoverable amount on the date of valuation, with the latter being determined by using the parameters of the calculation method provided for by the new supervisory provisions, represented by PD (probability of default) and LGD (loss given default). If, in a subsequent year, the impairment loss decreases and the reduction can be objectively linked to an event that occurred after the impairment was recognised (such as an improvement in the financial solvency of the debtor), the previously recognised impairment loss will be reversed. The amount of the reversal is indicated in the profit and loss statement under Item 130 Net impairment losses/reversals. With reference to loans which have been restructured by partial or full conversion into equity stakes of beneficiary companies, in accordance with joint document no. 4 issued by Banca d Italia/Consob/Isvap on 3 March 2010, it is noted that the fair value of quotas received was factored into the valuation. In particular, in the case of non performing exposure, such classification was maintained for converted financial instruments received and, in the case of classification in the available-for-sale (AFS) category, capital losses recognised after conversion were posted directly to the profit and loss statement. Impairment of available-for-sale financial assets is posted to the profit and loss statement when a reduction in fair value has been directly recognised in equity and the aforementioned objective evidence exists In such cases, the cumulative loss directly recognised in equity shall be reversed and posted to profit and loss, even if the financial asset has not been derecognised. The overall loss transferred from equity to profit and loss is the difference between the acquisition cost (net of any repayment of principal and amortisation) and the current fair value, less any impairment loss on the financial asset previously posted to profit and loss. Impaired losses posted to profit and loss for investment in an available-for-sale equity instrument do not have to be reversed with an impact on said statement. If the fair value of an available-for-sale debt instrument subsequently increases, and the increase can be objectively linked to an event that took place after the impairment loss was posted to the profit and loss statement, the impairment loss must be derecognised and reversed to profit and loss. However, the existence of a negative reserve is not in itself sufficient to determine a write-down in the profit and loss statement. The nature and number of assumptions used to identify impairment factors and determine losses and reversals are elements of uncertainty in estimation. For equity instruments listed in active markets, objective evidence of impairment occurs when the market price at the end of the reporting period is at least 30% lower than the original acquisition cost or when market value is lower than the cost for a period of more than 12 months. If further reductions take place in subsequent financial years, these are charged directly to the profit and loss statement. Methods for determining impairment losses on equity investments, goodwill and, more generally, other intangible assets Equity investments The impairment process entails computation of the recoverable amount, which is the greater of the fair value less costs to sell, and the value in use. The value in use is the present value of the cash flows arising from the impaired asset; it reflects the estimate of the cash flows expected from the asset, the estimate of possible changes in the amount and/or in the timing of the cash flows, the financial value over time, the price for remunerating the risk on the asset and other factors that can influence the pricing, on the part of market dealers, of the cash flows expected from the asset. Numerous 143

144 Notes to the Consolidated Financial Statements - Part A Accounting policies assumptions are therefore required to estimate the fairness of the recognition value of equity investments: it follows that the result of this verification inevitably entails some degree of uncertainty. Goodwill Goodwill posted following acquisitions is subjected to an impairment test at least once a year and whenever there are signs of impairment. For testing purposes, once goodwill has been allocated to cash-generating units (CGUs), the book value is compared with the recoverable value of said units pursuant to paragraph 9 Intangible assets. The discounted cash flow (DCF) method is normally used to determine the recoverable value of the CGUs. To this end, senior management has estimated CGU cash flows; these are dependent on several factors, including cost and revenue growth rates, which in turn depend on changes in the real economy, customer behaviour, competition and other factors. Numerous assumptions are therefore required to estimate the fairness of the recognition value of goodwill; it follows that the result of this verification inevitably entails some degree of uncertainty. Disclosure in Section 12 of the Assets in the notes to the financial statements provides more details on this subject. Other property, plant and equipment and intangible assets The tangible and intangible assets with limited useful life are tested for impairment in the presence of any indication that the book value of the asset may not be recovered. The recoverable value is computed with reference to (i) the fair value of the tangible or intangible asset, net of the charges for disposal or (ii) the value in use if determinable and if it is above fair value. The fair value of properties is predominantly determined on the basis of an appraisal. This expert valuation will be repeated periodically whenever a change in the trend of the real estate market is ascertained that causes previously determined estimates to appear invalid. The loss in value is reported only if the fair value less costs to sell, or the valuein-use, is less than the book value. The nature and number of assumptions are elements of uncertainty also for these values and for subsequent verifications. More information on the possible assumptions can be found in Sections 12 and 13 of the Assets in the notes to the financial statements. 144

145 Notes to the Consolidated Financial Statements - Part A Accounting policies A.3 Information on fair value A.3.1 Portfolio transfers A Reclassified financial assets: book value, fair value and effect on comprehensive income Income components Income components Type of financial instrument (1) Portfolio prior to transfer (2) Portfolio after transfer (3) Book value at (4) Fair value at (5) in the absence of transfers (before tax) Valuerelevance Other (7) (6) reported for the period (before tax) Valuerelevance Other (9) (8) Debt Securities Trading Loans to customers 5,710 5,710 (163) 129 (168) 131 Debt Securities Trading Loans to banks 293, ,670 (10,951) 1,286 (10,951) (644) Debt Securities Available for sale Loans customers 104,715 91,308 (6,567) 4, ,047 Debt Securities Available for sale Loans to banks 534, ,827 (65,915) 28,097 (16,846) 24,057 Debt Securities Trading Available for sale 331, ,090 (6,803) 5,901 (669) 9,546 UCITS Trading Available for sale 1,577,580 1,167,806 (204,645) 13,205 1,152 21,395 Total 2,848,056 2,282,411 (295,044) 53,149 (27,346) 60,532 In the course of 2008, the Group applied the amendment Reclassification of financial assets, which was issued by the IASB to amend IAS 39 and IFRS 7 in October 2008 introducing the possibility of reclassifying portfolios in unusual circumstances such as the crisis that emerged in the markets in the second half of On the basis of this amendment, some Group companies transferred the following securities portfolios in the second half of 2008, shown below at their historical transfer values: 1) units of UCITS in the amount of EUR mln from the trading portfolio to the AFS portfolio; 2) debt securities in the amount of EUR mln from the trading portfolio to loans to banks; 3) debt securities in the amount of EUR mln from the trading portfolio to loans to customers; 4) debt securities in the amount of EUR 1,029.3 mln from the AFS portfolio to loans to banks; 5) debt securities in the amount of EUR 1,392.7 mln from the AFS portfolio to loans to customers; In addition to illustrating the book values and fair values of financial instruments reclassified in 2008 as at , the table also reports (columns 6 and 7) financial results in terms of value relevance and other (realised profit/loss and interest), which the same financial instruments would have produced for the Group in 2011 had they not been transferred in Columns 8 and 9, on the other hand, show the profit and loss results in terms of value relevance and "other" (realised profit/loss and interest) which the Group actually posted for these instruments in the course of The assumed net capital losses (column 6) of EUR mln are higher than those actually recorded for 2011 (EUR 27.3 mln in capital gains, see column 8) by an overall amount of EUR mln in depreciation (of which EUR 66.9 mln posted to profit and loss and EUR mln to equity). By way of completeness, on the back of the reclassification in 2008 of bonds originally classified as AFS financial instruments, the relative negative reserve, for an amount of EUR mln, existing on the date of reclassification, was accounted for pursuant to the provisions set out in par. 50F of IAS 39. In particular, the negative AFS reserve was gradually phased out over a timeframe reflecting the residual life of the underlying securities, measured as a direct reduction of interest income. This negative impact on net interest income was offset by the positive effect of the amortised cost mechanism on securities, which gradually brings the maturity value in line with the nominal value. The residual reserve at the end of 2011 was EUR 72.6 mln, excluding tax impact. 145

146 Notes to the Consolidated Financial Statements - Part A Accounting policies A Reclassified financial assets: effects on comprehensive income prior to transfer A Transfer of financial assets held for trading A Effective interest rate and expected cash flows from reclassified financial assets Tables A.3.1.2, A and A were left blank because no financial assets were reclassified during the year. 146

147 Notes to the Consolidated Financial Statements - Part A Accounting policies A.3.2 Fair Value Hierarchy The fair value hierarchy, introduced by the IASB through IFRS 7 amendment Additional disclosures of March 2009, must be applied to all financial instruments measured at fair value in the balance sheet. IAS 39 defines fair value as the amount for which an asset may be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. The fair value of financial instruments listed in active markets is determined by using quoted market prices; quoted market prices for similar instruments or internal valuation models are used for other financial instruments. Financial instruments are classified in three different levels according to the reliability of the inputs used during measurement. The methods for classifying financial instruments in the three-level fair value hierarchy are shown below. Level 1 This level shall include financial instruments measured using unadjusted quoted prices in active markets for identical instruments. IAS 39 defines a financial instrument as quoted in an active market when: a) the quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, authorised body or regulatory agency; b) the quoted prices represent actual and regularly occurring market transactions on an arm s length basis. If the quoted prices meet these criteria, they represent the best estimation of fair value and must be used to measure the financial instrument. From the definition set out in IAS 39 it is inferred that the active market concept is particular to the individual financial instrument being measured and not to the market on which it is listed; the fact that a financial instrument is quoted in a regulated market is therefore not in itself sufficient for said instrument to be defined as listed in an active market. Level 2 and 3 Financial instruments not listed in an active market must be classified in level 2 or 3. Classification in level 2 or level 3 is determined on the basis of market observability of the significant inputs used to determine fair value. A financial instrument must be fully classified in one level; if inputs belonging to different levels are used for the purpose of measuring an instrument, said instrument is classified based on the lowest level of input that is significant to the fair value measurement. An instrument is classified in level 2 if all significant inputs are directly or indirectly observable on the market. An input is observable if it reflects the same assumptions used by market participants, based on independent market data. Level 2 inputs are as follows: quoted prices on active markets for similar assets or liabilities; quoted prices for the instrument in question or for similar instruments on non-active markets, i.e. markets where: there are few transactions; prices are not current or vary substantially over time and between the difference market makers or little information is made public; observable market inputs (e.g.:interest rates or yield curves observable in different buckets, volatility, credit curves, etc.); inputs that derive primarily from observable market data, the reporting of which is confirmed by parameters such as correlation. A financial instrument is classified in level 3 if the measurement techniques adopted use non-observable market inputs and their contribution to estimating fair value is deemed significant. All financial instruments not listed in active markets are classified in level 3 where: despite having observable data available, significant adjustments based on non-observable data are required; the estimate is based on assumptions internal to the Parent Bank on future cash flows and risk adjustment of the discount curve. 147

148 Notes to the Consolidated Financial Statements - Part A Accounting policies A Accounting portfolios: breakdown by fair value levels Level1 Level 2 Level 3 Total Level1 Level 2 Level 3 Total 1. Financial assets held for trading 2. Financial assets designated at fair value 3. Financial assets available for sale 7,007,897 25,233, ,231 32,539,184 8,141,387 22,150, ,499 30,615,441 26,062 12,169-38, ,194 11, ,143 20,636,149 2,066, ,761 22,904,656 19,312,242 2,240, ,532 21,801, Hedging derivatives - 363, , , ,412 Total 27,670,108 27,675, ,992 55,845,422 27,688,823 24,716, ,031 52,977, Financial liabilities held for trading 2. Financial liabilities designated at fair value 1,967,732 24,312,473 49,171 26,329, ,380 26,155,508 97,852 27,074,740-22,498,694-22,498,694-25,469,490-25,469, Hedging derivatives - 4,359,400-4,359,400-1,736,530-1,736,530 Total 1,967,732 51,170,567 49,171 53,187, ,380 53,361,528 97,852 54,280,760 The financial instruments measured at fair value and classified in level 3 of the hierarchy consist of instruments not listed in active markets, valued using the mark-to-model approach, for which input data include, inter alia, non-observable market data significant for measurement purposes or observable market data that requires significant adjustment based on non-observable data, or that requires internal assumptions and estimations of future cash flows. In addition, the Group deemed it appropriate and prudential to have Level 3 include -regardless of the observability of market data for necessary inputs- any instruments not listed in active markets which are complex by their financial structure or because of the unavailability of a clear measurement method recognised as standard in the market and adjustable based on observable prices of comparable structures. This applies, for example, to assets in the structured credit category not listed in an active market. Although, in some cases, this category could avail itself of appropriate measurement models that make use of observable market inputs (e.g. credit default swap curves) or quotations by primary counterparties, the lack of a liquid market on correlations in the wake of the financial crisis made it necessary to use subjective estimates. Given the complexity of these structures, the Group decided to classify these instruments in level 3, in the absence of an active market, regardless of the observability of input parameters significant for their mark-to-model measurement. Another category of financial instruments classified in level 3 comprises some types of exotic options, mainly multi-asset, path-dependent options on equity instruments. Subjectivity in measuring these instruments lies mainly in selecting an appropriate pricing model rather than in the availability of input parameters often inductively inferable from the quotations of comparable instruments. For example, these instruments depend significantly on estimates regarding the future development of certain market parameters, such as the volatility surface of underlying securities. Essentially, in consideration of the type of playoff, it is believed that the estimation of the fair value of these instruments should not only factor in current market conditions (often observable) but also speculations on future market developments that are implicit in the model used. Additional information on level 3 financial instruments can be found in the comments under the tables for the individual balance sheet items concerned. 148

149 Notes to the Consolidated Financial Statements - Part A Accounting policies A Annual changes in financial assets measured at fair value (level 3) FINANCIAL ASSETS Held for At Available Hedging trading fair value for sale derivatives 1. Opening balance Increases Purchases Profits posted to: Profit and Loss of which capital gains Equity X X Transfers from other levels Other increases Decreases Sales Redemptions Losses posted to: Profit and Loss of which capital losses Equity X X Transfers to other levels Other decreases IFRS 5 "Discontinuing operations" Closing balance The Table shows changes occurred during the period in financial assets classified in level 3 of the fair value hierarchy. Amounts shown in the column Held for trading under Profit and Loss of which capital gains and Profit and Loss of which capital losses, respectively EUR 20.7 mln and EUR 24.8 mln, refer to valuation of securities recognised in the financial statements as at 31 December 2011 and posted to item 80 Net trading income (loss) in the profit and loss statement. The amount shown in the column Available for sale under Equity totalling EUR 46.4 mln refers to valuation of securities recognised in the financial statements as at 31 December 2011 and posted to the AFS reserve. 149

150 Notes to the Consolidated Financial Statements - Part A Accounting policies A Annual changes of financial liabilities measured at fair value (level 3) FINANCIAL ASSETS Held for trading At fair value Hedging derivatives 1. Opening balance 97, Increases 45, Issues Losses posted to: 13, Profit and Loss 13, of which capital gains 10, Equity X X Transfers from other levels Other increases 32, Decreases 94, Redemptions 1, Repurchases Profits posted to: 63, Profit and Loss 63, of which capital losses 59, Equity X X Transfers to other levels Other decreases 29, Closing balance 49, The Table shows changes reported during the period in financial liabilities classified in level 3 of the fair value hierarchy. The EUR 32.9 mln amount posted to line 2.4 Other increases includes the fair value of the derivative embedded in the backup liquidity provider contract for the Casaforte Class A securities. The capital gain shown in column held for trading" under Profit and Loss of which capital gains, totalling EUR 59.6 mln, was posted to item 80 Net trading income (loss) in the profit and loss statement and includes two derivative contracts embedded in debt securities classified as loans to customers which were unbundled pursuant to IAS 39. A.3.3 Information on "day one profit/loss" The Group did not generate day one profit/loss from financial instruments pursuant to paragraph 28 of IFRS 7 and other related IAS/IFRS paragraphs. 150

151 Part B Information on the consolidated balance sheet Assets Section 1-Cash and cash equivalents Item Section 2 - Financial assets held for trading Item Section 3 - Financial assets designated at fair value Item Section 4 - Financial assets available for sale Item Section 5 - Financial assets held to maturity Item Section 6 - Loans to banks Item Section 7- Loans to customers Item Section 8 - Hedging derivatives Item Section 9 - Change in value of macro-hedged financial assets Item Section 10 - Equity investments Item Section 11 - Reinsurance technical reserves Item Section 12 - Property, plant and equipment - Item Section 13 - Intangible assets Item Section 14 - Tax Assets and Liabilities Item 140 (Assets) and Item 80 (Liabilities) Section 15 - Non-current assets and groups of assets held for sale / discontinued operations and associated liabilities Item 150 (assets) and 90 (liabilities) Section 16 - Other assets Item Liabilities Section 1 - Deposits from banks Item Section 2 - Deposits from customers Item Section 3 - Debt securities issued Item Section 4 - Financial liabilities held for trading Item Sezione 5 - Financial liabilities designated at fair value Item Section 6 - Hedging derivatives Item Section 7 Changes in value of macro-hedged financial liabilities Item Section 8 - Tax liabilities Item Section 9 - Liabilities associated with individual assets held for sale Item Section 10 - Other liabilities Item Section 11 - Provision for employee severance pay Item Section 12 - Provisions for risks and charges Item Section 13 Insurance reserves Item Section 14 - Redeemable shares Item Section 15 Group shareholders equity Items 140,160,170,180,190,200 and Section 16 - Non-controlling interests - Item Other information

152 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 1 Cash and cash equivalents Item Cash and cash equivalents: breakdown Total Total a) Cash 769, ,763 b) Demand deposits with central banks 108,705 1,636,268 Total 877,784 2,411,031 The line demand deposits with central banks does not include the legal reserve, which is shown in asset Item 60 Loans to banks. The decrease in "demand deposits with central banks" is due to a temporary use of liquidity in the form of deposits with central banks at the end of

153 Section 2 Financial assets held for trading Item Financial assets held for trading: breakdown Notes to the consolidated financial statements - Part B Consolidated balance sheet Items/Amounts Total 31/12/2011 Total 31/12/2010 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total A. Balance sheet assets 1. Debt securities 6,408,374 1,046, ,848 7,699,586 7,656, , ,181 8,737,245 Item 20 Financial assets held for trading includes: a) on-balance-sheet assets acquired mainly for short-term gains; b) financial assets deriving from derivative contracts other than those formally designated as hedging instruments. The criteria adopted for the classification of financial instruments in the three levels of the fair value hierarchy are indicated in Section A.3, Information on fair value of Part A, Accounting policies of the notes to the financial statements. As a result of the provisions set out in IAS 39 with regard to the derecognition of financial assets, lines 1.1 and 1.2 also include debt securities committed in repos and securities lending transactions carried out for own securities posted to the trading portfolio. As further explained in the notes to the balance-sheet, the 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender; recalculation entailed a reduction in balance-sheet assets as at 31 December 2010 by EUR 3,308.8 mln with respect to data reported in the annual report for the same year. 1.1 Structured securities 8, , , ,328 50, , , , Other debt securities 6,399, , ,955 7,420,258 7,605, , ,030 8,448, Equity instruments 349,756 3, , , , , Units in UCITS 107, , ,591 90, , , Loans - 7,466,693-7,466,693-9,573,715-9,573, Reverse repurchase agreements The item icludes "Debt securities" for an amount of EUR mln and Equity securities totalling EUR 41.3 mln classified as level 3, mainly comprising structured credit products. Amounts in Line "4. Loans" are mainly correlated with Lines "1. Deposits from banks" and "2. Deposits from customers" of item 40 Financial liabilities held for trading" and refer primarily to the repo business of subsidiary MPS Capital Services - Banca per le imprese S.p.a. Derivatives connected with fair value option instruments are also included in the trading portfolio: these cover the risks of funding designated at fair value arising from possible interest rate fluctuations and from any embedded options in structured securities issued. The fair value of such derivatives is shown in line B.1.2 Fair value option if carried out directly with external counterparties, while it is shown as a share of trading derivatives (line 1.1) where FVO hedging initially carried out with subsidiary MPS Capital Services made it necessary to externalise risk. For FVO derivatives arranged by Group companies with the subsidiary MPS Capital Services, it is worth noting that the relevant internal units responsible for risk management perform appropriate tests at consolidated level in order to periodically test the strength of the hedge applied from the perspective of a 'natural hedge'. - 7,024,426-7,024,426-8,893,777-8,893, Other - 442, , , ,938 Total (A) 6,866,102 8,961, ,176 16,113,437 8,002,837 10,668, ,285 18,984,719 B. Derivatives 1. Financial derivatives: 141,795 13,394,453 12,055 13,548, ,550 10,396,409 10,194 10,545, held for trading 141,795 13,354,271 12,055 13,508, ,550 10,347,864 10,194 10,496, fair value option - 40,182-40,182-48,545-48, other Credit derivatives: - 2,877, ,877,444-1,085, ,085, held for trading - 2,877, ,877,444-1,085, ,085, fair value option other Total (B) 141,795 16,271,897 12,055 16,425, ,550 11,481,958 10,214 11,630,722 Total (A+B) 7,007,897 25,233, ,231 32,539,184 8,141,387 22,150, ,499 30,615,

154 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet All financial instruments classified as financial assets held for trading are recognised at fair value, equity securities included. The trading book does not include any equity securities of entities under sole or joint control or significant influence. 154

155 2.1.a Breakdown of debt securities: structured securities Notes to the consolidated financial statements - Part B Consolidated balance sheet Structured debt securities Total Total Index Linked 2,853 5,698 Convertible - - Credit linked notes 107,297 96,407 Equity Linked 48, ,365 Step - up, Step down 18 2,901 Target redemption note - - Cap Floater 1 1 Reverse Floater 5, Commodity 51,675 20,774 Fund Linked 27,799 27,759 Inflat 7, Other 27,390 31,807 Total 279, ,131 The table adds detail to what is shown in table 2.1 and shows the main types of structured securities in the trading portfolio. Embedded derivatives were not separated from these securities, which were measured at fair value with direct recognition of value changes to profit and loss. 155

156 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 2.1.b Derivative receivables - Fair Value Option method Financial asset Items/Amounts Natural hedges Other types of accounting mismatches portfolios managed internally on the basis of fair value Financial derivatives 40,182 x - Credit derivatives - x - Total 40,182 x - This is a breakdown of previous table 2.1 and shows the book value (fair value) of hedging derivatives of fair value option instruments, by method of use, between Group companies and external counterparties. At the end of both 2011 and 2010, all fair value option derivatives posted to the trading book were attributable to the natural and systematic hedging of fixed-rate and structured bonds issued by the Group. By convention, such derivatives are classified in the trading book. In terms of their representation in the profit and loss statement, they comply with rules similar to the rules applicable to hedging derivatives: positive and negative spreads or margins settled or accrued until the balance sheet date are recognised as interest income and expense, while valuation profits and losses are posted under item 110 of the profit and loss statement, Net gains / losses on financial assets and liabilities designated at fair value, in compliance with representations used for funding instruments which adopted the fair value option. Items/Amounts Natural hedges Other types of accounting mismatches Financial asset portfolios managed internally on the basis of fair Financial derivatives 48,545 x - Credit derivatives - x - Total 48,545 x - 156

157 2.2 Financial assets held for trading: breakdown by borrower/issuer Notes to the consolidated financial statements - Part B Consolidated balance sheet Items/Amounts Total Total A. Balance sheet assets 1. Debt securities 7,699,586 8,737,245 a) Governments and Central banks 5,875,740 6,297,917 b) Other public entities 1,326 34,754 c) Banks 1,016,198 1,457,930 d) Other issuers 806, , Equity instruments 394, ,989 a) Banks 31,610 9,122 b) Other issuers: 362, ,867 - insurance companies 4, financial companies 16,310 18,764 - non-financial companies 341, ,743 - other Units in UCITS 552, , Loans 7,466,693 9,573,715 a) Governments and Central banks - - b) Other public entities - - c) Banks 1,699,513 5,573,546 d) Other entities 5,767,180 4,000,169 Total (A) 16,113,437 18,984,719 B. Derivatives a) Banks fair value 8,215,202 9,608,088 b) Customers fair value 8,210,545 2,022,634 Total (B) 16,425,747 11,630,722 Total (A+B) 32,539,184 30,615,441 The breakdown by borrower/issuer was carried out in accordance with criteria of classification by economic activity group and sector laid down by the Bank of Italy. As far as on-balance-sheet assets are concerned, an overall decrease of EUR 2,871.3 mln was registered, of which EUR mln in debt securities issued by Central Banks and Governments; EUR mln in debt securities issued by banks and EUR 2,107 mln in loans. Derivative instruments were up by EUR 4,795.0 mln on As part of this upturn, the increase in derivatives with customers (EUR 6,187.9 mln) is accounted for by a strong centralisation of trading in derivatives with central counterparties (clearing houses). 157

158 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 2.2.a Units in UCITS: Breakdown by main categories Categories/Amounts Total Total Equity 5,698 3,646 Bonds 3,754 3,941 Balanced 137, ,645 Hedge Funds 354, ,446 Other 50,951 38,092 Total 552, ,770 The table adds details to line "A.3. Units in UCITS" of table 2.2. An overall increase by EUR mln is noted, which was primarily contributed to by hedge funds. 2.3 On-balance-sheet financial assets held for trading: annual changes Changes/Underlying assets Debt securities Equity instruments Units in UCITS Loans Total A. Opening balance 8,737, , ,770 9,573,715 18,984,719 B. Increases 103,318,564 3,438, , ,961, ,130,537 B1. Purchases 101,053,607 3,313, , ,875, ,628,916 of which Business combinations B2. Positive changes in fair value 141,183 11,279 10,907 3, ,802 B3. Other increases 2,123, ,298 15,044 82,703 2,334,819 C. Decreases 104,356,223 3,299, , ,068, ,001,820 C1. Sales 94,432,194 3,043, , ,787, ,499,610 C2. Redemptions 8,833, ,000 9,034,285 C3. Negative changes in fair value 214,417 43,587 29, ,425 C4. Transfers to other portfolios C5. Other increases 876, ,676 10,079 80,656 1,179,500 IFRS 5 "discontinuing operations" D. Closing balance 7,699, , ,591 7,466,692 16,113,436 The table reports a decrease in debt securities (primarily Italian government securities) and loans. Lines B3 and C5 include Net trading income (loss), accruals on issue discounts and on coupon interest, effects of exchange-rate fluctuations and any initial (C5) and final (B3) uncovered short positions. 158

159 Section 3 Financial assets designated at fair value Item Financial assets designated at fair value: breakdown by type Notes to the consolidated financial statements - Part B Consolidated balance sheet Items/Amounts Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 1. Debt securities 26,062 12,169-38,231 27,551 11,949-39, Structured securities Other debt securities 26,062 12,169-38,231 27,551 11,949-39, Equity instruments of which valued at cost Units in UCITS , , Loans structured Other Total 26,062 12,169-38, ,194 11, ,143 Cost 25,707 11,898-37, ,855 11, ,530 The item exclusively includes securities underlying the internal pension funds of former subsidiary Banca Antonveneta S.p.a.. As of , units in UCITS associated to the "defined-benefit supplementary pension fund for Banca Toscana employees" have been transferred to the Supplementary Pension Fund for Banca MPS Employees who became such after , which has independent legal status. 159

160 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 3.2 Financial assets designated at fair value: breakdown by borrower/issuer Items/Amounts Total Total Debt securities 38,231 39,500 a) Governments and Central banks 26,062 27,551 b) Other public entities - - c) Banks 12,169 11,949 d) Other issuers Equity instruments - - a) Banks - - b) Other issuers: insurance companies financial companies non-financial companies other Units in UCITS - 207, Loans - - a) Governments and Central banks - - b) Other public entities - - c) Banks - - d) Other entities - - Total 38, ,143 The breakdown by borrower/issuer was carried out in accordance with the criteria for classification by economic activity group and sector laid down by the Bank of Italy. 3.2.a Units in UCITS: Breakdown by main categories Items/Amounts Total Total Equity - 76,023 Bonds - 120,088 Balanced - 11,532 Total - 207,643 The table adds detail to what is shown in table 3.2 and shows the main types of investments in UCITS, held in the portfolio of assets measured at fair value. 160

161 3.3 Financial assets designated at fair value: annual changes Notes to the consolidated financial statements - Part B Consolidated balance sheet Debt securities Equity instruments Units in UCITS Loans Total A. Opening balance 39, , ,143 B. Increases 7, ,906 B1. Purchases 6, ,920 B2. Positive changes in fair value B3. Other increases C. Decreases 9, , ,818 C1. Sales C2. Redemptions 7, ,290 C3. Negative changes in fair value 1, ,073 C4. Other increases , ,455 D. Closing balance 38, ,231 Line C4. Other decreases" includes EUR mln for investments in the "defined-benefit supplementary pension fund for Banca Toscana employees" which, as of , have been transferred to the Supplementary Pension Fund for Banca MPS Employees who became such after , which has independent legal status. 161

162 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 4 - Financial assets available for sale Item Financial assets available for sale: breakdown by type Items/Amounts Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 1. Debt securities 20,410, , ,455 20,728,635 18,991, , ,532 19,475, Structured securities Other debt securities 20,410, , ,455 20,728,635 18,991, , ,532 19,475, Equity instruments 209,343 1,213,748 70,306 1,493, ,093 1,257,388-1,575, Designated at fair value 209,343 1,199,841 70,306 1,479, ,093 1,245,400-1,563, Carried at cost - 13,907-13,907-11,988-11, Units in UCITS 16, , ,624 2, , , Loans Total 20,636,149 2,066, ,761 22,904,656 19,312,242 2,240, ,532 21,801,515 The portfolio of AFS financial assets includes: a) bonds and UCITS not held for trading; b) equity investments with shareholding lower than controlling or associate interests. As a result of the provisions set out in IAS 39 for the derecognition of financial assets, lines 1.1 and 1.2 also include debt securities committed in repos and securities lending transactions carried out for own securities posted to the available-for-sale portfolio. The increase in debt securities was primarily contributed to by purchases of Italian government securities. 162

163 Notes to the consolidated financial statements - Part B Consolidated balance sheet 4.1.a. Financial assets available for sale - Breakdown of equity securities Name % ownership Book value % ownership Book value Acque Blu Arno Basso S.p.A , ,528 Acque Blu Fiorentine S.p.A , ,298 Aeroporto di Firenze S.p.A , ,951 Alerion Industries S.p.A ,540 Armorlite S.p.A Banca d'italia , ,969 Bassilichi S.p.A , ,734 Cantine Cooperative riunite soc. coop. Agr ,498 Cedacri S.p.A , ,657 Centro Affari e Convegni Arezzo S.r.l , ,979 Compagnia Investimenti e Sviluppo C.I.S. S.p.A , ,938 Consorzio Etruria S.c.a.r.l ,807 Consorzio Granterre Caseifici e allevam. società coop. Agricola , ,500 Consorzio Latterie Soc. Mantov.Virgilio soc. agricola coop , ,000 Consorzio Perimetro Gest. Prop. Imm. S.c.p.a. (Classe A) Consorzio Perimetro Gest. Prop. Imm. S.c.p.a. (Classe B) , ,509 Cooperativa Italiana di Ristorazione Firenze Parcheggi S.p.A , ,939 Finanziaria Regionale Friuli Venezia Giulia , ,080 Fin.ser S.p.A ,802 Hopa S.p.A ,419 Immobiliare Novoli S.p.A , ,899 Iniziative Immobiliari S.r.l ,153 Istituto Centrale delle Banche Popol. Italiane S.p.A Istituto per il Credito Sportivo , ,434 LSE London Stock Exchange (ex Borsa Italiana) ,107 Marina di Stabia S.p.A , ,606 Ombrone S.p.A , ,481 Palladio Finanziaria S.p.A , ,160 Porto Industriale di Livorno S.p.A , ,271 Reno De Medici S.p.A S.S.B. S.p.A , ,874 SITEBA Sistemi Telematici Bancari S.p.A ,355 SNIA S.p.A Società Italiana per le Imprese all'estero Simest S.p.A , ,752 Società Aeroporto toscano Galileo Galilei S.p.A , ,995 Sofinco S.p.A , ,700 Sorgenia S.p.A , ,736 Sorin S.p.A ,182 S.T.A. S.p.A , ,337 S.T.B. Società delle Terme e del Benessere S.p.A , ,029 Telecom Italia S.p.A ,829 Trixia S.r.l Unipeg Soc. Coop. Agricola , ,800 Veneto Sviluppo S.p.A , ,307 Visa Inc ,351 Other minor investments N/A 146,729 N/A 145,784 Finance portfolio N/A 271,593 N/A 220,555 Total 1,493,397 1,575,481 The table shows the main equity investments classified in the portfolio of available-for-sale financial assets.voting rights at companies incorporated as limited liability co-operatives (it.: s.c.a.r.l.) are per capita, so the holding of shares is not indicative of an associate relationship. 163

164 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 4.2 Financial assets available for sale: breakdown by borrower/issuer Items/Amounts Total Total Debt securities 20,728,635 19,475,910 a) Governments and Central banks 19,355,132 18,449,773 b) Other public entities 46,083 22,254 c) Banks 991, ,239 d) Other issuers 335, , Equity instruments 1,493,397 1,575,481 a) Banks 1,024, ,734 b) Other issuers: 468, ,747 - insurance companies 8,410 8,952 - financial companies 80, ,310 - non-financial companies 323, ,502 - other 57,134 60, Units in UCITS 682, , Loans - - a) Governments and Central banks - - b) Other public entities - - c) Banks - - d) Other entities - - Total 22,904,656 21,801,515 The breakdown by borrower/issuer was carried out in accordance with the criteria for classification by economic activity group and sector laid down by the Bank of Italy. The balance of debt securities issued by governments and central banks, amountingl to EUR 19,355.1 mln, consists primarily of Italian government securities. 4.2.a Units in UCITS: Breakdown by main categories Categories/Amounts Total Total Equity Hedge Funds 330, ,637 Private Equity 239, ,327 Real estate 97,563 94,674 Others 15,247 - Total 682, ,124 The table adds detail to what is shown in table 4.2 and shows main types of investments in UCITS, held in the portfolio of financial assets available for sale. 164

165 4.3 Micro-hedged financial assets available for sale: Notes to the consolidated financial statements - Part B Consolidated balance sheet 1. Financial assets subject to micro-hedging of fair value Items/Amounts Total Total ,307,204 12,366,815 a) interest rate risk 15,290,018 12,277,587 b) price risk - - c) foreign exchange risk - - d) credit risk - 71,394 e) multiple risks 17,186 17, Financial assets subject to micro-hedging of cash flows - - a) interest rate risk - - b) foreign exchange risk - - c) other - - Total 15,307,204 12,366,815 The table shows the share of the available-for-sale portfolio which, at year-end, was subjected to micro-hedging. In 2011, there was a rise in fair value micro-hedge transactions to counter the interest rate risk of government securities. 165

166 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 4.4 Financial assets available for sale: annual changes Items/Amounts Debt securities Equity instruments Units in UCITS Loans Total A. Opening balance 19,475,910 1,575, ,124-21,801,515 B. Increases 9,311, , ,977-10,293,958 B1. Purchases 8,767, , ,339-9,472,218 B2. Increases in fair value 13,356 5,347 15,022-33,725 B3. Write-backs 4,684 63,098 55, ,160 - posted to profit and loss 1, ,441 - posted to net equity 3,243 63,098 55, ,719 B4. Transfers from other portfolios B5. Other decreases 526, ,294 10, ,855 C. Decreases 8,058, , ,477-9,190,817 C1. Sales 3,818, , ,211-4,581,634 C2. Redemptions 786,740 1, ,667 C3. Decreases in fair value 2,929, ,280 73,244-3,142,650 C4. Write-downs due to impairment 3,243 63,098 55, ,719 - posted to profit and loss 3,243 63,098 55, ,719 - posted to net equity C5. Transfers to other portfolios C6. Other decreases 521,679 26,749 7, ,147 IFRS 5 "discontinuing operations" D. Closing balance 20,728,635 1,493, ,624-22,904,656 Amounts shown in lines "B1 Purchases", "C.1 Sales" and "C.3 Decreases in fair value" in the "Debt securities" column, primarily refer to Italian government securities. Line B.3 Write-backs posted to equity includes the reversal of negative net equity reserves of impaired securities; in terms of profit and loss, the value adjustments for the same amount are posted to line C.4 Write-downs due to impairment of the table. Line "B5. "Other decreases" and line "C6. Other decreases include exchange-rate differences and gains (losses) on disposals. 166

167 Section 5 Financial assets held to maturity Item Financial assets held to maturity: breakdown by type Notes to the consolidated financial statements - Part B Consolidated balance sheet FV FV VB VB Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 1. Debt securities Structured securities Other debt securities Loans Total Financial assets held to maturity: breakdown by borrower/issuer Type of transaction / Amount Total Total Debt securities 2 3 a) Governments and Central banks 2 3 b) Other public entities - - c) Banks - - d) Other issuers Loans - - a) Governments and Central banks - - b) Other public entities - - c) Banks - - d) Other entities - - Total 2 3 Total fair value 2 3 The breakdown by borrower/issuer was carried out in accordance with the criteria for classification by economic activity group and sector laid down by the Bank of Italy. 167

168 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 5.3 Micro-hedged financial assets held to maturity There are no figures available because there were no micro-hedged held-to-maturity financial assets to report, either in the year under review or the previous year. 5.4 Financial assets held to maturity : annual changes Debt securities Loans Total A. Opening balance 3-3 B. Increases B1 Purchases B2 Write-backs B3 Transfers from other portfolios B4 Other changes C. Decreases 1-1 C1 Sales C2 Redemptions C3 Write-downs C4 Transfers to other portfolios C5 Other changes 1-1 D. Closing balance

169 Section 6 Loans to banks Item Loans to banks: breakdown by type Notes to the consolidated financial statements - Part B Consolidated balance sheet Type of transaction / Amount Total Total A. Loans and advances to central banks 4,526, , Time deposits 3,515,773 16, Compulsory reserve 1,005, , Reverse repurchase agreements Other 4,989 11,310 B. Loans and advances to banks 16,169,439 8,548, Current accounts and demand deposits 526, , Time deposits 2,375, , Other loans: 11,051,353 5,762, Reverse repurchase agreements 2,359,862 1,038, Finance leases Other 8,691,491 4,723, Debt securities 2,216,456 1,885, Structured securities Other debt securities 2,216,456 1,885,816 Total (book value) 20,695,447 8,809,712 Total (fair value) 20,725,010 9,756,063 Loans and advances to banks Impaired assets 3,408 15,589 As further explained in the notes to the balance-sheet, the 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender; recalculation entailed a reduction in balance-sheet assets as at 31 December 2010 by EUR mln with respect to data reported in the annual report for the same year. The portfolio of "Loans to banks" includes loans and deposits, in addition to the unrestricted part of the compulsory legal reserve with the Bank of Italy, which, as at , amounted to EUR 1,005.2 mln. In accordance with regulations on average maintenance levels, the end-ofperiod balance of the compulsory reserve may be subject to substantial changes in relation to the Group s contingent cash flow requirements. The increase in time deposits with Central Banks is due to an overnight deposit placed with the Bank of Italy for an amount of EUR 3,499.8 mln. The increase by EUR 2,144.7 mln posted to line "2. Time deposits in " Loans to banks" is accounted for by deposits pledged as collaterals in selfsecuritisations and covered bond issuances. The EUR 3,968.0 mln increase in Line 3.3 Other is largely attributable to deposits pledged as collaterals in OTC derivative and repo transactions. The collective write-down was also posted to the 'Debt securities' portfolio as it was applied to other loans to banks that were performing at the end of 'Banks' also includes international entities of a banking nature subjected to zero weighting in accordance with prudential supervisory regulations on the standardised approach to counterparty and credit risk. 169

170 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 6.2 Loans to banks: micro-hedged assets Type of transaction / Amount Total Total Loans subject to micro-hedging of fair value 595, ,751 a) interest rate risk 580, ,143 b) exchange risk - - c) credit risk 14,591 39,608 d) multiple risks Loans subject to micro-hedging of cash flows - - a) interest rate risk - - b) foreign exchange risk - - c) other - - Total 595, ,751 The table shows the share of the available-for-sale portfolio which, at year-end, was subjected to micro-hedging. 6.3 Finance leases This table was not compiled because the Group had no finance leases in the period under review or in the previous year. 170

171 Section 7 Loans to customers Item Loans to customers: breakdown by type Notes to the consolidated financial statements - Part B Consolidated balance sheet Type of transaction / Amount Performing Non performing Total Performing Non performing Total 1. Current accounts 14,246,495 2,755,288 17,001,783 15,213,770 2,360,668 17,574, Reverse repurchase agreements 881, , ,797 1, , Mortgages 80,855,501 6,973,763 87,829,264 84,382,703 5,702,932 90,085, Credit cards, personal loans and fifth-of-salary backed loans 3,017, ,827 3,140,166 3,108, ,230 3,253, Financial leasing 4,297, ,169 5,116,916 4,333, ,994 4,932, Factoring 1,431, ,556 1,569,558 1,598, ,290 1,723, Other transactions 25,292,010 2,666,219 27,958,229 30,057,533 2,446,081 32,503,614 of which leased assets under construction 396,267 55, , ,211 24, , Debt securities 3,105,929 4,095 3,110,024 4,376,754 1,281 4,378, Structured securities 684, , , , Other debt securities 2,421,690 4,095 2,425,785 3,714,356 1,281 3,715,637 Total (book value) 133,127,979 13,479, ,607, ,948,669 11,380, ,329,325 Total (fair value) 135,420,369 13,479, ,900, ,133,046 11,380, ,513,702 The portfolio of 'Loans to customers' includes all loans to ordinary customers and part of the banking book securities portfolio. 'Loans to customers' also includes operating receivables other than those connected with the payment for the supply of non-financial goods and services, which are posted to "Other assets" in item 160 of the Assets. As further explained in the notes to the balance-sheet, the 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender; recalculation entailed a reduction in Line "2. Repurchase agreements (assets)" as at 31 December 2010 by EUR mln with respect to data reported in the annual report for the same year. The securities portfolio also includes underwritten ABS arising from own securitisations and other bonds issued by regional public bodies, e.g. municipal bonds (it.: buoni ordinari comunali, BOC). The collective write-down was also posted to the 'Debt securities' portfolio as it was applied to other loans to customers that proved 'performing' at the end of According to the Bank of Italy's definitions, the Non performing column includes doubtful, substandard and restructured loans, as well as exposures more than 180 days past due, net of impairment losses. Details of these exposures can be found in the section on Credit Quality in Part E of the notes to the financial statements. The amount of EUR mln posted to Line 8.1 Structured securities refers to structured securities which were reclassified from the AFS portfolio in 2008; derivatives subject to bifurcation are recognised at fair value in the trading book. 171

172 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 7.2 Loans to customers: breakdown by borrower/issuer Type of transaction / Amount Performing Non performing Total Performing Non performing Total 1. Debt securities: 3,105,929 4,095 3,110,024 4,376,754 1,281 4,378,035 a) Governments 242,130 2, , , ,609 b) Other public entities 241, , , ,771 c) Other issuers 2,621,848 1,135 2,622,983 3,895,374 1,281 3,896,655 - non-financial companies 89,817 1,135 90, ,205 1, ,486 - financial companies 1,966,723-1,966,723 3,170,004-3,170,004 - insurance companies 565, , , ,033 - other Loans to: 130,022,050 13,475, ,497, ,571,915 11,379, ,951,290 a) Governments 1,085, ,086,429 1,269, ,269,203 b) Other public entities 2,969,986 1,262 2,971,248 3,872, ,872,498 c) Other entities 125,966,130 13,474, ,440, ,430,725 11,378, ,809,589 - non-financial companies 76,455,097 11,362,862 87,817,959 81,708,207 9,545,658 91,253,865 - financial companies 5,109, ,911 5,249,186 7,071, ,567 7,172,191 - insurance companies 39, ,436 47, ,067 - other 44,362,334 1,971,280 46,333,614 45,602,973 1,732,493 47,335,466 Total 133,127,979 13,479, ,607, ,948,669 11,380, ,329,325 The breakdown by borrower/issuer was carried out in accordance with the criteria for classification by economic activity group and sector laid down by the Bank of Italy. 172

173 7.3 Loans to customers: micro-hedged assets Notes to the consolidated financial statements - Part B Consolidated balance sheet Type of transaction/amount Total 31/12/2011 Total 31/12/ Loans subject to micro-hedging of fair value 1,450,848 1,408,938 a) interest rate risk 889, ,375 b) exchange risk 507, ,092 c) credit risk 10,544 73,160 d) multiple risks 44,054 69, Loans subject to micro-hedging of cash flows - - a) interest rate risk - - b) foreign exchange risk - - c) other - - Total 1,450,848 1,408,938 The table shows the share of the loans to customers portfolio which, at year-end, was subjected to micro-hedging. 7.4 Finance leases 7.4.a Loans to customers: reconciliation of future minimum lease payments receivable Carryng amount Gross investment Items/Amounts Lease payments receivable discontinued at explicit lease rate (a) Lease payments receivable discontinued at implicit lease rate (present value of minimum lease payments) (b) Total lease payments receivable recognised in income for the period Deferred financial income Future minimum lease payments of which: unguaranteed residual values Up to 1 year 138,276 2,514,960 2,653, ,775 2,908,735 43,286 From 1 to 5 years - 1,234,196 1,234, ,699 1,551, ,093 Over 5 years - 1,272,424 1,272, ,074 1,547, ,232 Indefinite useful life 357, , Total 495,733 5,021,580 5,517, ,548 6,008, ,611 Value adjustments (400,397) Loans and advances in the balance sheet 5,116,

174 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 8 Hedging derivatives Item Hedging derivatives: breakdown by type of contract and underlying asset Fair Value NV Fair Value NV Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total A. Financial derivatives - 354, ,464 10,960, , ,641 12,145,899 1) Fair value - 354, ,464 10,960, , ,475 12,045,899 2) Cash flows ,166-1, ,000 3) Foreign investments B. Credit derivatives - 8,887-8,887 81,900-8,771-8, ,500 1) Fair value - 8,887-8,887 81,900-8,771-8, ,500 2) Cash flows Total - 363, ,351 11,042, , ,412 12,316,399 Key NV = Nominal or Notional Value The table displays the positive book value (fair value) of hedging derivatives for hedges carried out through hedge accounting. Hedge accounting is used for the accounting of hedges of financial instruments posted in balance sheet items which do not provide for fair value measurement to offset profit and loss: in particular, hedges of all financial assets and liabilities other than those represented by securities are managed through hedge accounting. Hedges of financial liabilities consisting in securities are normally managed through the fair value option. The fair value option has systematically been adopted for fixed-rate and structured debt securities issued by the Group, for which the risk of fair value changes was hedged by derivatives upon issuance, with the aim of maintaining the hedge for the contractual duration of the hedged securities; derivatives used as part of the fair value option are classified in the trading book. Hedge accounting is used for securities issued by the Group for which the decision to hedge was taken after issuance or for which there is no intention to maintain the hedge for the contractual duration of the securities. Information on the underlying strategies and objectives of hedge transactions can be found in Section 2 Market risks of Part E Information on risks and relative hedging policies. 174

175 Risk Rate Risk Exchange Risk Credit Risk Price Multiple Risks Macro-hedge Micro-hedge Macro-hedge Investments Foreign Notes to the consolidated financial statements - Part B Consolidated balance sheet 8.2 Hedging derivatives: breakdown by hedged portfolios and type of hedging (book value) Fair Value Cash flow hedge Transaction/Type of hedge Micro-hedge Total 1. Financial assets available for sale x - x x Loans and receivables 4,934 1,513 8,306 x - x - x x 14, Financial assets held to maturity x - - x - x - x x - 4. Portfolio x x x x x - x - x - 5. Other transactions x - x - - Total assets 4,934 1,513 8, , Financial liabilities 348, x - x - x x 348, Portfolio x x x x x - x - x - Total liabilities 348, , Expected transactions x x x x x x - x x - 2. Financial assets and liabilities portfolio x x x x x - x Total 352,950 1,513 8, ,351 The table shows the positive fair values of hedging derivatives, classified by hedged assets or liabilities and type of hedging implemented. In particular, fair value micro-hedging was used to hedge against interest-rate risk on fixed and variable capped rate mortgages and bonds classified in the available-for-sale portfolio or among receivables, in order to protect them from unfavourable interest rate changes. The 'Exchange risk' column shows the positive fair value of cross currency swaps used to hedge foreign-exchange risk on unlisted bonds classified among loans and receivables. Fair value micro-hedging was also applied to the credit risk of bonds classified in the available-for-sale portfolio or among receivables; these hedges were performed by acquiring protection through credit default swaps. Fair value micro-hedging of the interest-rate risk on financial liabilities refers primarily to hedges of liabilities consisting in securities for which the decision to hedge was taken after issuance or for which there is no intention to maintain the hedge for the contractual duration of the securities. Prospective and retrospective tests performed in 2011 in accordance with IAS 39 confirmed the effectiveness of hedging relationships, with the exception of certain hedges of bonds issued by the Parent Company and partially repurchased by other Group companies. These hedges were partly discontinued with a consequent negative impact of EUR 31.4 mln on profit and loss, posted to item "90 Net hedging income (loss)" in the consolidated income statement. More information on hedged assets and liabilities can be found in the tables in Part B of the notes for each section of the balance-sheet accounts to which hedged items are posted. 175

176 Risk Rate Risk Exchange Risk Credit Risk Price Multiple Risks Macro-hedge Micro-hedge Macro-hedge Investments Foreign Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Transaction/Type of hedge Fair Value Micro-hedge Cash flow hedge Total 1. Financial assets available for sale 32,199-1, x - x x 34, Loans and receivables 6,708 19,047 6,903 x - x 1,166 x x 33, Financial assets held to maturity x - - x - x - x x - 4. Portfolio x x x x x 9,168 x - x 9, Other transactions x - x - - Total assets 38,907 19,047 8, ,168 1, , Financial liabilities 236, x - x - x x 236, Portfolio x x x x x - x - x - Total liabilities 236, , Expected transactions x x x x x x - x x - 2. Financial assets and liabilities portfolio x x x x x - x Total 275,260 19,047 8, ,168 1, ,

177 Notes to the consolidated financial statements - Part B Consolidated balance sheet Section 9 Change in value of macro-hedged financial assets Item Change in value of hedged assets: breakdown by hedged portfolio Changes in value of hedged assets / Group components Total Total Positive changes 76,695 28, of specific portfolios: 76,695 28,034 a) loans and receivables 76,695 28,034 b) financial assets available for sale overall Negative changes , of specific portfolios: ,379 a) loans and receivables ,379 b) financial assets available for sale overall - - Total 76,310 17,655 The value adjustment concerns a fixed and capped floating rate mortgage loan portfolio that was fair value macro-hedged with derivatives against possible interestrate risk-induced fluctuations in value. As this is a macrohedge, any gain or loss on the hedged item attributable to the risk hedged may not directly adjust the value of said item (unlike in microhedging), but must be presented in this separate line item of the assets. The amounts in this item must be removed from the balance sheet when the relevant assets or liabilities are derecognised. The fair value of the corresponding hedging derivatives is shown respectively in Table 8.2 (assets) or Table 6.2 (liabilities), both entitled Hedging derivatives: breakdown by hedged portfolio and type of hedging, in the Macro-hedging column. 9.2 Assets subject to macro-hedging of interest rate risk: breakdown Hedged assets Total Total Loans and receivables 1,906, , Assets available for sale Portfolio - - Total 1,906, ,815 The table shows the book value (amortised cost) of fixed-rate and capped floating rate mortgages included in Item 70 Loans to customers, which was macro-hedged against interest-rate risk as per Table 9.1 above. The sum of this amount and the one shown in Table 9.1 expresses the book value of these receivables, adjusted for profit or loss attributable to the risk hedged. 177

178 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 10 Equity investments Item Equity investments in entities subject to joint control (valued at equity) and under significant influence: information on shareholders' equity 178

179 Notes to the consolidated financial statements - Part B Consolidated balance sheet The sale of 22% of MPS Venture (then re-named "MPVenture SGR") was completed in October: it was previously 70% owned and consolidated in its entirety. The remaining 48% stake was classified among investments under significant influence at a value equal to its fair value as at lossof-control date. Investments in which the Group holds less than 20% of the voting rights are generally classified as investments under significant influence in those cases where the Group has signed a shareholders' agreement and/or is entitled to appoint one or more members in the Board of Directors. Pursuant to art of the Civil Code, it is noted that the Parent Company holds a 28.8% shareholding (32.5% at Group level) in Crossing Europe EEIG, a European Economic Interest Group whose members are jointly and severally liable without limitation for the Group's liabilities. The EEIG is intended to facilitate its members' activity, both in their respective countries and internationally (particularly in Eastern European and Mediterranean countries), through the development of an offering of services for SMEs, and participation in major financial projects sponsored by EU programmes. For further details on changes, see comments to table " Equity investments: annual changes". 179

180 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 10.2 Equity investments in entities subject to joint control and under significant influence: accounting information Company Name Total assets Total revenues Profit (Loss) Net Equity Consolidated Value Fair Value A. Companies valued at net equity A.1 Companies valued at net equity - jointly controlled A.2 Companies valued at net equity - under significant influence AD.Impresa S.p.a. x x (115) Aereoporto di Siena S.p.a. x x (2,079) 15,768-3,518 - Agricola Merse S.r.l. x x ,362 10,974-11,330 Antonveneta Assicurazioni S.p.a. x x (3,599) 27,644 4,809 5,580 - Antonveneta Vita S.p.a. x x ,494 6,383 6,353 - Asset Management Holding S.p.a. x x 13, ,346 33,000 81,301 - Axa Mps Assicurazioni Danni S.p.a. x x (130) 499, , ,820 - Beta Prima S.r.l. x x 11,398 54,463 28,587 30,927 - BioFund S.p.a. x x Casalboccone Roma S.p.A. x x (770) 4, CO.E.M. Costruzioni Ecologiche Moderne S.p.a. x x (96) Crossing Europe GEIE x x 3,677 21,979 19,500 25,142 - EDI.B. S.p.a. x x (100) (20) Fabrica Immobiliare SGR S.p.a. x x (2,483) 19,865 1,968 6,732 - Fidi Toscana S.p.a. x x 363 8,998 6,497 6,135 - Gruppo Axa Mps Assicurazioni Vita S.p.a. x x ,006 38,638 31,745 - Immobiliare Centro Milano S.p.a. x x 15, , , ,235 - Industria e Innovazione S.p.a. x x (6,994) (730) Intermonte SIM S.p.a. x x (10,378) 52,802 3,793 3,700 2,997 Interporto Toscano A.Vespucci S.p.a. Livorno- Guasticce x x 14,830 66,579 14,873 12,979 - J.P.P. Euro Securities Inc. x x (997) 18,786 10,116 9,930 - Le Robinie S.p.A. x x 50 2, Marinella S.p.a. x x (765) 3, Microcredito di Solidarietà S.p.A. x x (184) 39,375 9,844 10,003 - NewColle S.r.l. x x 8 1, Padova 2000 Iniziative Immobiliari S.p.a. x x (351) 4,086 2,003 2,174 - Prima Holding 2 S.p.a. x x (32) 12,910 3,588 3,522 - Quadrifoglio Vita S.p.a. x x (28) 9,172 3,630 3,680 - Re.Ge.Im. Realizzazione e Gestione Immobili di Qualità S.p.a. x x (21,255) (24,221) Realizzazioni e Bonifiche Arezzo S.p.a. x x 4,103 7,400 9, S.I.C.I. Sviluppo Imprese Centro Italia SGR S.p.a. x x 338 7,888 2,545 2,523 - S.I.T. - Finanz.di Sviluppo per l'innovaz. Tecnologica S.p.A. x x (21) Sansedoni Siena S.p.A. x x 1, ,482 47,912 47,912 - Società Incremento Chianciano Terme S.p.a. x x Società Italiana di Monitoraggio S.p.a. x x 9, ,375 33,389-32,538 Terme di Chianciano S.p.a. x x (664) 2,993 2,795 1,477 - B. Proportionately consolidated companies Banca Popolare di Spoleto S.p.a. 3,407, , (11,989) 190,060 x x - Integra S.p.a. 16, , ,785 x x - Total 894, ,529 The fair value of investments in companies under significant influence is only reported for listed companies. 180

181 10.3 Equity investments: annual changes Notes to the consolidated financial statements - Part B Consolidated balance sheet Total Total A. Opening balance 907, ,170 B. Increases 152, ,844 B.1 Purchases - 161,296 B.2 Write-backs - - B.3 Revaluations - - B.4 Other increases 152, ,548 C. Decreases 165, ,485 C.1 Sales - 154,820 C.2 Write-downs 74,726 18,000 C.4 Other changes 90,872 98,665 D. Closing balance 894, ,529 E. Total revaluation - - F. Total write-downs 106,750 - Changes relate to associates or companies subject to significant influence valued at equity. Increases and decreases also include profits and losses arising from this measurement. Among increases, Line B.4 "Other increases" includes transfers from the AFS portfolio of investments in Alerion Cleanpower S.p.a. (EUR 11.0 mln) and Sorin S.p.a (EUR 33.4 mln), which are classified as investments under significant influence. Line "C.2 Write-downs" includes the depreciation of Antoniana Veneta Popolare Vita (EUR 23.6 mln), Asset management Holding (EUR 35.3 mln), CO.E.M. Costruzioni Ecologiche Moderne S.p.a. (EUR 8.2 mln). Among decreases, line C.4 Other decreases also includes the amount of dividends paid out by the equity investments, in addition to the voluntary share capital reduction of Antoniana Veneta Popolare Vita S.p.a. through redemption and cancellation of shares for an amount of EUR 24.0 mln. The valuation of afore-mentioned investments in associates includes the value of goodwill, in accordance with IAS 28. The main embedded goodwill, shown below, refers to insurance associates Axa MPS Assicurazioni Vita, Axa MPS Assicurazioni Danni and Asset Management Holding S.p.a. Embedded goodwill Antoniana Veneta Popolare Vita S.p.A. - 21,651 Axa Mps Assicurazioni Vita S.p.A. 46,796 46,796 Axa Mps Assicurazioni Danni S.p.A. 2,316 2,316 Asset Management Holding S.p.A. 18,327 41,116 Sorin S.p.A. 4,649 - MP Venture Sgr S.p.A. 5,460 - Others 10,357 13,634 Total 87, ,

182 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet In accordance with IAS 28 Investments in associates and IAS 36 (to which IAS 28 refers), an impairment test was carried out on the main insurance associates of the Group in consideration of the size of these assets and of a global context which continues to be uncertain and unpredictable. In particular, based on an assessment of possible indications of impairment (IAS 39), the following equity investments were tested for impairment AXA MPS Assicurazioni Danni S.p.A. (AXA MPS Danni); AXA MPS Assicurazioni Vita S.p.A. (AXA MPS Vita); Antoniana Veneta Popolare Assicurazioni S.p.A. (Antonveneta Assicurazioni); Antoniana Veneta Popolare Vita S.p.A. (Antonveneta Vita); Asset Management Holding S.p.a. (AM Holding). With reference to how impairment losses on investments in associates are determined, IAS 28 specifies that the impairment is verified, pursuant to IAS 36, by comparing the recoverable value with the carrying value of the equity investment. Carrying value of equity investments - consolidated, predepreciation(in EUR/mln, rounded off) 31/12/11 AXA MPS Danni 29 Gruppo AXA MPS Vita; 477(*) Antonveneta Assicurazioni 6 Antonveneta Vita 59 AM Holding 157 (*) Includes AXA MPS Vita and AXA MPS Financial Limited. The recoverable value of equity investments in insurance associates and asset management companies was determined with the assistance of a leading consultancy firm (Consultant). For life insurers, the appraisal value method was used, which estimates the value of an insurance company as the sum of its Embedded Value (amount of adjusted shareholders equity and outstanding insurance policies) and its New Business Value (current value of future life insurance business). In accordance with professional measurement practices and regulations, this method is applied for the appraisal of life insurance companies. In the case of Antonveneta Vita, only the Embedded Value was considered, due to the company's substantial portfolio run-off. When applying the Appraisal Value method, parameters were agreed upon with the Consultant to represent the company s risk/return level. In particular, the following were considered: - a cost of equity of 10.4%, estimated using a risk-free rate of return of 5.35% with country risk factored in (average return for 10-year Italian government securities in 2011), a premium for market risk of 5% and beta of 1.01 calculated based on a panel of listed European companies operating exclusively in the field of life insurance (source: Bloomberg); - a long-term growth rate of 2%, on the basis of inflation forecasts from the leading econometric analysis institutes (ERC, IMF, Prometeia). The growth rate is thus not in excess of the market rate. The recoverable value of AXA MPS Danni was determined on the basis of economic and financial projections provided by the Parent Company and following parameters agreed upon with the Consultant: - a target solvency ratio of 150%; - a cost of equity of 10.0%, estimated using a risk-free rate of return of 5.35% with country risk factored in, a premium for market risk of 5% and beta of 0.92 calculated based on a panel of listed European companies operating exclusively in the field of P&C insurance (source: Bloomberg); - a long-term growth rate of 2%. The recoverable amount ofam Holding was determined by cash flow discounting. The value was determined on the basis of economic and financial projections by leading econometric institutions (which factored in different macroeconomic and sectorial variables) and following parameters agreed upon with the Consultant: - a cost of equity of 11.7%, estimated using a risk-free rate of return of 5.35% with country risk factored in, a premium for market risk of 5% and beta of 1.18 calculated based on a panel of listed European companies operating in asset management (source: Bloomberg) and an additional risk of 50bps, to factor in current uncertainties in the asset management industry; - a long-term growth rate of 2%. 182

183 Notes to the consolidated financial statements - Part B Consolidated balance sheet In order to best appraise the sensitivity of the results of the impairment test conducted on the investments with respect to changes in the base assumptions, several sensitivity tests were performed by changing the discount rate, the long-term growth rate and some underlying assumptions for the insurance company s economic and financial forecasts. In light of termination of the distribution agreement between Allianz and former Banca Antonveneta, net equity was considered as the recoverable value for Antonveneta Assicurazioni. The results of the impairment test showed that the recoverable values of the investments analysed were not lower than their respective carrying values, except for investments in AM Holding and Antonveneta Vita, whose recoverable value proved lower than their carrying value. In light of the above-described analyses and results, value adjustments respectively in the amount of EUR 35.3 and 26.3 mln were posted for these investments. 183

184 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 10.4 Covenants on investments in subsidiaries No covenants on investments in subsidiaries are reported Covenants on investments in jointly controlled companies No covenants on investments in jointly controlled companies are reported Covenants on investments in companies under significant influence No covenants on investments in companies under significant influence are reported. Section 11 Reinsurance technical reserves Item 110 No values are shown in this section as the Group's insurance investments are associates. 184

185 Section 12 - Property, plant and equipment - Item 120 Notes to the consolidated financial statements - Part B Consolidated balance sheet 12.1 Property, plant and equipment: breakdown of assets valued at cost Asset / Amount Total Total A. Assets used in the business 1.1 owned 1,170,774 1,197,577 a) land 427, ,031 b) buildings 442, ,438 c) furniture and furnishings 64,995 69,104 d) electronic systems 28,537 21,196 e) other 207, , Leased - - a) land - - b) buildings - - c) furniture and furnishings - - d) electronic systems - - e) other - - Total A 1,170,774 1,197,577 B. Assets held for investment owned 214, ,500 a) land 112, ,300 b) buildings 101,311 99, Leased - - a) land - - b) buildings - - Total B 214, ,500 Total (A+B) 1,384,965 1,407,077 All of the Group s property and equipment is measured at cost; the line "land" expresses the value of land separately from the value of buildings. In compliance with guidance provided by IAS 36 "Impairment of Assets" and recommendations contained in document no. 4 of 3 March 2010 issued jointly by the Bank of Italy, Consob and Isvap, an overall property appraisal was made with a view to determining any impairment losses to be posted to profit and loss for the year; disclosure of these impairment losses is provided in the notes to tables "12.3 Property, plant and equipment used in the business: annual changes" and "12.4 Property, plant and equipment held for investment: annual changes". 185

186 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 12.1.a Property, plant and equipment: leased property held for investment Items/Amounts Total Total Leased property held for investment 6,691 6, Property, plant and equipment: breakdown of assets designated at fair value or revalued The Group does not own any property, plant and equipment designated at fair value or revalued pursuant to IAS

187 Notes to the consolidated financial statements - Part B Consolidated balance sheet 12.3 Property, plant and equipment used in the business: annual changes Land Buildings Furniture Electronic systems Other Total A. Gross opening balance 439, , , , ,285 2,454,470 A.1 Total net decreases 2, , , , ,477 1,256,893 A.2 Net opening balance 437, ,438 69,104 21, ,808 1,197,577 B. Increases 2,436 12,300 13,994 23,536 20,402 72,668 B.1 Purchases 447 9,225 13,675 22,953 20,352 66,652 - Business combinations B.2 Capitalized expenditure on improvements B.3 Write-backs B.4 Increases in fair value booked to: a) shareholders' equity b) profit and loss B.5 Positive exchange differences B.6 Transfers from properties held for investment 1,902 2, ,089 B.7 Other increases C. Decreases 12,000 33,371 18,103 16,195 19,802 99,471 C.1 Sales ,968 2,030 5,374 C.2 Depreciation - 18,692 17,830 13,129 17,491 67,142 C.3 Impairment losses booked to: 2,353 1, ,410 a) shareholders' equity b) profit and loss 2,353 1, ,410 C.4 Decreases in fair value booked to: a) shareholders' equity b) profit and loss C.5 Negative exchange differences C.6 Transfers to: 9,385 12, ,449 a) tangible assets held for investment 8,902 11, ,504 b) assets held for sale C.7 Other decreases IFRS5 "Discontinuing operations" D. Net closing balance 427, ,367 64,995 28, ,408 1,170,774 D.1 Total net decreases 4, , , , ,640 1,328,235 D.2 Gross closing balance 432, , , , ,048 2,499,009 E. Carried at cost The table illustrates the Group s property assets used in the business. Buildings are measured at cost and depreciated based on their expected useful life. An analysis of external and internal impairment indicators resulted in impairment losses for an amount of EUR 4.4 mln being recognised in the balance sheet as at 31/12/2011; EUR 93.7 mln in overall capital gains on real estate used in the business are also highlighted which were not recognised in profit and loss. With regard to property, plant and equipment used in the Group's business other than buildings, no extraordinary negative market factors were thought to exist under a going concern assumption, that might call for the need to recognise impairment losses. Lines A.1 and D.1 "Total net decreases" include amounts relating to total depreciation and impairment losses booked. Line E "Carried at cost" was left blank, as per the Bank of Italy's instructions, since it only needs to be completed for assets accounted for at fair value. 187

188 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 12.4 Property, plant and equipment held for investment: annual changes Total 31/12/2011 Total 31/12/2010 Land Buildings Land Buildings A. Opening balance 110,300 99, ,500 - B. Increases 12,101 11,970 24,071 - B.1 Purchases 3, ,470 - Business combinations B.2 Capitalised expenditure on improvements B.3 Increases in fair value B.4 Write-backs B.5 Positive exchange differences B.6 Transfers from property used in the business 8,902 11,602 20,504 - B.7 Other increases C. Decreases 9,521 9,859 19,380 - C.1 Sales C.2 Depreciation - 4,417 4,417 - C.3 Decreases in fair value C.4 Impairment losses 6,577 2,137 8,714 - C.5 Negative exchange differences C.6 Transfers to other asset portfolios 2,452 2,851 5,303 - a) properties used in the business 1,902 2,187 4,089 - b) non-current assets held for sale ,214 - C.7 Other decreases IFRS5 "Discontinuing operations" D. Closing balance 112, , ,191 - E. Designated at fair value 120, , ,522 - The table illustrates the Group s property assets held for investment. Buildings are measured at cost and depreciated based on their expected useful life. An analysis of external and internal impairment indicators resulted in impairment losses for an amount of EUR 8.7 mln being recognised in the balance sheet as at 31/12/2011; EUR 29.2 mln in overall capital gains on real estate used in the business are also highlighted which were not recognised in profit and loss Commitments to purchase property, plant and equipment Items/Amounts Total Total Commitments to purchase tangible assets Commitments undertaken concern the purchase of movable assets for some branches of Group banks. 188

189 12.6 Property, plant and equipment: depreciation rates Notes to the consolidated financial statements - Part B Consolidated balance sheet Main categories of tangible assets % Land and works of art 0% Buildings 3% Furniture and furnishings 10-20% Alarm and video systems 20-30% Electronic and ordinary office equipment 12-25% Electronic data processing equipment 20-50% The table shows the depreciation rates used for main categories of property and equipment. Having an indefinite useful life, land and works of art are not depreciated. 189

190 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 13 Intangible assets Item Intangible assets: breakdown by type Total Total Asset / Amount Finite Life Indefinite Indefinite Total Finite Life Life Life Total A.1 Goodwill x 2,216,339 2,216,339 x 6,473,779 6,473,779 A.1.1 group x 2,202,882 2,202,882 x 6,460,322 6,460,322 A.1.2 minorities x 13,457 13,457 x 13,457 13,457 A.2 Other intangible assets 764, ,077 1,077,834-1,077,834 A.2.1 Assets carried at cost: 764, ,077 1,077,834-1,077,834 a) Internally generated intangible assets 157, , , ,680 b) other assets 606, , , ,154 A.2.2 Assets valued at fair value: a) Internally generated intangible assets b) other assets Total 764,077 2,216,339 2,980,416 1,077,834 6,473,779 7,551,613 All of the Group s intangible assets are measured at cost and comprise goodwill, intangible assets resulting from the acquisition of former Banca Antonveneta S.p.A. and subsidiary Biverbanca as well as software capitalised by the MPS Group Operating Consortium. All intangible assets recognised in the financial statements have a finite useful life, except for goodwill. During preparation of the 2011 accounts, goodwill and assets with limited useful life recognised in the financial statements were tested for recoverability or possible impairment. In accordance with Document 4 jointly published by Bank of Italy/CONSOB/ISVAP on 3 March 2010 and provisions set out in IAS 36, Impairment of Assets, a special chapter has been added below to describing the goodwill impairment testing procedure. Goodwill posted to assets is not systematically amortised but is tested for impairment at year-end ( Impairment Test ). The test resulted in an impairment loss of EUR 4,257.4 mln being reported. The impairment test on the carrying value of finite-life intangibles resulted in a loss of EUR mln of which EUR in PPA intangibles and 14.1 mln in software. Line A.2.1 Assets carried at cost b) other assets includes the following intangible assets arising from the acquisition of former Banca Antonveneta S.p.a. and Cassa di Risparmio di Biella e Vercelli S.p.a. (Biverbanca): intangible assets associated with relationships that the banks generated with customers over the years: o o o core deposits totalling EUR mln, from enhancement of on-demand funding (current accounts and savings deposits) of the merged banks; core overdrafts totalling EUR 47.4 mln, from enhancement of non-revolving loans consisting in credit facilities in current accounts of merged banks; assets under management and assets under custody in the amount of EUR 16.9 mln, arising from enhancement of AUM and AUC of merged banks; marketing-related intangible assets: o EUR 29.2 mln in trademarks. The following intangible assets were amortised for an amount of EUR mln, as per the breakdown specified in the notes to Table 13.2 Intangible assets: annual changes. Line A.2.1 Assets carried at cost a) internally generated intangible assets includes internally generated intangibles associated with IT. 190

191 Notes to the consolidated financial statements - Part B Consolidated balance sheet Impairment testing of finite-life intangible assets An analysis of external and internal impairment indicators, worsening macroeconomic conditions and variables in the assessment of customerrelationship- and marketing-related intangibles, revealed the need for an estimate of the recoverable value of PPA intangibles with a view to determining the extent of impairment losses, if any. Here follows a short description of the method and main assessment parameters used for an estimate of the recoverable value of each intangible asset tested. Core deposits Core deposits were valued by discounting cash flows associated with this form of funding (for years of useful life). Variables considered in the estimate of cash flows included: average volumes of current accounts and savings deposits as at 31 December 2011; customer retention rate; mark down with respect to best theoretical market rate; fees directly correlated with core deposit management; operating costs of core deposit management; tax rate. The discounting rates applied were those used in the impairment testing of goodwill. Core overdrafts Core overdrafts were valued by discounting cash flows associated with this form of investment (for years of useful life). Variables considered in the estimate of cash flows included: average volumes of overdraft facilities in current accounts as at 31 December 2011; customer retention rate; mark down with respect to best theoretical market rate; operating costs for the management of this form of investment; tax rate. The discounting rates applied were those used in the impairment testing of goodwill. AuM/AuC AUM and AUC were valued by discounting cash flows associated with this form of business (for years of useful life). Variables considered in the estimate of cash flows included: fees associated with this form of business; customer retention rate; operating costs for this business; tax rate. The discounting rate used was 11.7%. Trademark Trademark valuation was based on the exclusive right to use the trademark that the holder may grant to a third party, i.e the cost saving associated with trademark ownership (with no royalties paid for trademark licence). The trademark recoverable value was valued using the "Relief from Royalty" method, assessing the profit made from royalties if it was transferred to a third party. The discounting rate applied was the rate used in the impairment testing of goodwill. The above-described tests revealed that the recoverable values of core overdrafts and trademarks are substantially higher than their carrying values. As for core deposits and AuM/AuC, the analyses carried out revealed that their recoverable value as at 31 December 2011 was lower than their carrying value by EUR mln and 11.0 mln respectively. 191

192 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Impairment testing of Group goodwill IAS 36 sets out the principles for the recognition and reporting of impairment of certain types of assets, including goodwill, illustrating the principles that an enterprise must follow to make sure that the carrying amount of its assets is not higher than their recoverable amount. IAS 36 defines recoverable amount as the higher of: - fair value less costs to sell - the amount obtainable from the sale of an asset or cash-generating unit in an arm s length transaction between knowledgeable, willing parties, less the costs of disposal; - value in use - the present value of estimated future cash flows expected to arise from the continuing use of an asset or from a cashgenerating unit. IAS 36 requires the carrying amount of goodwill to be compared with the recoverable amount whenever there is an indication that the asset may have been impaired and in any case at least once a year at the balance sheet date (Impairment Test). The recoverable amount of goodwill is estimated with reference to the cash-generating unit (CGU), since goodwill is not able to generate cash flows independently from an asset. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use which are largely independent of the cash inflows from other assets or groups of assets, which the Group is able to recognise separately in its management reporting system. The impairment test process in 2011 was particularly compounded by the slowdown in global growth during the period, which was primarily attributable to the sovereign debt crisis, tensions on the main financial markets and persisting uncertainty about the process of consolidation of public accounts in certain industrialised countries,and their foreseeable prospects. Additionally, in this context, the persisting volatility of the stock market does not allow stock quotes and related equity multipliers to fully reflect the value of listed companies. The Impairment Test conducted in 2011 was based on economic and financial projections for the Group over a forecasting time horizon of five years ( ), taking account of the circumstances of the new macroeconomic scenario and with no prejudice to the strategic guidelines of the Business Plan approved in April 2011(with business and efficiency-boosting strategies thus remaining unaltered). The impairment test was therefore carried out taking into account the economic and financial projections previously approved by the Group companies' Boards of Directors. In accordance with IAS 36 and considering the aforementioned considerations, the impairment test carried out on goodwill as shown in the Group s consolidated financial statements at 31 December 2011 was comprised of the following activities: 1) Identification of goodwill 2) Identification of cash-generating units and allocation of goodwill to the cash-generating units identified 3) Determination of the recoverable amount of the cash-generating units 4) Impairment test results 5) Analysis of impairment test result sensitivity to changes in the underlying assumptions In determining the carrying and recoverable values of the CGUs, the goodwill impairment test took account of the value reduction emerging from the above-described impairment testing of finite-life intangible assets. 1. Identification of goodwill The Impairment Test was conducted on goodwill for a total amount of EUR 6,473.8 mln No other indefinite-life intangible assets are recognised in the balance sheet. 2. Identification of cash-generating units and allocation of goodwill to the cash-generating units identified According to IAS 36, each unit or group of units to which goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes and should not be larger than an operating segment as defined by IFRS 8 ( Operating Segments ). As for the impairment test at 31 December 2010, the Group s goodwill was tested by identifying those CGUs into which the Group s operations can be separated and analysing the cash flows that these will be able to generate in future years, based on an approach consistent with Segment Reporting at the balance sheet date, which in turn reflects Management Reporting. For the purpose of primary reporting of profit and loss/balance-sheet data, the Group has adopted a business approach opting for results to be broken down by the business sectors in which the Group operates: Consumer Banking (Retail and Private Customers), Corporate Banking (Corporate Customers) and the Corporate Centre (residual central operations). The Group s performance and planning development are monitored based on a model that splits the business into these various operating segments. Accordingly, five cash-generating units have been identified in a line of continuity and consistency with the achievements of the previous financial year: 192

193 Notes to the consolidated financial statements - Part B Consolidated balance sheet 1) CGU - MPS Consumer Banking, composed of: retail customers from BMPS and Consum.it branches; typically private customers of BMPS branches and other private clients from other Group entities; 2) CGU - MPS Corporate Banking, composed of typically corporate clients of BMPS branches, foreign branches, Key Clients, MPS Leasing & Factoring, MPS Capital Services, MP Belgium and MP Banque. 3) CGU - BAV Consumer Banking composed of: retail customers from 378 BAV branches; customers from 9 BAV private banking centres. 4) CGU - BAV Corporate Banking composed of clients from 26 BAV corporate banking centres. 5) CGU - Cassa di Risparmio di Biella e Vercelli ( Biverbanca ), composed of Biverbanca. The process of allocating goodwill to individual cash-generating units was carried out in 2008 taking into account the effects of the acquisition of Banca Antonveneta and synergies arising from business combinations. Goodwill tested for impairment in consolidated financial statements: 6,474 (in EUR/mln, amounts rounded off) Goodwill related to MPS CGUs: 4, CGU Consumer Banking 2. CGU Corporate Banking Goodwill allocated: 4,845 Goodwill allocated: 5 Goodwill related to BAV CGUs: 1, BAV Consumer Banking 4. BAV Corporate Banking Goodwill allocated: 1,027 Goodwill allocated: CGU Biverbanca Goodwill allocated: 241 (*) The goodwill of the Corporate Banking CGU is relatively insignificant since it incurred an impairment loss of EUR 150 mln in To establish whether corporate assets which cannot be allocated on a reasonable and consistent basis to the cash-generating units identified have been impaired, an estimate has been made of the recoverable amount of the Group as a whole. IAS 36 in fact states that if a corporate asset cannot be allocated on a reasonable and consistent basis to the cash-generating unit identified, it must be tested by identifying the smallest group of cash-generating units a sort of higher cash-generating unit to which it can be allocated. In this case, the higher cash-generating unit has been identified as the Group as a whole. 3. Determination of the recoverable amount of the cash-generating units The Group s goodwill at 31 December 2011 was tested for impairment by identifying the recoverable amount of the individual cash-generating units as the value in use. The recoverable amount of the MPS Group and cash-generating units was determined partly with the support of a leading consultant. The recoverable value of the CGUs was estimated by discounting future distributable cash flows. In order to test corporate assets, an estimate was made of the recoverable amount of the Group as a whole (identified as the value in use) through the discounting of future distributable cash flows, considering that the persisting volatility of the stock market, penalised by macroeconomic uncertainty, does not allow stock quotes and related equity multipliers to fully reflect the value of listed companies. To determine the recoverable amount, reference was made to the economic and financial projections for the Group (and CGUs identified). 24. These projections were prepared considering preliminary 2011 and budget 2012 data and the new market scenario for the period up to 2016 drawn up in February 2012 on the basis of internal and external sources, including forecasts by leading econometric analysis institutes (ERC, IMF, Prometeia, Bank of Italy) with no prejudice to the strategic guidelines of the Business Plan announced in April 2011(with business and efficiency-boosting strategies thus remaining unaltered). 24 For the purpose of determining the recoverable amount, account was taken of the effects of the Purchase Price Allocation in relation with the acquisition of Banca Antonveneta and Biverbanca (after amortisation of intangibles), as well as of the capital contribution allocated to individual cash-generating units. 193

194 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet The main underlying assumptions of the Group s economic and financial projections are shown in the table below: Turnover and income trends CAGR Total lending to customers 1.5% Total funding 2.4% Assets under management 5.4% Net operating income 26.6% Profitability indicators 2012B 2016P Euribor 0.6% 2.9% Mark down (vs. ITR) 0.83% 1.40% Markup (vs. ITR) 1.53% 1.69% Cost / Income 64.7% 51.8% The economic and financial projections for the CGUs identified were based on assumptions consistent with the economic and financial projections for the MPS Group. CGUs The recoverable amount of the cash-generating units and of the Group was estimated by discounting future distributable cash flows, based on the following formula: W F n t t 1 t (1 i) VT a where: F t = cash flows potentially distributable to shareholders over the selected time horizon based on the economic and financial projections made, maintaining a satisfactory level of capitalisation. i = discounting rate represented by the cost of equity (ke). VT a = present terminal value ( Terminal Value ) calculated as the value of a perpetual yield estimated based on an economically sustainable normalised cash flow consistent with the long-term growth rate ( g ). For an estimate of distributable cash flows, reference was made to the Group s economic and financial projections (and the CGUs identified). To discount cash flows distributable to shareholders the cost of equity was used, that is the return on equity required by investors/shareholders for investments with similar risk characteristics. This rate was estimated using the Capital Asset Pricing Model ( CAPM ), based on the following formula: where: k e = R f + Beta * (R m -R f ) Rf = risk-free rate (factoring in the country risk) of 5.35% identified as the 2011 average yield of 10-year bonds issued by the Italian government (source: Bloomberg). Beta = correlation factor between actual share performance and overall performance of the reference market (measurement of the volatility of a stock relative to the market), equivalent to 0.99 (for BMPS beta, source: Bloomberg) R m - R f = risk premium required by the market which, in line with assessment practices is set at 5.0%. The Terminal Value was determined based on the following formula: where g is the long-term growth rate. VT = normalised distributable cash flow / (k e g) The recoverable value was determined based on the parameters identified together with the Consultant and which represented the actual level of risk/return for the individual cash-generating unit. Specifically, the valuation parameters used were based on the following assumptions: - capital ratios: to test the recoverable amount of the entire Group, an objective supervisory ratio was used (Common Equity/Core Tier 1) in line with the requirements set forth by the new supervisory regulations of Basel 3 (7.0%). 194

195 Notes to the consolidated financial statements - Part B Consolidated balance sheet For Biverbanca, in view of the fact that the CGU is a legal entity, an objective supervisory ratio was considered that is in line with the requirements set forth by the new supervisory regulations of Basel 3 (from 8% in 2011 to 10.5% in 2019) 25. For other cash-generating units, a target capital Coverage Ratio of 8% was used, which allows all capital needs of the CGU to be met. - Cost of equity (ke): for the test to determine the recoverable amount of the entire Group, a ratio was used of 10.3%. When testing the recoverable amount of individual cash-generating units at consolidated level, the ratios were determined using estimates that reflect their specific risk. - Long-term growth rate (g): it was estimated at 2.0% based on forecasts of leading econometric institutions (ERC, IMF, Prometeia). The main parameters used to determine the recoverable amount of cash-generating units are shown below. CGU In EUR/mln (amounts rounded off) Measurement criteria k e (*) g (*) Capital ratio MPS Consumer 10.3%(*) 2.0% (*) 8.0% MPS Corporate 11.3% (*) 2.0% (*) 8.0% BAV Consumer 10.3% (*) 2.0% (*) 8.0% BAV Corporate 11.3% (*) 2.0% (*) 8.0% Biverbanca (60.4%) 10.0% (*) 2.0% (*) 8.0%-10.5% (*): Amounts approved by consultant. 4. Impairment test results Based on the analyses and evidence described above, the impairment test conducted on the MPS Group's consolidated accounts revealed the need to recognise a total impairment loss of EUR -4,257 mln, allocated to the individual CGUs as per the following breakdown: impairment loss provisions In EUR/mln (amounts rounded off) 31/12/11 CGU - MPS Consumer CGU - MPS Corporate -5 CGU - BAV Consumer -935 CGU - BAV Corporate -356 Biverbanca (MPS shareholding) -223 Total The reasons justifying the need for a reduction in goodwill value lie primarily in the new macroeconomic scenario penalised by the sovereign debt crisis, tensions on the main financial markets and persisting uncertainty about the global economic recovery. 5. Sensitivity of impairment test results to changes in underlying assumptions. In order to better assess the sensitivity of impairment test results in relation to changes in the underlying assumptions, certain sensitivity analyses were carried out based on the following: - for CGUs and the Group, a change in the discount rate (+0.3%). 25 Having no supplementary instruments, Biverbanca's Core Tier 1/Common Equity coincides with its Total Capital ratio. 195

196 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet - for cash-generating units and for the Group, a more negative macroeconomic scenario than the one illustrated in the economic/financial projections; The following table shows the results of the sensitivity analysis of cash-generating units, expressed in terms of the difference between the recoverable amount and carrying amount (after goodwill amortisation) in absolute terms and in percentage terms. Sensitivity analysis In EUR/mln (amounts rounded off) 2011 post-impairment change in recoverable value vs. carrying value (consolidated) Discount rate Scenario analysis Absolute value % Absolute value % CGU - MPS Consumer % -1, % CGU - BAV Consumer % % CGU - Biverbanca (60.4%) % % The valuation and sensitivity analysis carried out for the Group substantially confirm results obtained at CGU level. The 'Ke' limit values for testing individual CGUs and the Group are not reported since the selected test value in itself proved the carrying values of the CGUs to be lower than their recoverable values. 196

197 13.2 Intangible assets: annual changes Notes to the consolidated financial statements - Part B Consolidated balance sheet Goodwill Other intangible assets: generated internally finite life indefinite life Other intangible assets: other finite life indefinite life Total A Opening balance 6,623, ,375-1,613,984-8,511,138 A.1 Total net decreases 150, , , ,525 A.2 Net opening balance 6,473, , ,154-7,551,613 B. Increases - 58, , ,466 B.1 Purchases - 58, , ,400 - Business combinations B.2 Increases in internally generated intangible assets x B.3 Write-backs x B.4 Increases in fair value to net equity x to profit and loss x B.5 Positive exchange differences B.6 Other increases C. Decreases 4,257,440 37, ,367-4,778,663 C.1 Sales Disposals and one-off transactions C.2 Write-downs 4,257,440 37, ,997-4,778,285 - Depreciation x 33, , ,296 - Write-downs 4,257,440 4, ,768-4,599,989 + net equity x profit and loss 4,257,440 4, ,768-4,599,989 C.3 Decreases in fair value to net equity x to profit and loss x C.4 Transfers to non-current assets held for sale C.5 Negative exchange differences C.6 Other decreases IFRS5 "Discontinuing operations" D. Net closing balance 2,216, , ,631-2,980,416 D.1 Total net value adjustments 4,407, ,543-1,146,666-5,728,649 E. Gross closing balance 6,623, ,989-1,753,297-8,709,065 F. Carried at cost Line A.1, "Total net decreases", and line D.1, "Total net value adjustments", show the opening and closing balances for total value adjustments and amortisation recorded for intangible assets with a finite life. Line C.2 "Value adjustments - Amortisation" in the Other intangible assets: other finite life column, mainly consists of the amrotisation charge for the period relating to intangibles recognised following the acquisition of former Banca Antonveneta S.p.A. and Biverbanca. An analysis of external and internal impairment indicators, worsening macroeconomic conditions and deterioration of all variables lying at the base of the assessment of intangibles associated with customer relationships, revealed the need for impairment losses to be recognised in the amount of EUR mln for core deposits and EUR 11.0 mln for assets under management / assets under custody. Sub-item F, "Carried at cost", was left blank in accordance with instructions from the Bank of Italy, as it only needs to be completed for assets recognised at fair value. 197

198 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 13.3 Intangible assets: depreciation rates Main categories of intangible assets % residual depreciation period Software 20.00% Concessions and other licenses 10% - 20% Banca Antonveneta S.p.a. trademark 10.00% 6 Core deposits - current accounts 9% - 9,1% 7 Core deposits - deposits 6,70% - 7% 11 Core overdrafts 9% - 9,1% 7 Assets under management 11,1% 5 Intangible assets recognised during the purchase price allocation of former Banca Antonveneta S.p.A. and Biverbanca S.p.a. are all finite-life and therefore amortised based on their expected useful life. As at 31 December 2011, there were no: revalued intangible fixed assets; intangible fixed assets acquired through government concessions (IAS, par. 44); intangible fixed assets offered as loan collaterals; commitments to purchase intangible assets. 198

199 Notes to the consolidated financial statements - Part B Consolidated balance sheet Section 14 Tax Assets and Liabilities Item 140 (Assets) and Item 80 (Liabilities) 14.1 Deferred tax assets: breakdown Items/Amounts Total Total Receivables (including securitisations) 983, ,109 Other financial instruments 40,760 42,970 Goodwill 2,512,323 2,133,006 Multi-annual costs 74,755 13,579 Tangible and intangible assets 58,348 16,944 Corporate entertainment expenses Personnel expenses 28,386 30,155 Tax losses 224,672 25,904 Other 2,217, ,383 Financial instruments - valuation reserves 664, ,882 Deferred tax assets (gross) 6,804,846 4,283,064 Offsetting with deferred tax liabilities 132, ,185 Deferred tax assets (net) 6,672,647 4,113,879 Deferred tax assets in the Receivables line mainly include tax assets for value adjustments which were not deducted in prior years since they exceeded the limit indicated in Article 106 of the Income Tax Act (TUIR). Such adjustments will be deductible in subsequent periods on the basis of the straight-line (1/18th) method. Line Goodwill includes the following significant elements: recognition of taxation concerning the goodwill of Banca Antonveneta S.p.a. and the goodwill of Cassa di Risparmio di Biella e Vercelli S.p.a. (which are exclusively posted to the Group's consolidated accounts and implicitly classified in the Parent Company's separate financial statements as controlling interests), as arising after tax redemption carried out in 2011 pursuant to art. 23 paragraphs 12 through 15 of Legislative Decree no. 98/2011. tax rate reduction following deduction of the second annual tranche of amortisation of the goodwill which was tax-relieved in 2008 pursuant to art. 15 of Legislative Decree no. 185/2008 and recognised in relation to the mergers by absorption of Banca Agricola Mantovana S.p.a. and Banca Antonveneta S.p.a, tax rate reduction following deduction of the first annual tranche of amortisation of the goodwill recognised by Banca Antonveneta S.p.A. in its separate accounts as a result of the transfer of banking business completed by the Parent Company on 1 January 2009 and tax-relieved in fiscal year Line "Other intangible assets" shows an increase in the balance attributable to the amortisation of intangible assets from the acquisition of former Banca Antonveneta S.p.A. and Biverbanca, not fiscally recognised. Line "Tax losses" shows an increase due to the tax loss of the parent company arising during the year. With regard to tax loss for the period, art. 2, paragraph 56-bis of legislative decree no. 201 of 6 December 2011, transposed, as amended, into law no. 214 of 22 December 2011 shall apply, which provides for conversion [of DTAs] into tax credits. Conversion will be effective as of submission of the tax return for The line Financial instruments valuation reserves includes tax assets relating to cash flow hedge derivatives, financial instruments classified in portfolios of available-for-sale financial assets and those originally in the portfolio of available-for-sale financial assets and reclassified in 2008 in the portfolio of 'loans to customers' and 'loans to banks'. The increase as compared with the 2010 balance is mainly attributable to negative fair value changes in Italian government securities, classified in the portfolio of 'available for sale assets' posted to equity. The line Other includes tax assets relating to other cases, such as those recognised on provisions for risks and charges in respect of deductible costs and those on residual goodwill deducted as per the law provisions applicable prior to goodwill tax deduction rules set out in legislative decree no. 185/

200 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 14.2 Deferred tax liabilities: breakdown Items/Amounts Total Total Capital gains to be divided into installments 59,821 80,998 Goodwill Tangible and intangible assets 26,658 39,788 Financial instruments 21,037 25,308 Personnel expenses 5,231 5,254 Other 43,839 35,990 Financial instruments - valuation reserves 76,468 86,604 Deferred tax liabilities (gross) 233, ,339 Offsetting with deferred tax assets 132, ,185 Deferred tax liabilities (net) 100, ,154 The lower taxes on Capital gains to be divided into instalments is attributable to the current year s taxation of a fifth of the capital gain earned from the sale of branches by the parent company in 2009 and 2010, paid in instalments as per the option set out in art. 86, par. 4 of the Income Tax Act (TUIR). The line Financial instruments valuation reserves includes tax liabilities relating to financial instruments classified in the portfolio of availablefor-sale financial assets and those originally in the portfolio of available-for-sale financial assets and reclassified in 2008 in the portfolio of loans to customers and loans to banks, as well as tax liabilities relating to cash flow hedge derivatives. Other includes taxes relating to the alignment, upon consolidation, of the various criteria accounting of commissions on intra-group consumer loans. adopted by consolidated companies for the 200

201 Notes to the consolidated financial statements - Part B Consolidated balance sheet 14.3 Deferred tax assets: annual changes (with offsetting entry to profit and loss) Total Total Opening balance 3,789,762 3,732, Increases 1,200, , Deferred tax assets arising during the year 1,111, ,145 a) relating to previous years - - b) due to changes in accounting principles - - c) write-backs - - d) other 1,111, , New taxes or increases in tax rates 61, ) Other increases 26, , Decreases 440, ,764 Disposals and one-off transactions Deferred tax assets derecognised during the year 398, ,473 a) reversals 396, ,473 b) write-downs of non-recoverable items - - c) changes in accounting principles - - d) other 1, Reduction in tax rates Other decreases 41, ,291 IFRS5 "Discontinuing operations" - (1) 4. Closing balance 4,550,213 3,789,762 The table illustrates the tax assets that will be absorbed in subsequent periods with an offsetting entry to profit and loss. Major deferred tax assets arising during the year as reported in line 2.1 d) include EUR mln concerning the goodwill of Banca Antonveneta S.p.a. and the goodwill of Cassa di Risparmio di Biella e Vercelli S.p.a. (which are exclusively posted to the Group's consolidated accounts and implicitly classified in the Parent Company's separate financial statements as controlling interests), as arising after tax redemption carried out in 2011 pursuant to art. 23 paragraphs 12 through 15 of Legislative Decree no. 98/2011. The balance is largely attributable to amortisation of intangible assets arising from the acquisition of former Banca Antonveneta S.p.A. and Biverbanca, as well as to loan writedowns exceeding deductible limits, Parent Company's tax loss for the period and taxed provisions for the period. Line 2.2 "New taxes or increases in tax rates" reflects adjustments made to IRAP (regional productivity) deferred tax assets owing to the 0.75% increase in the tax rate for banks provided for by art. 23 of Legislative Decree no. 98/2011. "Deferred tax assets derecognised during the year" in Line 3.1 a) includes EUR mln in goodwill recognised in relation to the mergers by absorption of Banca Agricola Mantovana S.p.a. and Banca Antonveneta S.p.a. completed in 2008; EUR 46.4 mln in goodwill recognised in relation to the transfer of banking business by the Parent Company to Banca Antonveneta on 1 Januray 2009; the balance includes the 2011 deductible portion of loan writedowns (in eighteenths) carried over from previous years and the use in 2011 of funds taxed in previous years. 201

202 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 14.4 Deferred tax liabilities: annual changes (with offsetting entry to profit and loss) Total Total Opening balance 187, , Increases 25,344 94,580 Business combinations Deferred tax liabilities arising during the year 5,526 75,623 a) relating to previous years - - b) due to changes in accounting principles - - c) other 5,526 75, New taxes or increases in tax rates 2, Other increases 17,488 18, Decreases 58,007 16,884 Disposals and one-off transactions Deferred taxes derecognised during the year 54,818 10,471 a) reversals 54,146 10,471 b) due to changes in accounting principles - - c) other Reduction in tax rates Other decreases 3,189 6,413 IFRS5 "Discontinuing operations" Closing balance 154, ,602 This table illustrates tax liabilities which will be absorbed in subsequent years with an offsetting entry to profit and loss. Line 2.2 "New taxes or increases in tax rates" reflects adjustments made to IRAP (regional productivity) deferred taxes owing to the 0.75% increase in the tax rate for banks provided for by art. 23 of Legislative Decree no. 98/2011. Deferred tax liabilities derecognised during the year in Line 3.1 a) are largely attributable to capital gains arising from branches sold to Banca Popolare Puglia e Basilicata in 2009 and to the Carige Group and the Cassa di Risparmio di Firenze in 2010 for the tranche taxable during the current year. 202

203 Notes to the consolidated financial statements - Part B Consolidated balance sheet 14.5 Deferred tax assets: annual changes (with offsetting entry to equity) Total Total Opening balance 493, , Increases 1,820, ,723 Business combinations Deferred tax assets arising during the year 1,808, ,876 a) relating to previous years - - b) due to changes in accounting principles - - c) other 1,808, , New taxes or increases in tax rates 11, Other increases 564 9, Decreases 59,265 41, Deferred tax assets derecognised during the year 58,702 34,535 a) reversals 58,697 34,535 b) write-downs of non-recoverable items - - c) due to changes in accounting principles - - d) other Reduction in tax rates Other decreases 563 6, Closing balance 2,254, ,302 Changes chiefly relate to taxes recognised on changes in equity reserves relating to financial instruments classified in portfolios of available-forsale financial assets, those originally in the portfolio of available-for-sale financial assets and reclassified in 2008 in the portfolio of loans to customers and loans to banks, as well as cash flow hedge derivatives. Deferred tax assets arising during the year in line 2.1 c) mainly refers to negative fair value changes posted to the reserve for Italian Government securities classified in portfolios of 'AFS financial assets'. Line 2.2 "New taxes or increases in tax rates" reflects adjustments made to IRAP (regional productivity) deferred tax assets owing to the 0.75% increase in the tax rate for banks provided for by art. 23 of Legislative Decree no. 98/

204 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 14.6 Deferred tax liabilities: annual changes (with offsetting entry to equity) Total Total Opening balance 86, , Increases 15,168 28,149 Business combinations Deferred tax liabilities arising during the year 8,813 20,284 a) relating to previous years - - b) due to changes in accounting principles - - c) other 8,813 20, New taxes or increases in tax rates 5, Other increases 1,114 7, Decreases 23,781 90, Deferred tax liabilities derecognised during the year 23,776 87,268 a) reversals 23,756 87,268 b) due to changes in accounting principles - - c) other Reduction in tax rates Other decreases 5 3,019 IFRS5 discontinuing operations - (76) 4. Closing balance 78,124 86,737 Changes mainly relate to taxes recognised on changes in equity reserves relating to financial instruments classified in portfolios of 'available-forsale financial assets', in addition to cash flow hedge derivatives. Line 2.2 "New taxes or increases in tax rates" reflects adjustments made to IRAP (regional productivity) deferred taxes owing to the 0.75% increase in the tax rate for banks provided for by art. 23 of Legislative Decree no. 98/2011. Derecognised tax liabilities for the year mainly relates to shares, bonds and Units in UCITS classified in portfolios of 'available-for-sale financial assets'. 204

205 14.7 Other information Notes to the consolidated financial statements - Part B Consolidated balance sheet Current tax assets Items/Amounts Total Total Prepayments of corporate income tax (IRES and IRAP) 121, ,808 Other tax credits and withholdings 674, ,288 Gross current tax assets 795, ,096 Offsetting with current tax liabilities 244, ,187 Net current tax assets 550, ,909 Prepayments of corporate income tax (IRES) and regional tax on productivity (IRAP) refer to downpayments made in respect of taxes due for the period. In 2011 the Parent Company made no IRES downpayments since credit from the previous consolidated tax return (which can be used as a set-off) was higher than the dowpayment due for Other tax credits and withholdings mostly consist of income tax credits claimed for refund, IRES/IRAP credits resulting from prior tax returns which can be used as a set-off, and withholdings incurred and deductible during the year. Current tax liabilities Items/Amounts Booked to net equity Booked to profit & loss Total Booked to net equity Booked to profit & loss Total Corporate income tax (IRES) payables , ,196 (764) 258, ,509 Other current income tax payables - 5,339 5,339-9,403 9,403 Gross current tax payables , ,535 (764) 267, ,912 Offsetting with current tax assets , , , ,187 Net current tax payables (492) 183, ,596 (1,126) 129, ,725 The total amount of tax owed to the tax authority is represented by the algebraic sum of current taxes generated by fiscally significant entries carried through profit and loss and fiscally significant entries carried at equity. "IRES-IRAP tax payables" with an offsetting entry to profit and loss refer to IRES (corporate income tax) and IRAP (regional tax on productivity) due by Group companies in the current period. Line "Other income tax payables" primarily includes provisions made by the Parent Company against minor litigation instances with tax authorities, whose risk was deemed probable. 205

206 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 15 Non-current assets held for sale / discontinued operations and associated liabilities Item 150 (assets) and 90 (liabilities) 15.1 Non-current assets held for sale and discontinued operations: breakdown A. Individual assets As at , assets held for sale consist in real estate owned by subsidiary MPS Immobiliare. Total Total A.1 Financial assets - - A.2 Equity investments - - A.3 Tangible assets 2,158 95,997 A.4 Intangible assets - - A.5 Other non-current assets - - B. Asset groups (discontinued operations) Total A 2,158 95,997 B.1 Financial assets held for trading - - B.2 Financial assets designated at fair value - - B.3 Financial assets available for sale B.4 Financial assets held to maturity - - B.5 Loans to banks - 10,414 B.6 Loans to customers - 41,456 B.7 Equity investments - - B.8 Property, planst and equipment B.9 Intangible assets B.10 Other assets - 12,819 C. Liabilities associated with individual assets held for sale and discontinued operations Total B - 65,775 C.1 Payables - - C.2 Securities - - C.3 Other liabilities - - D. Liabilities included in disposal groups of assets held for sale and discontinued operations Total C - - D.1 Deposits from banks - 19 D.2 Depostis from customers - 207,547 D.3 Debt securities issued - - D.4 Financial liabilities held for trading - - D.5 Financial liabilities designated at fair value - - D.6 Provisions - 1,922 D.7 Other liabilities - 3,912 Total D - 213, Other information No information to be disclosed for 2011 pursuant to paragraph 42 of IFRS Details of investments in companies subject to significant influence not valued at equity No information to be disclosed for 2011 pursuant to paragraph 37 i) of IAS 28. Section 16 Other assets Item

207 16.1 Other assets: breakdown Notes to the consolidated financial statements - Part B Consolidated balance sheet Total Total Tax credits from the Revenue and other tax levying authorities 273, ,106 Third party cheques held at the cashier's for collection 319, ,478 Cheques drawn on the Company held at the cashier's for collection 3,075 5,032 Gold, silver and precious metals Property inventory 34,945 35,112 Items in transit between branches 105, ,783 Items in processing 1,126, ,504 Receivables associated with the provision of goods and services 35,057 49,389 Improvements and incremental costs on third party assets other than those included under tangible assets 79,467 82,228 Prepaid expenses and accrued income not attributable to a separate account 494, ,453 Biological assets 3,782 3,780 Other 1,637,904 2,309,796 Total 4,113,589 4,804,737 The lines Items in processing and Other include transactions which were completed in early

208 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet LIABILITIES Section 1 Deposits from banks Item Deposits from banks: breakdown Type of transaction / Group item Total Total Deposits from central banks 33,701,358 14,330, Deposits from banks 13,091,574 13,088, Current accounts and demand deposits 983,336 3,749, Time deposits 592,684 1,509, Loans 11,109,904 7,425, Repurchase agreements 7,470,857 4,437, Other 3,639,047 2,988, Liabilities for commitments to repurchase own equity instruments Other liabilities 405, ,436 Total 46,792,932 27,419,008 Fair Value 46,794,092 28,335,819 As further explained in the notes to the balance-sheet, the 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender; recalculation entailed a reduction in Line "2.3.1 Repurchase agreements" as at 31 December 2010 by EUR mln with respect to data reported in the annual accounts for the same year. Among the most significant changes in this item, which saw an increase by an overall EUR 18,458.5 mln, the following are reported: a EUR 19,370.7 mln increase in deposits from central banks, mainly consisting in lending transactions in the Eurosystem, collateralised with securities pledged by the Parent Company (including Italian Government-guaranteed securities issued and concurrently repurchased by the Parent Company for an amount of EUR 10,000 mln, against which EUR 2.7 mln was accrued on the State guarantee as commission expense, posted to item 50 Commission expense in the profit and loss statement) using the pooling method, an increase by EUR 2,117.6 mln in item 2.3.1, Repurchase agreements of deposits from banks; the item includes financial liabilities arising from repo transactions (liabilities) with banks on both treasury securities and securities made available through repurchase agreements (assets) and securities lending transactions. 1.2 Details of Item10 "Deposits from banks": subordinated liabilities Type/Item Issue Date Maturity Date Currency Rate Balance Balance ABN AMRO Bank Subordinated Loan A. 10/10/ /10/2016 Eur variabile 403, ,388 Total 403, ,388 For prudential purposes this borrowing, as an innovative capital instrument, counts as supplementary capital (see Section 2, Capital requirements and capital ratios in Part F of these notes to the financial statements). 208

209 1.3 Details of Item 10 "Deposits from banks": structured liabilities Notes to the consolidated financial statements - Part B Consolidated balance sheet This table was not completed a the Group has no such liabilities for either the current or the previous year. 1.4 Deposits from banks subject to micro-hedging This table was not completed as the Group has no such liabilities for either the current or the previous year. 1.5 Finance lease payables This table was not completed as the Group has no such liabilities for either the current or the previous year. 209

210 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 2 Deposits from customers Item Deposits from customers: breakdown Type of transaction / Group item Total Total Current accounts and demand deposits 62,195,909 65,773, Time deposits 1,515,088 3,291, Loans 18,495,646 26,006, Repurchase agreements 14,352,047 18,741, Other 4,143,599 7,265, Liabilities for commitments to repurchase own equity instruments Other liabilities 1,804,028 1,805,243 Total 84,010,671 96,876,569 Fair Value 84,010,671 97,769,565 As further explained in the notes to the balance-sheet, the 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender; recalculation entailed a reduction in Line "3.2 Loans - Other" as at 31 December 2010 by EUR mln with respect to data reported in the annual accounts for the same year. Deposits from customers are valued at cost or at amortised cost, except for liabilities subject to micro-hedging of fair value as reported in Table 2.4 of this section, the amortised cost of which is adjusted proportionally to the fair value of the hedged item. The line Repurchase agreements contains the financial liabilities arising from repo transactions with customers on both treasury securities and securities made available through reverse repurchase agreements or securities lending transactions. For this item, a EUR 4,389.0 mln decrease is reported, which is primarily due to the combined effect of a reduction by EUR 8,539 mln in transactions with the clearing house 'Cassa di Compensazione e Garanzia' and an increase by approximately EUR 4,000 mln in transactions with leading foreign counterparties. 2.2 Details of Item 20 "Deposits from customers": subordinated liabilities This table was not completed as the Group has no such liabilities for either the current or the previous year. 2.3 Details of Item 20 "Deposits from customers": structured liabilities This table was not completed as the Group has no such liabilities for either the current or the previous year. 210

211 2.4 Deposits from customers subject to micro-hedging Notes to the consolidated financial statements - Part B Consolidated balance sheet Type of transaction / Amount Total Total Liabilities subject to micro-hedging of fair value: 77,515 72,844 a) interest rate risk 77,515 72,844 b) exchange risk - - c) multiple risks Liabilities subject to micro-hedging of cash flows: - - a) interest rate risk - - b) exchange risk - - c) other - - Total 77,515 72,844 This table contains a breakdown of Table 2.1 and shows the carrying amount of two borrowings subject to fair value micro-hedging of interestrate risk. The carrying amount corresponds to the amortised cost adjusted by changes in fair value for the specific risk hedged. 2.5 Finance lease payables This table was not completed as the Group has no such liabilities for either the current year or the previous year. 211

212 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 3 Debt securities in issue Item Debt securities in issue: product breakdown Type of Securities/ Amounts A. Listed securities Book value Total Total Fair Value Book Fair Value Level 1 Level 2 Level 3 Total value Level 1 Level 2 Level 3 Total 1. Bonds 37,766,342 14,288,876 21,721,204-36,010,080 31,080,108 14,957,878 16,301,806-31,259, Structured ,219-37,109-37, Others 37,766,342 14,288,876 21,721,204-36,010,080 31,042,889 14,957,878 16,264,697-31,222,575 2, Other securities 2,048,307-2,090,259-2,090,259 4,166,609-4,208,386-4,208, Structured Others 2,048,307-2,090,259-2,090,259 4,166,609-4,208,386-4,208,386 T o tal 39,814,649 14,288,876 23,811,463-38,100,339 35,246,717 14,957,878 20,510,192-35,468,070 The table shows funding represented by securities which, in addition to bonds, also include certificates of deposit (outstanding and maturities). Liabilities are 'net of' bonds and repurchased CDs; on this connection it is noted that the Parent Company has issued and concurrently repurchased one type of State-guaranteed bonds in December 2011 for a nominal amount of EUR 10,000 mln, which were then pledged as collateral for financing transactions in the Eurosystem. The fair value column indicates the theoretical market value of the financial instruments at the balance sheet date. 3.1.a Debt securities in issue: details of structured liabilities Item/Amount Total Total Index Linked - 19,742 Inflation - 16,148 Other - 1,329 Total - 37,219 Table 3.1 is a breakdown of all structured securities, in which the derivative was separated and valued independently, by major types of securities issued. 3.1.b Fair value of derivatives embedded in structured securities in issue Items/Amounts Total Total Fair value of derivatives embedded in structured securities in issue The table shows the fair value of derivatives embedded in structured securities which were separated from the host instrument and classified in the trading portfolio measured at fair value. For regulatory purposes, these derivatives are considered as part of the banking book and are not included in the regulatory trading book, except when they are actually held for trading. 212

213 Currency Notes to the consolidated financial statements - Part B Consolidated balance sheet 3.2 Details of Item 30 "Debt securities in issue": subordinated securities Type Book value Maturity Interest Name Issue date Regulatory date rate A) Tier I Capital Preferred Securities I^ Tr. 21/12/00 (a) EUR floating 79,727 79,295 A) Tier I Capital Preferred Securities II^ Tr. 27/06/01 (b) EUR floating 202, ,697 A) Tier I F.R.E.S.H. (Floating Rate Equity- linked 30/12/03 Subordinated Hybrid) (c) EUR floating 27, ,417 Total A) Tier I 309, ,409 B) Tier II Upper BMPS SUB /05/06 31/05/16 EUR fixed 769, ,304 B) Tier II Upper BMPS 5.75 SUB /05/06 30/09/16 GBP fixed 230, ,007 B) Tier II Upper PASCHI SUB TV 08/18 15/05/08 15/05/18 EUR floating 1,987,223 2,161,657 Total B) Tier II Upper 2,986,997 3,164,968 C) Tier II Lower BC ANTONVE SUB TV 18 30/04/08 30/04/18 EUR floating 2,320 1,964 C) Tier II Lower BCA ANTONVE TV 01/11/02 01/11/12 EUR floating 13,585 28,001 C) Tier II Lower BMPS 7,44 08/16 30/06/08 30/12/16 EUR fixed 248, ,945 C) Tier II Lower BMPS SUB 7 09/19 04/03/09 04/03/19 EUR fixed 577, ,122 C) Tier II Lower BMPS TV 05/17 30/11/05 30/11/17 EUR floating 484, ,822 C) Tier II Lower BMPS TV SUB 08/18 31/10/08 31/10/18 EUR floating 143, ,464 C) Tier II Lower BMPS/BAM 17 SUB TV 29/06/07 29/06/17 EUR floating 5 5 C) Tier II Lower BMPSBAM 17STCLSB S43 14/12/07 14/12/17 EUR floating C) Tier II Lower MPS TV 05/18 20/12/05 15/01/18 EUR floating 135, ,338 C) Tier II Lower MPS 04/2020 FX 5 LT2 EUR 21/04/10 21/04/20 EUR fixed 546, ,384 C) Tier II Lower MPS 09/2020 FX 5,6 EUR 09/09/10 09/09/20 EUR fixed 512, ,848 C) Tier II Lower MPS Capital Services 30/09/03 30/09/13 EUR floating 2,815 4,216 C) Tier II Lower MPS Capital Services 30/09/03 30/09/13 EUR floating C) Tier II Lower MPS Capital Services 22/12/03 22/12/13 EUR floating - 16 C) Tier II Lower MPS Capital Services 30/06/05 30/06/15 EUR floating - 1 C) Tier II Lower Banca Popolare di Spoleto 07/12/05 07/12/15 EUR floating 7,805 7,807 C) Tier II Lower Banca Popolare di Spoleto 15/04/08 15/04/18 EUR floating 2,128 2,128 C) Tier II Lower Banca Popolare di Spoleto 18/04/08 18/04/18 EUR floating 2,822 2,823 Total C) Tier II Lower 2,680,106 2,576,147 Total 5,976,172 6,478,524 a) These instruments are non-redeemebale. The Parent Company has decided not to exercise the call option on these instruments by 21/03/2011 and increase to 630 bps the 3M Euribor spread as of the same date (as announced on 18/01/2011); b) These instruments are non-redeemebale. The Parent Company has decided not to exercise the call option on these instruments by 27/09/2011 and increase to 630 bps the 3M Euribor spread as of the same date (as announced on 23/09/2011); c) the amount relates to funding through issuance of the innovative equity instrument 'Floating Rate Equity-linked Subordinated Hybrid' (F.R.E.S.H.) by the vehicle MPS Preferred Capital II LLC.. The amount is reported net of the embedded derivative component, posted to own equity instruments, which has been classified under balance sheet liabilities in item 50, Equity instruments. For prudential purposes this issue, as an innovative capital instrument, counts as Tier 1 (see Section 2, Capital requirements and capital ratios in Part F of these notes to the financial statements). The reduction in the accounting balance with respect to 2010 is due to conversions (nominal EUR mln) and repurchases (nominal EUR mln) in

214 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 3.3 Details of Item 30 "Debt securities in issue": securities subject to micro-hedging Type of transaction / Amount Total Total Securities subject to micro-hedging of fair value: 11,927,101 11,680,889 a) interest rate risk 11,927,101 11,680,889 b) exchange risk - - c) multiple risks Securities subject to micro-hedging of cash flows: 2,217,952 2,400,532 a) interest rate risk 1,987,223 2,165,529 b) exchange risk 230, ,003 c) other - - Total 14,145,053 14,081,421 The table shows outstanding securities which are subject to micro-hedging. As a result of cash flow hedging, the fair value of derivative contracts is posted to a specific equity reserve. 214

215 Section 4 Financial liabilities held for trading Item Financial liabilities held for trading: breakdown FV = fair value FV* = fair value calculated excluding value adjustments due to changes in the credit rating of the issuer since the date of issue. NV = nominal or notional value Notes to the consolidated financial statements - Part B Consolidated balance sheet 215

216 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Item 40, Financial liabilities held for trading, includes: a) on-balance-sheet liabilities mainly issued for short-term profit; b) financial liabilities which originate from derivatives other than those formally designated as hedges. Criteria adopted for classification of financial instruments in the three levels of the fair value hierarchy are reported in Section A.3, Fair value disclosure of Part A, Accounting policies of the notes to the financial statements. The 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender; recalculation entailed a reduction in Line "3.2 Loans - Other" as at 31 December 2010 by EUR 3,308.8 mln with respect to data reported in the annual accounts for the same year. Amounts in Line "1. Deposits from banks" and "2. Deposits from customers" are primarily correlated with those of lines "1. Debt securities" and "4. Loans" in Table 2.1 Financial assets held for trading" and refer primarily to the repo business of subsidiary MPS Capital Services - Banca per le imprese S.p.a. in the amount of EUR 1,183.8 mln and 8,316.2 mln respectively; uncovered short positions of the Parent Company and subsidiary MPS Capital Services - Banca per le imprese S.p.a account for EUR mln posted to deposits from banks and EUR 1,606.6 mln posted to deposits from customers. Derivatives connected with fair value option instruments are also included in the trading book: these cover the risks of funding designated at fair value arising from possible interest rate fluctuations and from any embedded options in structured securities issued. The fair value of these derivatives is shown in the table in line "B1.2 - Fair value option, if made directly with Group s external counterparties, but is represented by a portion of the held-for-trading derivatives (line B1.1) whenever the FVO hedge originally carried out with the subsidiary MPS Capital Services required risk externalisation. For FVO derivatives arranged by Group companies with the subsidiary MPS Capital Services, it is worth noting that the relevant internal units responsible for risk management perform suitable tests at consolidated level in order to periodically test the effectiveness of the hedge established from the perspective of a 'natural hedge'. Column Level 3, line B.2.3, Credit derivatives other includes Credit default Swap contracts embedded in bonds classified in the loan book, bifurcated and separately recognised at fair value in the trading book. 4.2 Details of Item 40 "Financial liabilities held for trading": structured liabilities The Group has issued no subordinated liabilities classified in the trading book. 4.3 Details of item 40 "Financial liabilities held for trading": structured liabilities The Group has issued no structured liabilities classified in the trading book. 4.4 On-balance-sheet financial liabilities (excluding "technical overdrafts") held for trading: annual changes Deposits from Deposits from Debt securities Total banks customers issued A. Opening balance 914,305 14,512,573-15,426,878 B. Increases 32,384,047 1,087,069,604-1,119,453,651 B.1 Issues B.2 Sales 32,366,761 1,086,934,113-1,119,300,874 B.3 Increases in fair value B.4 Other increases 17, , ,777 C. Decreases 32,114,531 1,093,266,007-1,125,380,538 C.1 Purchases 32,108,041 1,093,236,230-1,125,344,271 C.2 Redemptions C.3 Decreases in fair value C.4 Other decreases 6,490 29,777-36,267 D. Closing balance 1,183,821 8,316,170-9,499,991 For the Deposits from banks and Deposits from customers columns, changes in the item do not include technical overdrafts. 216

217 4.4.a Derivatives payable - Fair Value Option method Notes to the consolidated financial statements - Part B Consolidated balance sheet Financial asset Financial asset Items/Amounts Natural Hedges Other types of accounting mismatches portfolios managed internally on the basis of Natural Hedges Other types of accounting mismatches portfolios managed internally on the basis of fair value fair value Financial derivatives , Credit derivatives Total , This table adds details to table 4.1 above and shows the carrying amount (fair value) of hedging derivatives under the fair value option, broken down by methods of use. As at 31 December 2011, all fair value option derivatives recognised in the trading book are attributable to the natural and systematic hedging of fixed-rate and structured bonds issued by the Group. By convention, such derivatives are classified in the trading book. However, in terms of their representation in the profit and loss statement, they comply with rules similar to the rules applicable to hedging derivatives: positive and negative spreads or margins settled or accrued until the balance sheet date are recorded under interest income and expense, while valuation profits and losses are posted under item 110 of the profit and loss statement, Net gains / losses on financial assets and liabilities designated at fair value, in compliance with representations used for funding instruments which adopted the fair value option. 217

218 Section 5 Financial liabilities designated at fair value Item Financial liabilities designated at fair value: breakdown FV = fair value FV* = fair value calculated excluding value adjustments due to changes in the credit rating of the issuer since the date of issue. VN = nominal or notional value The table shows the financial liabilities represented by fixed-rate and structured bonds which have been classified at fair value and are systematically subject to hedging. Hedging occurs through derivative contracts and is used to cover the risk of interest rate fluctuations and the risk resulting from embedded options. The fair value option has been adopted systematically for fixed-rate and structured debt securities issued by the Group companies, for which the risk of fair value changes has been hedged by derivatives upon issuance, with the aim of maintaining the hedge for the contractual duration of the hedged securities; derivatives used under the fair value option are classified in the trading book. Hedge accounting is used for securities issued by the Group companies for which the decision to hedge was taken after issuance or for which there is no intention to maintain the hedge for the contractual duration of the securities. Funding subject to hedging with derivative instruments under the fair value option is thus designated at fair value, in accordance with all the relative hedging derivatives which, for the purposes of the financial statements, have been classified under specific sub-items in the trading book. Positive and negative spreads or margins in relation to derivative contracts settled or accrued until the balance sheet date are recorded in the profit and loss statement under interest income and expense, while valuation profits and losses are posted under Item 110, Net gains / losses on financial assets and liabilities designated at fair value, in compliance with reporting used for funding instruments for which the fair value option was used. Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 218

219 Notes to the consolidated financial statements - Part B Consolidated balance sheet 5.1.a Financial liabilities designated at fair value: the Fair Value Option method Items/Amounts Deposits from banks Deposits from customers Debt securities issued Deposits from banks Deposits from customers Debt securities issued Natural hedges through derivatives ,498, ,469,490 Natural hedges through other financial instruments Other types of accounting mismatches Financial asset portfolios managed internally on the basis of fair value Structured financial instruments Total ,498, ,469,490 This table adds details to table 5.1 above and shows the carrying amount (fair value) of liabilities for which the fair value option was adopted, broken down by methods of use. 5.2 Details of Item 50 "Financial liabilities designated at fair value": subordinated liabilities Type Maturity Book value Name Issue date Currency Rate Regulatory date A) Tier I PASCHI 01/31 7,59 SUB - Preferred 07/02/01 Capital I LLC 07/02/31 EUR fixed 316, ,617 (a) As of 7/2/2011 the rate is 3m Euribor bp (as communicated on 18/1/2011), Total A) Tier I Lower 316, ,617 C) Tier II Lower PASCHI 22/2015 INDEX 07/07/00 07/07/15 EUR floating 39,121 38,120 C) Tier II Lower PASCHI 00/15 IND. 20/07/00 20/07/15 EUR floating 30,430 34,407 Total C) Tier II Lower 69,551 72, , ,144 The table shows subordinated financial liabilities designated at fair value, with their main characteristics. For the purpose of quantifying regulatory capital, subordinated liabilities are not designated at fair value, but on the basis of the amount which was actually collected (see Part F, Section 2, Regulatory capital ). In 2011 no new issues were finalised as part of the portfolio of financial liabilities designated at fair value. 219

220 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 5.3 Financial liabilities designated at fair value: annual changes Deposits from Deposits from Debt securities Total banks customers issued A. Opening balance ,469,490 25,469,490 B. Increases - - 3,998,277 3,998,277 B.1 Issues - - 3,196,824 3,196,824 B.2 Sales B.3 Increases in fair value , ,073 B.4 Other increases , ,380 C. Decreases - - 6,969,073 6,969,073 C.1 Purchases - - 2,698,100 2,698,100 C.2 Redemptions - - 3,457,037 3,457,037 C.3 Decreases in fair value , ,552 C.4 Other decreases , ,384 D. Closing balance ,498,694 22,498,694 The table shows changes in the main types of liabilities of the fair-valued portfolio during the year. Line B3, Increases in fair value, shows the increase in liabilities, resulting in the recognition of a corresponding capital loss in the profit and loss statement (Section 7, Table 7.1 of the profit and loss statement). Line C3, Decreases in fair value, shows a decrease in liabilities, and thus the recognition of a corresponding capital gain in the profit and loss statement (Section 7, Table 7.1 of the profit and loss statement). Lines B4 and C4 respectively include gains and losses from repurchase, in addition to accruals on issue discounts and coupon interest and effects of exchange rate fluctuations. 5.3.a Financial liabilities designated at fair value: structured liabilities Item/Amount Total Total Commodity Linked 11,282 21,877 Equity Linked 14,208 49,401 Fund Linked 20,138 30,991 Index Linked 163, ,126 Inflation Linked 70,486 71,754 Step - up, Step down 255, ,524 Others - 1,501 Total 534, ,174 The table reports the main types of structured bonds issued by the Group and measured at fair value. Since bonds are measured at fair value as an offset to profit or loss, embedded derivatives are not reported separately. 220

221 Section 6 Hedging derivatives Item 60 Notes to the consolidated financial statements - Part B Consolidated balance sheet 6.1 Hedging derivatives: breakdown by type of contract and underlying asset Fair Value Fair Value NV NV Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total A. F inancial derivatives - 4,359,400-4,359,400 26,261,265-1,734,856-1,734,856 21,782,791 1) Fair value - 3,911,309-3,911,309 23,806,236-1,351,161-1,351,161 17,977,762 2) Cash flows - 448, ,091 2,455, , ,695 3,805,029 3) Foreign investments B. C redit derivatives ,674-1,674 79,323 1) Fair value ,674-1,674 79,323 2) Cash flows T o tal - 4,359,400-4,359,400 26,261,265-1,736,530-1,736,530 21,862,114 Key NV = Nominal or Notional Value The table displays the negative book value (fair value) of hedging derivatives for hedges carried out through hedge accounting. Hedge accounting is used for the accounting of hedges of financial instruments posted to balance sheet items which do not provide for measurement at fair value as an offset to profit or loss: in particular, hedges of all financial assets and liabilities other than those represented by securities are managed through hedge accounting. Hedges of financial liabilities represented by securities are normally managed through the fair value option. Information on the underlying strategies and objectives of hedge transactions can be found in Section 2 Market risks of Part E Information on risks and relative hedging policies. 221

222 interest rate risk exchange risk credit risk price risk multiple risks Macro-hedge Micro-hedge Macro-hedge Foreign investments Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 6.2 Hedging derivatives: breakdown by hedged portfolio and type of hedging Fair Value Cash flow hedge Micro Hedge Total Transaction/Type of hedge Financial assets available for sale 3,482, x - x x 3,482, Loans and receivables 333, x - x - x x 333, Financial assets held to maturity x - - x - x - x x - 4. Portfolio x x x x x 87,596 x - x 87, Other transactions x - x - - Total assets 3,816, , ,904, Financial liabilities 7, x - x 448,091 x x 455, Portfolio x x x x x - x - x - Total liabilities 7, , , Expected transactions x x x x x x - x x - 2. Financial assets and liabilities portfolio The table shows the negative fair values of hedging derivatives, classified by hedged assets or liabilities and type of hedging implemented. In particular, on the assets side, fair value micro-hedging was used to hedge against interest-rate risk on fixed-rate and capped mortgages and bonds classified in the available-for-sale portfolio or among receivables, in order to protect them from unfavourable interest rate changes. Fair value micro-hedging of the interest-rate risk on financial liabilities refers primarily to hedges of liabilities represented by securities for which the decision to hedge was taken after issuance or for which there is no intention to maintain the hedge for the contractual duration of the securities. Fair value macro-hedging was applied to fixed-rate mortgage portfolios. Cash flow hedges were implemented in the case of some specific floating-rate bond issues, for the purpose of stabilising their flows through interest rate swaps. Prospective and retrospective tests performed in 2011 in accordance with IAS 39 confirmed the effectiveness of hedging relationships, with the exception of certain hedges of bonds issued by the Parent Company and partially repurchased by other Group companies. These hedges were partly discontinued with a consequent negative impact of EUR 31.4 mln on profit and loss, posted to item "90 - Net hedging income (loss)" in the consolidated income statement. More information on hedged assets and liabilities can be found in the tables in Part B of the notes for each section of the balance-sheet accounts to which hedged items are posted. x x x x x - x Total 3,823, , , ,359,

223 interest rate risk exchange risk credit risk price risk multiple risks Macro-hedge Micro-hedge Macro-hedge Foreign investments Notes to the consolidated financial statements - Part B Consolidated balance sheet Fair Value Cash flow hedge Transaction/Type of hedge Micro-hedge Total Financial assets available for sale 1,075, x - x x 1,076, Loans and receivables 189,285-1,299 x 5,315 x - x x 195, Financial assets held to maturity x - - x - x - x x - 4. Portfolio x x x x - 36,501 x - x 36, Other transactions x - x - - Total assets 1,265,161-1,673-5,315 36, ,308, Financial liabilities 74, x - x 353,356 x x 427, Portfolio x x x x x - x - x - Total liabilities 74, , , Expected transactions x x x x x x - x x - 2. Financial assets and liabilities portfolio x x x x x - x Total 1,339,685-1,673-5,315 36, , ,736,

224 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 7 Changes in value of macro-hedged financial liabilities Item 70 This item was left blank since no macro-hedges have been established on financial liabilities. Section 8 Tax liabilities Item 80 See Section 14 of the Assets. Section 9 Liabilities associated with individual assets held for sale Item 90 See Section 15 of the Assets. 224

225 Section 10 Other liabilities Item Other liabilities: breakdown Notes to the consolidated financial statements - Part B Consolidated balance sheet Total Total Due to the Revenue and other tax levying authorities 199, ,294 Due to social security authorities 140, ,767 Amounts available to customers 298, ,341 Liabilities related to share-based payments Other amounts due to employees 43,264 48,691 Items in transit between branches 83,449 96,259 Items undergoing processing 159,426 1,904,214 Payables in relation to the payment of supplies of goods and services 697, ,714 Irrevocable commitments to disburse funds 59,486 54,175 Accrued expenses and unearned revenues not attributable to a separate account 380, ,915 Other 2,053,952 2,037,210 Total 4,116,879 5,859,531 The lines Items undergoing processing and Other include transactions which were completed in early

226 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 11 Provision for employee severance pay Item Provision for employee severance pay: annual changes Total Total A. Opening balance 287, ,497 B. Increases 8,218 8,970 B.1 Provision for the year 7,789 6,895 B.2 Other increases 429 2,075 C. Decreases 29,789 25,569 C.1 Severance payments 27,686 18,722 C.2 Other decreases 2,103 6,847 IFRS5 "Discontinuing operations" - (422) D. Closing balance 265, , Other information While staff severance pay is considered as a defined benefit fund for the purpose of international accounting standards, any changes in relation to actuarial valuations are detailed under Section 12.3 of the liabilities side, in addition to changes in the Group s defined benefit pension funds. The provision for the year, as clarified by the Bank of Italy, does not include amounts which, as a result of the reform introduced by Legislative Decree no. 252 of 5 December 2005, are paid directly by the Group, depending on the various employee options, to supplementary pension schemes or to the treasury fund managed directly by the the Italian National Social Security Institute, INPS. These items are recognised in personnel expenses, as contributions to external pension funds: defined contribution". 226

227 Section 12 Provisions for risks and charges Item Provisions for risks and charges: breakdown Notes to the consolidated financial statements - Part B Consolidated balance sheet Item/Amount Total Total Pensions and other post retirement benefit obligations 192, , Other provisions for risks and charges 1,055, , legal disputes 329, , personnel expenses 28,595 35, other 697, ,706 Total 1,248,268 1,318,

228 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 12.2 Provisions for risks and charges: annual changes Total 31/12/2011 Total 31/12/2010 Pensions and other Pensions and other Item/Amount post Other post Other Total retirement provisions retirement provisions Total benefit obligations benefit obligations A. Opening balance 435, ,443 1,318, , ,081 1,369,214 B. Increases 11, , ,169 44,147 97, ,705 B.1 Provision for the year 4, , ,084 19,244 77,940 97,184 B.2 Changes due to the time value of money 7,380 9,704 17,084 7,490 9,262 16,752 B.3 Changes due to discount rate changes - 6,461 6,461-6,659 6,659 B.4 Other increases ,413 3,697 21,110 C. Decreases 255,048 90, ,263 66, , ,057 C.1 Use during the year 22,968 74,945 97,913 64,562 92, ,927 C.2 Changes due to discount rate changes 1,261 8,854 10,115 1, ,114 C.3 Other decreases 230,819 6, , ,606 32,016 IFRS5 "Discontinuing operations" (1,500) (1,500) D. Closing balance 192,596 1,055,672 1,248, , ,443 1,318,362 Under increases, in Item B2, Changes due to the time value of money, the Other provisions column shows the amount of time value accrued during the year due to the expected imminent maturity of the estimated liability (EUR 7.4 mln for post-retirement funds and EUR 9.7 for the other funds). As for post-retirement funds, the amount of EUR mln in Line C.3 Other decreases of the Decreases section includes the transfer, as of , of the assets of the defined-benefit section of the supplementary pension fund of former subsidiary Banca Toscana to the external defined-benefit Supplementary Pension Fund for Banca MPS Employees who became such after This transfer did not entail any amendments to the Fund Regulations. With reference to the Other provisions column, the net provision for the year recorded in Item 190 of the profit and loss statement corresponds to the combined totals for B1, B2, B3, C2 and C3, shown in the table, net of amounts posted to item 310 "Gains (losses) after tax from groups of assets held for sale". Item C1 "Use during the year" does not affect the provision for the year since it consists in direct use of the fund against amounts paid. Decreases, in Item C.1, Use during the year, show the direct use of provisions for risks and charges (EUR 74.9 mln) for agreements and settlements made during the period. Use during the year mainly covers outflows for legal disputes and claw-back actions; Item C.3, Other decreases, in the Decreases column, includes write-backs due to surplus provisions in relation to charges actually incurred. 228

229 12.3 Defined-benefit company pension funds: Introduction to the funds Notes to the consolidated financial statements - Part B Consolidated balance sheet The sections below report disclosure required by IAS 19 for defined benefit plans, in which the Group substantially assumes the actuarial and investment risks, including those relating to staff severance pay provisions. For supplementary defined benefit pension funds, the actuarial values required by IAS 19, Employee Benefits, are determined by an independent actuary using the Projected Unit Credit Method as described in detail in Part A Accounting Policies of the notes to the financial statements. The defined benefit funds in which the Group has a joint and several obligation are either internal funds or external supplementary pension funds. Internal funds Supplementary pension provision for staff in the former tax collection division of Banca Monte dei Paschi di Siena S.p.A. This is a supplementary pension fund designed to provide staff in retirement with supplementary pension in the form of a defined benefit (annuity). Banca Monte dei Paschi S.p.A. contributes to the fund for staff who are members of the defined benefit plan. National insurance (INPS) for ex-banca Operaia di Bologna staff. The fund is intended to supplement and replace benefits paid out under compulsory pension schemes for ex-employees active and retired of former Banca Operaia di Bologna. The fund regulations allow INPS benefits to be supplemented based on a percentage of the final salary, calculated using specific coefficients for each grade. Pension provision for employees of former Banca di Credito Popolare e Cooperativo di Reggio Emilia. The sole aim of the fund is to supplement compulsory schemes in order to guarantee higher levels of insurance coverage for exemployees of former Banca di Credito Popolare and Cooperativo di Reggio Emilia, as the direct beneficiaries of a life annuity or as the surviving spouse of a former employee. Pension provision for employees of former Banca Popolare Veneta. The fund is intended to supplement INPS pensions for employees already in retirement as of 7 December 1989 and their beneficiaries, in accordance with the legislation and agreements of 4 February 1956 and 1 January 1982 (for management personnel). The fund, to which only the Parent Company contributes, provides comprehensive coverage for retired personnel indexed to the current salary of an employee of the same grade. Pension provision for employees of former Banca Nazionale Agricoltura. This is an accumulation fund designed to supplement the INPS pension for employees already in retirement as of 1 October 2000, the date on which BNA merged with Antonveneta, or who will retire after that time, not having exercised their right, under the agreements of 12 September 2000, to transfer their contributions to Banca Antonveneta's corporate pension scheme (FAP). Supplementary pension provision for employees of former Banca Toscana. This is a supplementary or additional defined benefit pension fund reserved for personnel already in retirement as of 01/01/1999 and for active employees hired before 27/04/1993 who have expressed an interest in remaining with this plan. The Parent company s contribution is determined based on the mathematical reserve calculated by an independent actuary at the end of each financial year. Supplementary pension provision for employees of former Mediocredito Toscano and former Istituto Nazionale di Credito Agrario (now included in MPS Capital Services Banca per le Imprese S.p.a.). This is a supplementary or additional defined-benefit pension fund reserved for personnel in retirement as of 01/01/1999 and for active employees hired before 27/04/1993 who have expressed an interest in remaining with this plan. The company s contribution is determined based on the mathematical reserve calculated by an independent actuary at the end of each financial year. Supplementary pension scheme for personnel of former Cassa di Risparmio di Biella e Vercelli S.p.A. The pension fund was set up for commitments made towards retired employees who are entitled to periodic benefits as part of a supplementary pension scheme as the direct beneficiaries of a life annuity or as the surviving spouse of a former employee. The fund is fully funded by the Parent Company and is invested together with the company s assets. Based on the mathematical reserve calculated by an independent actuary, the value of the afore-mentioned funds was proved adequate for ensuring payments to fund members. 229

230 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet External funds Cassa di Previdenza Aziendale per il Personale del Monte dei Paschi di Siena (the company pension scheme for employees of Monte dei Paschi di Siena), an independent legal entity with separate assets and asset management. The fund, reserved for current and retired employees of the Parent Bank hired prior to 31/12/1990, is divided into two separate and independent plans: a defined contribution and a defined benefit plan. Information about the defined benefit plan can be found in the tables below. Pension Fund for personnel of former Banca Agricola Mantovana S.p.A. -Defined-benefit supplementary pension fund. The sole aim of the fund is to supplement compulsory schemes in order to guarantee higher levels of insurance coverage to fund members. The fund value is consistent with the mathematical reserve calculated by the independent actuary, necessary to cover the present value of future obligations towards pensioners who have remained with the defined benefit scheme. The defined-benefit pension funds for personnel of the branches in London (BMPS UK Pension Fund) and New York (Retirement Plan) are designed to pay for the employees' benefits on retirement. The value of funds required to meet future payment obligations was proved to be in line with the mathematical reserve calculated by the independent actuary. As required by the Bank of Italy, the internal fund statements can be found in the annexes to the financial statements. 230

231 Notes to the consolidated financial statements - Part B Consolidated balance sheet Changes in pension funds and employee severance pay provisions during the year Items/Amounts Total 31/12/2011 Total 31/12/2010 Defined-benefit Defined-benefit company pension Provision for company pension funds funds staff Internal External severance Internal External pension plan pension plan pay pension plan pension plan Provision for staff severance pay Opening balance 195, , , , , ,184 Increases 11,053 70,267 24,558 9,073 23,564 27,183 Business combinations Current service cost 60 2,864 1, ,426 1,320 Financial charges 7,380 18,211 6,308 7,490 18,973 5,552 Participants' contributions to plan Actuarial losses 1,624 6,067 16,390 1,274-15,875 Negative exchange differences Past service cost Other increases 1,700 42, ,165 4,436 Decreases 21,722 44,973 37,221 21,628 39,451 26,694 Benefits paid 19,208 35,416 27,686 19,632 35,206 19,957 Past service cost Actuarial gains 2,514 9,557 7,432 1,996 4,245 - Positive exchange differences Effect of any plan curtailments Effect of any plan settlements Other decreases - - 2, ,737 IFRS5 "Discontinuing operations" (422) Closing balance 184, , , , , ,251 The table shows movements for the year in internal funds, external funds and staff severance pay provisions which, according to international accounting standards, come under the heading of defined contribution funds. The closing balance represents the theoretical gross liabilities in relation to the fund, taking account of actuarial profits and losses which have not been accounted for due to the application of the corridor method. 231

232 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet a Defined-benefit obligations: breakdown Items/Amounts Internal External pension plans pension plans Provision for staff severance pay a) Unfunded plans 63, ,588 b) Funded plans 120, ,018 - Total 184, , , Items/Amounts Internal pension plans External pension plans Provision for staff severance pay a) Unfunded plans 69, ,251 b) Funded plans 126, ,724 - Total 195, , ,251 The table highlights the distinction made in defined benefit funds between funded and unfunded plans. Plans are funded when separate assets exist to cover liabilities Changes to plan assets during the year and other information Items/Amounts Defined-benefit company pension funds Defined-benefit company pension funds Internal pension plans External pension plans Internal pension plans External pension plans Opening balance 136, , , ,373 Increases 6,795 67,946 7,433 21,448 Expected return of plan-servicing assets 5,578 18,632 6,203 20,124 Actuarial gains 450-1,230 1,110 Positive exchange differences Group contributions to plan 767 6, Participants' contributions to plan Other decreases - 42, Decreases 13,867 49,440 13,978 35,206 Actuarial losses 1,168 14,024 1,031 0 Negative exchange differences Benefits paid 12,699 35,416 12,947 35,206 Effect of any plan settlements Other decreases Closing balance 128, , , ,615 The table illustrates the total assets servicing funded defined benefit plans and movements during the year. These mainly consist of assets relating to the pension fund for employees of former Banca Agricola Mantovana S.p.A., the pension fund for employees of former Banca Toscana S.p.A., 232

233 Notes to the consolidated financial statements - Part B Consolidated balance sheet the pension fund for employees of former Banca Antonveneta and the company pension scheme for employees of Monte dei Paschi di Siena (defined benefit plan), which on the whole are surplus in relation to obligations at year-end a Fair value of plan assets: breakdown Items/Amounts Own financial instruments /Assets used by the Group Overall Own financial instruments /Assets used by the Group Overall Own financial instruments /Assets used by the Group Overall Own financial instruments /Assets used by the Group Overall Equity instruments , ,509 of which: own instruments - - 1, ,324 - Debt instruments - 38, ,509-39, ,716 of which: own instruments , ,198 - Property , ,741 of which: immovables used by the Group Insurance management accounts of which: own instruments Other assets - 90, ,813-96,522-89,925 of which: other assets used by the Group 90, ,522-6,154 - Total - 128, , , ,615 of which: own instruments/assets used by the Group Internal pension plans External pension plans Internal pension plans External pension plans 90,719-16,747-96,522-23,676 - This table provides a detailed illustration of plan assets at year-end, and thus of the assets of the funds indicated in Table , by major asset classes (financial and non-financial). Other assets mainly consist of investments in mutual funds and open-end collective investment schemes (Sicavs). 233

234 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Reconciliation of present value of staff pension and severance pay provisions to present value of plan assets and to assets and liabilities recognised in the balance sheet Total 31/12/2011 Items/Amounts Defined-benefit pension and other post retirement plans Internal External pension plans pension plans Provision for staff severance pay Present value of defined-benefit obligations (+) 184, , ,588 Fair value of plan assets (-) (128,950) (462,121) - Fund status 55,686-8, ,588 Unrecognised cumulative actuarial gains/losses (+/-) - - (68,683) Unrecognised past service cost (-) Effect of asset ceiling 7,960 8,103 - Fair value of assets refundable by third parties (-) Assets recognised in the Balance Sheet 192, ,905 Liabilities recognised in the Balance Sheet 128, This table enables a reconciliation between the present value of the funds, as per the independent actuary s estimate, and the present value of liabilities recognised in the financial statements. As a result of the application of the corridor method, actuarial gains and losses are posted to the balance sheet only when they exceed the higher of 10% of the present value of the defined benefit obligation and 10% of the fair value of any assets servicing the plan. For internal plans in particular, the line Fair value of plan assets shows assets relating to the pension fund for employees of former Banca Agricola Mantovana S.p.A. and the fund for employees of former Banca Toscana S.p.A.. Total 31/12/2010 Items/Amounts Defined-benefit pension and other post retirement plans Internal External pension plans pension plans Provision for staff severance pay Present value of defined-benefit obligations (+) 195, , ,251 Fair value of plan assets (-) (136,022) (443,615) - Fund status 59,283 (14,891) 347,251 Unrecognised cumulative actuarial gains/losses (+/-) - - (59,775) Unrecognised past service cost (-) Effect of asset ceiling 9,915 14,891 - Fair value of assets refundable by third parties (-) Assets recognised in the Balance Sheet 205, ,476 Liabilities recognised in the Balance Sheet 136,

235 Main actuarial assumptions used Notes to the consolidated financial statements - Part B Consolidated balance sheet Total 31/12/2011 Total 31/12/2010 Defined-benefit pension Defined-benefit pension Provision Provision Main actuarial assumptions and other post and other post for staff for staff / Discount rates retirement plans retirement plans severance severance Internal External Internal External pay pay pension pension pension pension Discount rates plans 4.20% plans 4.20% 2,31-2,63% plans 4,40-4,50% plans 4.40% 2,31-3,83% Expected return on plan-servicing assets 4.20% 4.20% x 4.40% 4.40% x Expected remuneration increase rate 1.50% 2.60% 1,80-2,00% 2.60% Provisions for risks and charges - Other provisions Items/Amounts Provisions to the fund for legal disputes primarily includes appropriations to cover the cost of actions filed against the Bank. Provisions for charges arising from contractual obligations consist in appropriations for charges deriving from contracts and agreements associated with the disposal of investments and/or business segments, completed in previous years. Total Total controversie legali 329, , oneri per il personale 28,595 35, altri 697, ,706 - revocatorie 241, ,126 - oneri derivanti da impegni contrattuali 70,135 1,753 - reclami clientela 46,662 26,680 - altri 339, ,147 Totale 1,055, ,

236 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 13 Insurance reserves Item 130 The tables in this section have not been completed as no data is present for the current or the previous year. Section 14 Redeemable shares Item 150 The tables in this section were not completed as no data is present for the current year or for the previous year. 236

237 Notes to the consolidated financial statements - Part B Consolidated balance sheet Section 15 Group shareholders equity Items 140,160,170,180,190,200 and Share capital and Treasury shares : breakdown 15.1.a Share capital : breakdown Items/Amounts Implied par value share Par value of fully paid shares Par value per share Par value of fully paid shares Ordinary shares ,262,748, ,731,411,812 Preferred shares ,859, ,359,237 Savings shares ,639, ,639,108 Total share capital 6,732,246,665 4,502,410,157 a) On 6 June 2011, the Bank's Extraordinary Shareholders' Meeting resolved that indication of the par value of the three classes of shares be eliminated; accordingly, as at , the so-called non-expressed par value" is indicated, which is obtained by dividing the total share capital amount by the number of shares in the same category, outstanding at the reference date. Ordinary and preferred shares are registered and indivisible. Each share entitles to one vote. Preferred shares do not allow holders to vote at ordinary meetings. Savings shares are indivisible and may be registered or bearer shares, according to the shareholder s preference. Savings shares have no voting rights, and are preferred shares in relation to profit distribution and capital repayment. Information on the number of fully paid-up shares can be found in the notes to Table 15.2, Share capital number of shares: annual changes" b Treasury shares: breakdown Items/Amounts Implied par value share Book Balance Par Value Book Balance Ordinary shares 30,947,662 (26,460,508) 14,623,514 (24,612,663) Preferred shares Savings shares Total share capital 30,947,662 (26,460,508) 14,623,514 (24,612,663) Under international accounting standards, any repurchase of treasury shares is treated as capital repayment. For this reason, the consideration recognised for share repurchase is ideally deducted directly from equity. 237

238 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 15.2 Share capital - Parent Company's number of shares: annual changes Item/Type Ordinary Preferred Savings Ordinary Preferred Savings A. Shares outstanding as at the beginning of the year 5,569,271,362 1,131,879,458 18,864,340 5,569,271,362 1,131,879,458 18,864,340 - fully paid 5,569,271,362 1,131,879,458 18,864,340 5,569,271,362 1,131,879,458 18,864,340 - not fully paid A.1 Treasury shares (-) 21,911, ,131, A.2 Shares outstanding: opening balance 5,547,359,888 1,131,879,458 18,864,340 5,545,140,098 1,131,879,458 18,864,340 B. Increases 5,448,397, ,015, B.1 New issues 4,961,524, against payment: 4,961,524, business combinations bonds converted 136,698, warrants exercised other 4,824,826, without payment: to employees to directors other B.2 Sale of treasury shares 36,873, ,015, B.3 Other increases 450,000, C. Decreases 69,194, ,000,000-30,796, C.1 Cancellation C.2 Purchase of treasury shares 69,194, ,796, C.3 Business transferred C.4 Other decreases - 450,000, D. Shares outstanding: closing balance 10,926,563, ,879,458 18,864,340 5,547,359,888 1,131,879,458 18,864,340 D.1 Treasury shares (+) 54,232, ,911, D.2 Shares outstanding as at the end of the year 10,980,795, ,879,458 18,864,340 5,569,271,362 1,131,879,458 18,864,340 - fully paid 10,980,795, ,879,458 18,864,340 5,569,271,362 1,131,879,458 18,864,340 - not fully paid The Parent Bank s share capital consists of 10,980,795,908 ordinary shares, 681,879,458 preferred shares and 18,864,340 savings shares. Under "Preferred", line C.4 Other decreases reports the decrease due to the sale of 450,000,000 preferred shares by the MPS Foundation, which entailed their automatic conversion into ordinary shares. The corresponding increase of ordinary shares is posted to the column "Ordinary, line B.3 Other increases. The same column also reports: in line B.1 New issues against payment - other, the number of ordinary shares issued through the capital increase completed in the third quarter of 2011; in line B.1 New issues against payment - bonds converted, the number of ordinary shares issued as at the end of December 2011 upon conversion of Convertible Preferred Securities(F.R.E.S.H) into shares for a nominal amount of EUR 289,8 mln at a unit conversion price of EUR

239 15.3 Share capital - other information Notes to the consolidated financial statements - Part B Consolidated balance sheet Of the 295,236,070 ordinary shares representing a total nominal value of 197,808,166.90, a restriction exists on the payout of dividends since the Parent Bank has acquired usufruct in these shares. 15.3a Equity instruments: breakdown and annual changes Equity Equity component of Other equity component of Other equity convertible instruments convertible instruments bonds bonds A. Opening balance 49,365 1,900,000 49,365 1,900,000 B. Increases B.1 New issues B.2 Sales B.3 Other increases C. Decreases 46, C.1 Redemptions C.2 Repurchases 15, C.3 Other decreases 30, D. Closing balance 3,002 1,900,000 49,365 1,900,000 The Item Equity instruments includes, in the Equity component of convertible bonds column, the equity component of bonds issued and convertible into treasury shares. This mainly concerns the value determined upon issue of the Convertible Preferred Securities in relation to the embedded option which, according to IAS 32, must be separated from the bond instrument since it is considered as an equity instrument. The EUR 16.0 mln decrease recognised under item C.2 Repurchases is accounted for by the repurchase of the afore-mentioned Preferred Securities for a nominal amount of EUR mln in the course of 2011, while the EUR 30.4 mln decrease posted to item C.3 Other decreases is attributable to the conversion of these instruments into shares for a nominal amount of EUR mln in December The column "Other equity instruments" includes EUR 1,900 mln worth of Tremonti bonds issued in These instruments are aimed at improving the Bank's supervisory capital and sustaining economic growth with a special focus on small-medium sized companies Retained earnings: other information See Section F, Information on consolidated equity of these notes to the financial statements Other information See Section F, Information on consolidated equity of these notes to the financial statements. 239

240 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Section 16 Non-controlling interests - Item Non-controlling interests: breakdown Items/Amounts With respect to 2010, non-controlling interests were down by EUR 52.4 mln primarily on account of the non-controlling interests' portion of write-downs in the AFS Reserve. Total Total ) Share capital 50,274 50,804 2) Share premium reserve 13,406 13,406 3) Reserves 69,636 76,023 4) (Treasury shares) - - 5) Valuation reserves 87, ,910 6) Equity instruments - - 7) Profit (loss) for the year - Non-controlling interests (3,465) 1,485 Total 217, ,

241 Other information Notes to the consolidated financial statements - Part B Consolidated balance sheet 1 Guarantees and commitments Transactions Amount Amount ) Financial guarantees given to 3,920,759 4,366,265 a) Banks 589, ,440 b) Customers 3,330,965 3,558,825 2) Commercial guarantees given to 5,777,022 6,081,830 a) Banks 312, ,814 b) Customers 5,464,059 5,782,016 3) Irrevocable commitments to disburse funds 8,295,093 8,954,129 4) a) Banks 433, ,750 i) usage certain 428, ,666 ii) usage uncertain 4,869 27,084 b) Customers 7,862,056 8,701,379 i) usage certain 3,047,092 2,330,592 ii) usage uncertain 4,814,964 6,370,787 Underlying commitments on credit derivatives: sales of protection 39,902,955 28,344,509 5) Assets pledged as collateral for third-party commitments 6, ,615 6) Other commitments 1,498,217 1,606,544 Total 59,400,411 49,506,892 2 Assets pledged as collateral for liabilities and commitments Portfolios Financial assets held for trading 6,947,446 6,834, Financial assets designated at fair value Financial assets available for sale 20,015,336 17,921, Financial assets held to maturity Loans to banks 9,684,953 1,049, Loans to customers 29,665,405 15,601, Property, plant and equipment - - The table shows assets pledged as collateral for own liabilities, primarily consisting in repo transactions. The amount reported in Line "6. Loans to customers" includes EUR ,6 mln in loans sold to the vehicle, MPS Covered Bond S.r.l., as part of the programme for the issuance of covered bonds. *** For the purpose of complying with Bank of Italy's disclosure requirements set out in its letters of 16/02/2011 and 15/02/2012, the following table reports on- and off-balance sheet assets, which the Bank has pledged, on various grounds, as a guarantee for funding transactions. The application of IAS 39 requirements for the recognition and derecognition of financial assets is based more on the substantial transfer of risks and rewards than on the transfer of legal ownership; consequently, the financial assets consisting in securities acquired by the Bank - in ways that do not substantially transfer the risks and rewards of the assets to the Bank- are recognised indirectly in the financial statements (as receivables for example: reverse repurchase agreements) or not recognised at all as assets in the balance sheet (for example: securities borrowing). 241

242 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet Securities Non-securities Total Total amount of recognised on-balance-sheet financial assets (items 20, 40, 50, 60, 70 of the Assets) (A) 36,877, ,443, ,321,436 Certificated financial assets not directly recognised in the balance sheet Securities purchased through reverse repurchase agreements against payables to the counterparty posted in the balance sheet 11,268,826 (11,268,826) - Securities from own securitisations with underlying receivables not derecognised 21,613,850 (21,613,850) - Total certificated financial assets not directly recognised in the balance sheet (B) 32,882,676 (32,882,676) - Certificated financial assets not directly or indirectly recognised in the balance sheet: securities borrowing without collateral or with collateral represented by other securities: from banks 6,216,730 6,216,730 from financial intermediaries 7,346 7,346 from insurance companies - from retail customers 3,378,836 3,378,836 from other entities 28,461 28,461 securities received as collateral 354, ,276 repurchased own State-guaranteed bonds 10,000,000 10,000,000 Total certificated financial assets not directly or indirectly recognised in the balance sheet ( C ) 19,985,649-19,985,649 Total amount of recognised and non-recognised available financial assets (D=A+B+C) 89,746, ,560, ,307,085 of which committed on/as: Repurchase agreements 30,615,522 30,615,522 Collateral pooling in the Eurosystem 34,823,672 4,575,621 39,399,293 Collateral pooling on the Collateralised Interbank Market 66,884 66,884 Securities lending: - to banks 76,657 76,657 to financial intermediaries 7,520 7,520 to insurance companies - to other entities - Uncovered short positions (Item 40 Liabilities) 1,812,364 1,812,364 as collateral for bank covered bonds 15,178,624 15,178,624 Securities, receivables and cash pledged as collateral 3,234,730 17,313,131 20,547,861 Other commitments 407, ,612 Total commitments (E) 71,044,961 37,067, ,112,337 Total amount of recognised and non-recognised uncommitted financial assets (F=D - E) 18,701,244 99,493, ,194,748 The amount of EUR ,2 mln in unpledged on-balance-sheet financial assets consisting in securities includes both collateralisable and noncollateralisable securities. This item is therefore not indicative of the Group's counterbalancing capacity, for details on which please see the Consolidated Report on Operations. 242

243 3 Operating leases 3.1 Future minimum operating lease payables Notes to the consolidated financial statements - Part B Consolidated balance sheet Items/Amounts Up to 1 year 101,943 From 1 to 5 years 405,894 Over 5 years 1,672,275 Future minimum lease payments due 2,180,112 Non-cancellable future minimum lease payments receivable 29,378 4 Investments in unit-linked and index-linked policies: breakdown No data to report for the current or the previous year. 243

244 Notes to the Consolidated Financial Statements Part B Information on the consolidated balance sheet 5 Asset management and trading on behalf of third parties 1. Trading of financial instruments on behalf of third parties Amounts a) Purchases 24,249, Settled 24,090, Unsettled 159,113 b) Sales 24,230, Settled 24,071, Unsettled 159, Asset management accounts a) individual 4,555,724 b) collective 1,636, Custody and administration of securities a) third party securities on deposit associated with custodian bank transactions (excluding asset management) 1, Securities issued by companies included in consolidation - 2. Other securities 1,936 b) Other third party securities on deposit (excluding asset management) 107,659, Securities issued by companies included in consolidation 35,963, Other securities 71,695,799 c) third party securities deposited with third parties 101,324,524 d) own securities deposited with third parties 81,257, Other transactions 4.1 Credit collection on behalf of third parties: debit and credit adjustments a) Debit adjustments 16,294, current accounts 51, banking book 14,214, cash 15, other accounts 2,013,196 b) Credit adjustments 16,355, current accounts 204, transfer of bills and notes 16,151, Other transactions Type of services a) Third party portfolios for collection 2,629,877 b) Other 7,885,

245 Notes to the consolidated financial statements - Part C Information on the consolidated income statement Section 1 - Interest income/expense and similar revenues/charges items 10 e Section 2 - Fee and commission income/expense Items 40 e Section 3 - Dividends and similar income Item Section 4 - Net trading income (loss) Item Section 5 - Net hedging income (loss) Item Section 6 - Gains (losses) on disposals/repurchases - Item Section 7 - Net gains (losses) on financial assets and liabilities designated at fair value Item Section 8 - Net impairment losses/reversals Item Section 9 - Net premiums Item Section 10 - Other net insurance income/expense Item Section 11- Administrative expenses Item Section 12 - Net provisions for risks and charges Item Section 13 - Net impairment losses/reversals on property, plant and equipment Item Section 14 - Net adjustments/recoveries on intangible assets Item Section 15 - Other operating expenses (income) Item Section 16 - Gains (losses) on investments Item Section 17 - Net gains (losses) on tangible and intangible assets measured at fair value Item Section 18 - Impairment of goodwill Item Section 19 - Gains (losses) on disposal of investments Item Section 20 - Tax expense (recovery) on income from continuing operations Item Section 21 - Profit(loss) after tax from assets held for sale and discontinued operations Item Section 22 - Profit (loss) for the year: non-controlling interests Item Section 23 Other Section 24 - Earnings per Share (EPS)

246 Notes to the consolidated financial statements - Part C Consolidated income statement Section 1 Interest income/expense and similar revenues/charges items 10 and Interest income and similar revenues: breakdown Item/Type Debt securities Loans Other transactions Total Total Financial assets held for trading 196, , , , , Financial assets designate at fair value , Financial assets available for sale 785, , , Financial assets held to maturity Loans to banks 76, ,185 2, , , Loans to customers 108,335 5,636,980 20,327 5,765,642 5,034, Hedging derivatives x x Other assets x x 18,520 18,520 13,271 Total 1,166,568 5,891, ,941 7,343,020 6,466,633 As further explained in the notes to the income statement, the 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender. Recalculation entailed a reduction in Line "1. Financial assets held for trading" as at 31 December 2010 by EUR 5.0 mln with respect to data reported in the annual accounts for the same year. Line 1. Financial assets held for trading, in the Other transactions column, includes the positive net total of spreads relating to derivatives connected with financial liabilities designated at fair value (fair value option), for an amount of EUR mln. Lines 5 and 6, Loans to banks and Loans to customers, in the Debt securities column, include interest income on treasury securities not listed in active markets and classified in these portfolios. Line 7. Hedging derivatives, Other transactions column: the amount indicated is zero because the difference between positive and negative spreads concerning derivatives classified as hedging derivatives according to hedge accounting rules is negative. Therefore, this difference was accounted for in Table 1.4, Interest expense and similar charges: breakdown, with details given in Table 1.5, Interest expense and similar charges: spreads on hedging transactions in this section. Line 8. Other assets, in the Other transactions column, shows interest accrued on tax credits and other residual assets. Interest other than that recognised in item 130 Net impairment losses/reversals and accrued during the year for positions that are classified as non performing totalled mln. This interest is calculated for financial assets measured at amortised cost according to the effective interest rate method and is entered in different columns based on the original 'technical form'. Interest on arrears accrued during the year contributes to net interest income only for the portion actually recovered. The portion of interest on arrears not recovered is written down and deducted directly from interest accrued. Any amounts recovered in subsequent years are treated as a write-back on receivables and recognised in Item 130 of the profit and loss statement, Net impairment losses/reversals on loans. 246

247 Notes to the consolidated financial statements - Part C Consolidated income statement 1.1.a Interest income and similar revenues: spreads on hedging derivatives under the fair value option Items Total Total Spreads 243, , Interest income and similar revenues: spreads on hedging transactions Information on spreads relating to hedging transactions is provided in Table Interest income and similar revenues: other information Interest income from financial assets denominated in foreign currency Items/Amounts Total Total Interest income from financial assets denominated in foreign currency 60,837 80, Interest income from finance leases Items/Amounts Total Total Interest income from financial leasing 174, ,

248 Notes to the consolidated financial statements - Part C Consolidated income statement 1.4 Interest expense and similar charges: breakdown Item/Type Deposits Securities Other transactions Total Total Deposits from central banks (153,127) x - (153,127) (90,256) 2. Deposits from banks (281,366) x (7,746) (289,112) (225,843) 3. Deposits from customers (978,400) x (5) (978,405) (390,380) 4. Debt securities issued x (1,434,412) (256) (1,434,668) (1,175,537) 5. Financial liabilities held for trading (148,882) - (3,143) (152,025) (82,479) 6. Financial liabilities designated at fair value - (610,679) - (610,679) (683,909) 7. Other liabilities x x (37,415) (37,415) (10,369) 8. Hedging derivatives x x (271,148) (271,148) (270,973) Total (1,561,775) (2,045,091) (319,713) (3,926,579) (2,929,746) As further explained in the notes to the income statement, the 2010 comparative data was re-calculated to take account of Bank of Italy's guidance on the recognition of securities lending transactions backed by collaterals other than cash, fully owned by the lender. Recalculation entailed a reduction in Line "5. Financial liabilities held for trading" as at 31 December 2010 by EUR 5.0 mln with respect to data reported in the annual accounts for the same year. Lines 2, Deposits from banks and 3, Deposits from customers, in the Deposits column, also include: interest on payables under repurchase agreements on: treasury securities; securities obtained through reverse repo transactions or securities lending; and securities from self-securitisations not recognised in the balance-sheet; the expense relating to liabilities arising from the assignment of tax credits not derecognised in accordance with IAS 39 on derecognition of financial assets; Line 4, Securities in issue, indicates the interest expense accrued during the year on bonds and certificates of deposit valued at amortised cost. Line 6. Financial liabilities designated at fair value, includes interest expense accrued on structured fixed-rate bonds issued and systematically hedged by derivative contracts under the fair value option. Line 7. Other liabilities includes interest, amounting to EUR 29.7 mln, paid in 2011 by the Parent Company and MPS Capital Services Banca per le Imprese following the settlement of all claims raised by the Italian Revenue Agency (see part E of the Notes to the Financial Statements) against certain transactions completed between 2002 and 2008 under alleged abuse of law in disregard of consequent tax implications. In particular, claims being settled concern certain repurchase agreements in foreign securities and trading of securities in a period straddling dividend payout dates. 1.4.a Interest expense and similar charges: spreads on hedging derivatives under the fair value option Information on spreads on hedging derivatives used under the fair value option is provided in table 1.1.a. 248

249 Notes to the consolidated financial statements - Part C Consolidated income statement 1.5 Interest expense and similar charges: spreads on hedging transactions Items Total Total A. Positive spreads on hedging transactions 1,058, ,079 B. Negative spreads on hedging transactions (1,329,380) (1,095,052) C. Balance (A+B) (271,147) (270,973) Total net spreads as at the end of 2011 were -EUR mln, compared with EUR mln as at the end of In line with its hedging objectives and consequent minimisation of risks in the banking book, the Group carries out both fair value and cash flow hedging transactions. 1.6 Interest expense and similar charges: other information Interest expense on liabilities denominated in foreign currency Item/Amount Total Total Interest expense on financial liabilities denominated in foreign currency (78,379) (105,414) Interest expense on liabilities from finance leases No values are shown in this table as no data is to be reported for either the current or the previous year. 249

250 Notes to the consolidated financial statements - Part C Consolidated income statement Section 2 Fee and commission income/expense Items 40 and Fee and commission income: breakdown Type of service / Amount Total Total a) guarantees issued 82,347 77,287 b) credit derivatives - - c) management, brokerage and advisory services: 749, , trading of financial instruments 13,714 10, currency trading 46,431 44, asset management 49,609 54, individual accounts 49,609 54, collective investment schemes custody and administration of securities 11,643 12, custodian bank 1,737 1, placement of securities 46, , client instructions 63,470 56, advisory on 19,590 11, investments 2,145 1, financial structure 17,445 10, distribution of third-party services 496, , asset management individual accounts collective investment schemes insurance products 200, , other products 295, ,709 d) collection and payment services 172, ,007 e) servicing of securitisations 1,053 6,239 f) factoring transaction services 22,072 19,428 g) tax collection services - - h) management of multilateral trade systems - - i) current account keeping 710, ,831 j) other services 378, ,407 Total 2,116,795 2,174,911 Line i), current-account keeping, contains the 'fee on the credit line amount granted' introduced pursuant to Article 2 bis of Legislative Decree no. 185 of transposed, as amended, into law no. 2 of

251 2.2 Fee and commission expense: breakdown Notes to the consolidated financial statements - Part C Consolidated income statement Type of service / Amount Total Total a) guarantees received (3,407) (734) b) credit derivatives - - c) management, brokerage and advisory services: (123,480) (80,896) 1. trading of financial instruments (22,760) (19,528) 2. currency trading (258) (324) 3. asset management: (1,363) (1,689) 3.1 own portfolio - (2) 3.2 third-party portfolios (1,363) (1,687) 4. custody and administration of securities (16,773) (9,646) 5. placement of financial instruments (31,955) (2,252) 6. off-site marketing of financial instruments, products and services (50,371) (47,457) d) collection and payment services (18,475) (22,269) e) other services (170,387) (138,066) Total (315,749) (241,965) 251

252 Notes to the consolidated financial statements - Part C Consolidated income statement Section 3 Dividends and similar income Item Dividends and similar income: breakdown Item/Income Dividends Income from units Total Dividends Income from units Total in UCITS in UCITS A. Financial assets held for trading 84, , , ,142 B. Financial assets available for sale 16,285 5,706 21,991 20, ,912 C. Financial assets designated at fair value D. Investments - x - - x - Total 101,208 5, , ,974 1, ,054 The table shows the amount of dividends received on: shares traded within the trading book; non-controlling interests classified in the availablefor-sale asset portfolio and revenues from UCITS. Conversely, dividends relating to the Group s subsidiaries and associates, consolidated line-by-line or under the equity method, are excluded. 252

253 Section 4 Net profit (loss) from trading Item Net protit (loss) from trading: breakdown Notes to the consolidated financial statements - Part C Consolidated income statement Transactions / P&L items Capital Gains (A) Trading Profit (B) Capital Losses ( C) Trading Losses (D) Net Profit (Loss) Net Profit (Loss) (A + B)-(C + D) (A + B)-(C + D) Financial assets held for trading 105, ,465 (299,648) (460,028) (426,538) (581,396) 1.1 Debt securities 80, ,036 (225,687) (240,048) (218,615) (54,755) 1.2 Equity instruments 11,249 47,926 (43,540) (194,401) (178,766) (547,581) 1.3 Units of UCITS 10,907 3,309 (29,923) (8,903) (24,610) 16, Loans 3,433 - (498) (7,650) (4,715) 3, Other - 9,194 - (9,026) Financial liabilities held for trading 112,278 83,534 (9,498) (19,028) 167,286 (53,473) 2.1 Debt securities 112,248 80,753 (9,451) (18,792) 164,758 29, Deposits Other 30 2,781 (47) (236) 2,528 (83,198) 3. Other financial assets and liabilities: exchange differences x x x x 28,006 23, Derivatives 6,441,039 12,906,434 (5,975,594) (13,202,925) 122, , Financial derivatives: 4,569,712 11,805,195 (4,178,640) (12,134,252) 15, ,974 - on debt securities and interest rates 4,355,604 10,232,092 (4,049,108) (10,632,515) (93,927) (82,094) - on equity instruments and stock indices 194,552 1,252,930 (110,497) (1,200,987) 135, ,261 - on currency and gold x x x x (46,362) (20,900) - other 19, ,173 (19,035) (300,750) 19,944 3, Credit derivatives 1,871,327 1,101,239 (1,796,954) (1,068,673) 106,939 14,218 Total 6,658,990 13,217,433 (6,284,740) (13,681,981) (108,654) (322,117) The table shows the profit and loss attributable to the portfolio of financial assets and liabilities held for trading, except for derivative contracts hedging financial instruments under the fair value option, whose valuation results are indicated in Part C, Section 7, Net gains / losses on financial assets and liabilities designated at fair value Item 110 in these notes to the financial statements. In line 3. Other financial assets and liabilities: foreign exchange differences, the positive or negative balance of any changes in value of financial assets and liabilities denominated in currencies other than the trading currencies has been indicated in accordance with standard practice. For trading instruments, the effect resulting from any changes due to foreign exchange is not reported separately. 253

254 Notes to the consolidated financial statements - Part C Consolidated income statement Section 5 Net profit (loss) from hedging Item Net profit (loss) from hedging: breakdown P&L items/values Total Total A. Gains on: A.1 Fair value hedging instruments 479, ,117 A.2 Hedged financial assets (fair value) 2,761, ,206 A.3 Hedged financial liabilities (fair value) 607 3,786 A.4 Cash-flow hedging derivatives - - A.5 Assets and liabilities denominated in foreign currency - - Total hedging gains (A) 3,241, ,109 B. Losses on: B.1 Fair value hedging instruments (2,891,962) (812,934) B.2 Hedged financial assets (fair value) (27,252) (66,508) B.3 Hedged financial liabilities (fair value) (353,851) (24,017) B.4 Cash-flow hedging derivatives - (258) B.5 Assets and liabilities denominated in foreign currency - - Total hedging losses (B) (3,273,065) (903,717) C. Total hedging income (loss) (A - B) (32,004) (608) The table shows Net hedging income (loss). It therefore includes the realised income components posted to the profit and loss statement resulting from the valuation of both assets and liabilities subject to hedging, and the relative hedging derivative contracts, including any foreign exchange differences. During the year, other hedging transactions were carried out against adverse changes in interest rate risk, exchange risk and credit risk, mainly for bonds classified in the available-for-sale asset portfolio and debt securities issued by the Group and posted to Item 30 of the Liabilities, Securities in issue. For information on hedging derivatives, (whose gains and losses are indicated in lines A.1 and B.1 of this table), see Section 8, Hedging derivatives Item 80 of the Assets and Section 6, Hedging derivatives item 60 of the Liabilities in Part B of the notes to the financial statements. More information on hedged assets and liabilities can be found in the tables in Part B of the notes for each section of the accounts to which hedges are posted. Prospective and retrospective tests performed in 2011 in accordance with IAS 39 confirmed the effectiveness of hedging relationships, with the exception of certain hedges of bonds issued by the Parent Company and partially repurchased by other Group companies. These hedges were partly discontinued with a consequent negative impact of EUR 31.4 mln on the income statement. 254

255 Section 6 - Gains (losses) on disposal/repurchase - Item Gains (losses) on disposal/ repurchase: breakdown Notes to the consolidated financial statements - Part C Consolidated income statement Total 31/12/2011 Total 31/12/2010 Items / P&L items Gains Losses Net Profit (Loss) Gains Losses Net Profit (Loss) 1. Financial assets 1. Loans to banks 23,995 (3,976) 20,019 11,149 (7,978) 3, Loans to customers 19,978 (28,406) (8,428) 23,137 (45,926) (22,789) 3. Financial assets available for sale 109,404 (37,826) 71,578 88,986 (25,861) 63, Debt securities issued 35,473 (19,965) 15,508 27,677 (4,959) 22, Equity instruments 66,065 (5,937) 60,128 47,939 (6,580) 41, Units of UCITS 7,866 (11,924) (4,058) 13,370 (14,322) (952) 3.4 Loans Financial assets held to maturity 1. Financial liabilities Total assets 153,377 (70,208) 83, ,272 (79,765) 43, Deposits from banks Deposits from customers Debt securities issued 79,515 (13,213) 66,302 4,672 (25,009) (20,337) Total liabilities 79,515 (13,213) 66,302 4,672 (25,009) (20,337) The table shows the net profit/loss arising on the disposal of financial assets other than those held for trading and those designated at fair value, and the net profit/loss arising on the repurchase of own financial liabilities. With regard to financial liabilities, the repurchase of own liabilities is treated as advance repayment with derecognition of the financial instrument and subsequent realisation of gains or losses on repurchase. Gains amounting to EUR 79.5 mln posted to line "3. Securities in issue" under Financial liabilities, include EUR 75.9 mln arising from derecognition of nominal EUR mln in F.R.E.S.H. notes issued in December 2003 by the subsidiary MPS Capital Trust LLC II. Derecognition of these securities was to an extent proportional to the subscription for the public tender offer launched by Mediobanca on behalf of the issuer. 255

256 Notes to the consolidated financial statements - Part C Consolidated income statement Section 7 Net profit (loss) from financial assets and liabilities designated at fair value Item Net changes in financial assets and liabilities designated at fair value: breakdown Transactions / P&L items Capital Gains (A) Gains following disposal (B) Capital Losses (C ) Losses Net Profit (Loss) Net Profit (Loss) following (A+B) - (C+D) (A+B) - (C+D) disposal (D) Financial assets Debt securities issued Equity instruments Units of UCITS Loans Financial liabilities 113,552 37,048 (177,073) (10,852) (37,325) (115,987) 2.1 Debt securities issued 113,552 37,048 (177,073) (10,852) (37,325) (115,987) 2.2. Deposits from banks Deposits from customers Financial assets and liabilities x x x x - 4. Credit and financial derivatives 180, ,021 (116,150) (173,435) 40,772 85,607 Total 293, ,069 (293,223) (184,287) 3,447 (30,380) This item includes capital gains and losses originating from the fair-value measurement of financial liabilities classified in the fair value option portfolio and related hedging derivative contracts. As for financial assets, no value changes are posted to profit and loss because the portfolio on the assets side, totalling EUR 38.2 mln, refers exclusively to pension plan assets. With reference to the amount of EUR mln in capital gains recognised under financial liabilities in column A, line 2.1, Debt securities, Group banks -by applying the interpretation published by the Italian accounting standards board (OIC) in 'Operating Guidance no. 4 for the accounting treatment of rules on the distribution of profits and reserves pursuant to Legislative Decree no. 38 of 28 February 2005, endorsed by the Supervisory Authority- arranged, when distributing profits, to set the amount of capital gains on individual securities aside, after tax, in a nondistributable reserve pursuant to Article 6 of Legislative Decree no. 38 of 28 February a Net profit (loss) from financial assets designated at fair value - depreciation or trading losses due to deterioration of debtor creditworthiness The portfolio posted to balance sheet assets for an amount of EUR 38.2 mln is exclusively attributable to pension plan assets. 256

257 Capita Gains Capital Losses Notes to the consolidated financial statements - Part C Consolidated income statement 7.1.b Net profit (loss) from financial assets and liabilities designated at fair value under the fair value option Type/Item Gains following disposal Losses following disposal Net Profit (Loss) Assets Natural hedges through derivatives Natural hedges through other financial instruments Other types of accounting mismatches Financial asset portfolios managed internally on a fair value basis Structured financial instruments Liabilities 113,552 37,048 (177,073) (10,852) (37,325) (115,987) Natural hedges through derivatives 113,552 37,048 (177,073) (10,852) (37,325) (115,987) Natural hedges through other financial instruments Other types of accounting mismatches Financial asset portfolios managed internally Structured financial instruments Financial derivatives 180, ,021 (116,150) (173,435) 40,772 85,607 Natural hedges 180, ,021 (116,150) (173,435) 40,772 85,607 Other types of accounting mismatches Financial asset portfolios managed internally Credit derivatives Natural hedges Other types of accounting mismatches Financial asset portfolios managed internally Total 293, ,069 (293,223) (184,287) 3,447 (30,380) 7.1.c Changes in fair value of financial liabilities (FVO) arising from changes in own creditworthiness In the year Cumulative Type/Item Capital Losses Capital Gains Net Profit (Loss) Capital Losses Capital Gains Net Profit (Loss) Changes in fair value of fair valued financial liabilities due to changes in own credit risk - 20,769 20,769-29,883 29,883 Changes in the fair value of liabilities issued due to changes in own creditworthiness are 'immunised' for the purpose of regulatory capital quantification. 257

258 Notes to the consolidated financial statements - Part C Consolidated income statement Section 8 Net impairment losses/reversals Item Net impairment losses/reversals on loans: breakdown Value adjustments Write-back Transactions / P&L items Write-off Specific Others Portfolio Specific Portfolio Total Total A. Loans to banks (207) (1,469) (4,215) 158 2,168-4,600 1,035 (9,078) - Loans (207) (1,062) (249) ,558 3,966 (4,423) - Debt securities - (407) (3,966) - 1, (2,931) (4,655) B. Loans to customers (49,674) (1,934,696) (60,751) 331, , ,994 (1,310,223) (1,116,431) - Loans (49,674) (1,917,313) (59,257) 331, , ,000 (1,292,340) (1,204,337) - Debt securities - (17,383) (1,494) (17,883) 87,906 C. Total (49,881) (1,936,165) (64,966) 331, , ,594 (1,309,188) (1,125,509) Key A = From interest B = Other reversals This item includes losses and reversals recognised for the impairment of financial instruments allocated to the portfolios of loans to customers and loans to banks. In particular, the Write-offs column shows losses recorded in relation to the derecognition of financial instruments, whereas the Other column includes specific write-downs on non performing loans subject to analytical valuation. Portfolio value adjustments were quantified with reference to 'performing' financial instruments. Impairment losses in Line B. Loans to customers Debt securities are accounted for by the loss provision taken in connection with one type of Greek government bonds for an amount of EUR 17.2 mln. Column A (specific reversals) incorporates the reversals represented by interest released on non performing positions valued at amortised cost and interest on arrears recovered and written down in the year in which it was accrued. For further information on loans to banks and customers, see Section 1, Credit risk, in Part E of the notes to the financial statements. 8.2 Net impairment losses (reversals) on financial assets available for sale: breakdown Transactions / P&L items Value Adjustments Specific Write-offs Others Write-backs Specific A B Total Total A. Debt securities issued - (3,243) - - (3,243) (665) B. Equity instruments - (63,098) x x (63,098) (25,882) C. Units in UCITS - (55,378) x - (55,378) (3,934) D. Loans to banks E. Loans to customers F. Total - (121,719) - - (121,719) (30,481) Key A = From interest B = Other reversals 258

259 Write-offs Others Portfolio Notes to the consolidated financial statements - Part C Consolidated income statement 8.3 Net impairment losses (reversals) on financial assets held to maturity: breakdown No data to report for current and previous year. 8.4 Net impairment losses (reversals) on other financial transactions: breakdown Transactions / P&L items Value adjustments Specific Specific Write-backs Portfolio Total Total A B A B A. Guarantees issued - (15,987) (448) - 1,362-4,016 (11,057) (7,679) B. Credit derivatives C. Commitments to disburse funds - (1) (26) (1,556) D. Other transactions - (4,445) (4,445) (1,390) E. Total - (20,433) (474) - 1,526-4,718 (14,663) (10,625) This item shows impairment losses/reversals (against expected loss) on guarantees issued, if executed. 259

260 Notes to the consolidated financial statements - Part C Consolidated income statement Section 9 Net premiums Item 150 The tables in this section were not completed since the Group has no net premiums to report for either the current or previous year. Section 10 Other net insurance income/expense Item 160 The tables in this section were not completed since the Group has no insurance management activities to report for either the current or previous year. 260

261 Section 11 Administrative expenses Item Personnel expenses: breakdown Notes to the consolidated financial statements - Part C Consolidated income statement Type of Expense / Area Total Total Employees (2,210,474) (2,206,385) a) wages and salaries (1,508,161) (1,554,606) b) social-welfare charges (445,342) (406,862) c) severance pay (105,093) (106,011) d) social security expenses (1) (19) e) provision for staff severance pay (7,789) (6,895) f) pension fund and similar obligations: (2,483) (7,602) - defined contribution (822) (6,031) - defined benefit (1,661) (1,571) g) contributions to external pension funds: (44,806) (34,692) - defined contribution (38,617) (34,478) - defined benefit (6,189) (214) h) costs related to share-based payments - - i) other employee benefits (96,799) (89,698) 2. Other staff (2,163) (9,083) 3. Directors and Statutory Auditors (8,026) (9,029) 4. Retired personnel - (241) Total (2,220,663) (2,224,738) The line pension and similar obligations includes amounts set aside for internal funds, while the line contributions to external pension funds includes contributions paid and adjustments made to external pension funds. The line Other employee benefits includes employment termination benefits for an amount of EUR 26.3 mln. 261

262 Notes to the consolidated financial statements - Part C Consolidated income statement 11.2 Average number of employees by category Category / Average Number Employees: 31,542 31,868 a) executives b) middle managers 11,946 11,686 c) remaining staff 19,077 19,629 Other personnel 8 13 Total 31,550 31, Defined-benefit pension funds: total cost Items/Amounts Defined-benefit company pension funds Internal External pension pension plans plans Provision for staff severance pay Defined-benefit company pension funds Internal External pension pension plans plans Provision for staff severance pay Current service cost (+) (60) (2,864) (1,431) (214) (2,426) (1,320) Financial charges (+) (7,380) (18,211) (6,308) (7,490) (18,973) (5,552) Expected return on plan assets (-) 5,578 18,632-6,203 20,124 - Third party reimbursements (-) Actuarial gains and losses (±) 172 (10,534) (50) 921 5,355 (23) Social security cost in relation to past employment service (+) (289) - - (55) - - Effect of any plan curtailments (±) Effect of any plan settlements (±) Effect of recognition of assets (+) (936) - - Total (1,661) (12,977) (7,789) (1,571) 4,080 (6,895) 11.4 Other employee benefits No information to report pursuant to sections 131, 141 and 142 of IAS

263 11.5 Other administrative expenses: breakdown Notes to the consolidated financial statements - Part C Consolidated income statement Items/Amounts Stamp duties (186,012) (174,051) Indirect taxes and duties (51,395) (74,611) Municipal immovable property tax (3,879) (9,164) Subscription and purchase of publications (1,118) (1,670) Property rentals (267,006) (165,084) Cleaning service contracts (25,922) (22,540) Insurance (28,473) (59,050) Rentals (45,718) (46,911) Remuneration of external professionals (107,995) (137,922) Third-party data processing (63,342) (78,015) Title searches and land registry surveys (7,224) (10,716) Lease of equipment (52,580) (44,365) Utilities (47,060) (46,173) Maintenance of movable and immovable properties (used in the business ) (36,860) (48,660) Data transmission rental (39,552) (40,158) Postage (58,939) (58,337) Advertising (58,069) (66,105) Membership dues (7,777) (7,483) Reimbursement of employee car and travel expenses (18,993) (27,160) Security services (54,077) (38,640) Software (66,086) (93,399) Corporate entertainment expenses (8,202) (8,951) Expenses for non-rented investment real estate (1,688) (301) Printing and stationery (11,427) (12,684) Telephone, telefax and telegraph (14,354) (18,162) Transportation (51,589) (40,627) Sundry occupancy expenses and refunds for release of immovable property used in the business (8,764) (13,431) Other (74,125) (57,070) Total (1,398,226) (1,401,440) For 2011, Line Advertising, sponsorships and promotions" includes: i) advertising, events and printing (EUR 20.7 mln), ii) sponsorships and promotions (EUR 35,6 mln), iii) other communication expenses (EUR 1.8 mln). 263

264 Notes to the consolidated financial statements - Part C Consolidated income statement Section 12 Net provisions for risks and charges Item Net provisions for risks and charges: breakdown Items/Amounts Legal disputes Personnel costs Others Total Legal disputes Personnel costs Others Total Provisions for the year (71,937) (926) (190,041) (262,904) (56,832) (8,389) (28,475) (93,696) Write-backs 4,250 8,174 2,846 15,270 14,435-17,871 32,306 Total (67,687) 7,248 (187,195) (247,634) (42,397) (8,389) (10,604) (61,390) The item "Provisions for risks and charges" for the year is negative by EUR mln; of this, EUR 71.9 mln relates to legal disputes. Changes due to the time value of money are included in "Provisions for the year" and show the amount of time value accrued during the year due to the expected imminent maturity of the estimated liability. Write-backs include reversals from surplus provisions vs. charges actually incurred. 264

265 Notes to the consolidated financial statements - Part C Consolidated income statement Section 13 Net adjustments/write-backs on property, plant and equipment Item Net adjustments on property, plant and equipment: breakdown Assets / P&L items Amortization (a) Impairment losses (b) Write-backs (c ) Net Profit (loss) (a+b-c) Net Profit (loss) (a+b-c) Tangible assets A.1 Owned (71,559) (13,124) - (84,683) (101,586) - used in the business (67,142) (4,410) - (71,552) (97,802) - held for investment (4,417) (8,714) - (13,131) (3,784) A.2 Leased used in the business held for investment Total (71,559) (13,124) - (84,683) (101,586) Property and equipment with a finite life is tested for impairment. 265

266 Notes to the consolidated financial statements - Part C Consolidated income statement Section 14 Net adjustments to (recoveries on) intangible assets Item Net adjustments to (recoveries on) intangible assets: breakdown Assets / P&L items Amortization ( a) Impairment losses ( b) Write-backs ( c ) Net profit Net profit (loss) (loss) (a+b-c) (a +b-c) Intangible assets A.1 Owned (178,296) (342,549) - (520,845) (155,968) - generated internally by the company (33,067) (4,781) - (37,848) (26,817) - other (145,229) (337,768) - (482,997) (129,151) A.2 Leased Total (178,296) (342,549) - (520,845) (155,968) Amortisation mainly relates to software held by the MPS Group Operating Consortium and finite life intangible assets identified during the PPA process for Biverbanca and former Banca Antonveneta. An analysis of external and internal impairment indicators, worsening macroeconomic conditions and deterioration of all variables lying at the base of the assessment of intangibles associated with customer relationships, revealed the need for impairment losses to be recognised in the amount of EUR mln for core deposits and EUR 11.0 mln for assets under management / assets under custody, posted to Line "A.1 Owned - other" in the "Impairment losses" column. 266

267 Section 15 Other operating expenses (income) Item Other operating expenses: breakdown Notes to the consolidated financial statements - Part C Consolidated income statement Items/Amounts Total Total Contingent liabilities (60,789) (32,279) Cost of robberies (7,112) (9,648) Amortisation on improvements of third-party assets classified as Other (29,096) (29,121) Other Real estate management charges (43) - Cost of financial lease transactions (13,637) (12,586) Other (179,206) (103,580) Total (289,883) (187,214) Line "Other" comprises the amount of EUR 76.8 mln, included in the overall EUR settlement of claims raised by the Italian Revenue Agency against certain transactions completed in the period straddling dividend payout dates and certain repurchase agreements in foreign securities (see part E of the Notes to the Financial Statements). Specifically, undue tax benefits were claimed on these trading transactions for the period (so-called "abuse of law"), although they were obtained by legitimate application of existing rules and regulations.. On 2 December 2011, the Parent Company agreed to settle all claims raised by the Italian revenue Agency by way of payment of the greater amount of tax due and sanctions (plus any interest required by law) for an amount of EUR mln (of which EUR mln by the Parent Company and EUR 1.9 mln by the subsidiary, MPS Capital Services). In detail, the amount of EUR 76.8 mln can be broken down as follows: EUR 42.4 mln in sanctions paid by the Parent Company on its own behalf; EUR 26.7 mln in tax and EUR 7.3 mln in sanctions paid by the Parent on behalf of the disposed company MPS Finance (now State Street Bank S.p.a.) in compliance with specific contractual agreements with the purchaser and EUR 0.4 mln in sanctions paid by the subsidiary, MPS Capital Services. With reference to said agreement and in consequence of the afore-mentioned settlement, the Parent Company has also paid the purchaser of MPS Finance (now State Street Bank S.p.a.) an amount of EUR 16.5 mln, similarly included in item "Other", by way of refund of the interest set on the settlement amount by law and of charges arising, for the purchaser, from taxation of the amounts obtained by way of indemnity Other operating income: breakdown Items/Amounts Total Total Exceptional write-downs of liabilities not attributable to a separate account 8,273 18,002 Rents from investment real estate 16,528 9,414 Other revenues from real estate inventory/management Recovery of taxes 195, ,932 Recovery of insurance premiums 24,288 52,252 Income from financial lease transactions 6,132 10,221 Other 107,387 95,734 Total 358, ,448 "Tax recoveries" were mainly related to the stamp duty on current accounts and securities deposited and to the substitute tax on medium-term loans. 267

268 Notes to the consolidated financial statements - Part C Consolidated income statement Section 16 Gains (losses) on investments Item Gains (losses) on investments: breakdown P&L items/sectors Total Total ) Jointly owned companies A. Income Revaluations Gains on disposal Write-backs Other income - - B. Expense Write-downs Impairment losses Losses on disposal Other expenses - - Net Profit (Loss) - - 2) Companies subject to significant influence A. Income 90, , Revaluations 90,279 82, Gains on disposal - 176, Write-backs Other income 713 1,150 B. Expense (81,228) (30,983) 1. Write-downs (6,502) (12,621) 2. Impairment losses (74,726) (18,000) 3. Losses on disposal - (48) 4. Other expenses - (314) Net Profit (Loss) 9, ,883 3) Subsidiaries A. Income - 405, Revaluations Gains on disposal - 405, Write-backs Other income - - B. Expense (4,580) - 1. Write-downs Impairment losses Losses on disposal (4,580) - 4. Other expenses - - Net Profit (Loss) (4,580) 405,455 Total 5, ,338 As for item 2) Companies subject to significant influence, it is noted that: line Impairment losses contains write-downs on stakes in associates, including those on Asset Management Holding S.p.a. (EUR 35.3 mln), Antoniana Veneta Popolare Assicurazioni S.p.a. (EUR 26.3 mln), Co.E.M. Costruzioni Ecologiche Moderne S.p.a. (EUR 8.2 mln), EDI.B S.p.a. (EUR 3.1 mln); for furthe information on the methodology for determining impairment losses, please see section 10.3, part B, of these notes to the financial statements; the amounts in lines Revaluations and Write-downs, namely EUR 90.3 and 6.5 mln respectively, reflect the positive and negative adjustments to the Group's portion of total gains and losses on equity investments in the course of

269 Notes to the consolidated financial statements - Part C Consolidated income statement With respect to item 3) Subsidiaries, the amount of EUR 4.6 mln posted under Expense to line 3. Losses on disposal reflects price adjustments associated with the disposal of Banca Depositaria in Section 17 Net gains (losses) on tangible and intangible assets measured at fair value Item 250 The tables for this section were not completed since the Group has no tangible and intangible assets carried at fair value to report for either the current or previous year. Section 18 Impairment of goodwill Item Impairment of goodwill: breakdown Items/Amounts Total Total Impairment of goodwill (4,257,440) - Owing to its indefinite or unlimited useful life, goodwill is tested at the end of each year to asses whether its carrying value is fairly stated or recoverable. The test resulted in an impairment loss of EUR 4,257.4 mln being reported for goodwill allocated to the various CGUs (cash generating units). For additional information concerning the methods for conducting impairment tests, see the appropriate section in Part B of the Notes to the Financial Statements Information on the Balance Sheet Section 13.1 of Assets Intangible Assets: breakdown by type. Section 19 Gains (losses) on disposal of investments Item Gains (losses) on disposal of investments: breakdown P&L items/sectors Total Total A. Property 34,458 16,403 - Gains on disposal 34,458 16,403 - Losses on disposal - - B. Other assets ,991 - Gains on disposal ,998 - Losses on disposal (1) (7) Net Profit (Loss) 34, ,394 Gains amounting to EUR 34.5 mln posted to line "3. Property - Gains on disposal" made in 2011 consists almost entirely in profit arising from the disposal by MPS Immobiliare S.p.a. of a property unit located in Via dei Normanni, Rome, which once housed the central tax collection agency. 269

270 Notes to the consolidated financial statements - Part C Consolidated income statement Section 20 Tax expense (recovery) on income from continuing operations Item Tax expense (recovery) on income from continuing operations: breakdown P&L items/sectors Total Total Current tax (-) (612,749) (327,683) 2. Adjustments to current tax of prior years (+/-) (168,761) (3,881) 3. Reduction of current tax for the year (+) - 1, Changes in deferred tax assets (+/-) 775,813 64, Changes in deferred tax liabilities (+/-) 29,050 (76,080) 6. Tax expense for the year (-) (-1+/-2 +3+/-4+/-5) 23,353 (341,850) The overall balance of item 290 "Tax expense (recovery) on income from continuing operations" was affected not only by ordinary charges in relation to the corporate income tax (IRES) and regional productivity tax (IRAP) but also by the following one-off components: Pursuant to paragraphs 10 bis and 10 ter of article 15 of Legislative Decree no. 185/2008 (as integrated by art. 23 of Legislative Decree no. 98/2011 and its enactment by the Director of the Italian Revenue Agency on 22/11/2011), the Parent Company opted for 'tax realignment' of goodwill and intangible assets recognised in the consolidated financial statements and embedded in the value of the equity investments posted to the separate financial statements with respect to the: - acquisition of control over the Cassa di Risparmio di Biella e Vercelli (BIVERBANCA) in 2007; - transfer of banking business from the Parent Company to new Banca Antonveneta in In consequence of the options exercised, the Parent Company posted EUR mln worth of net benefits to the profit and loss account, broken down as follows: - under Current tax, a total amount of EUR mln in substitute tax (16% rate) for tax realignment purposes; - under "Changes in deferred tax assets", EUR mln in deferred tax assets [both IRES (corporate income tax) and IRAP (regional tax on productivity)] against the tax deduction in regular instalments of the 're-aligned' amounts. A 0.75% adjustment is also reported on the rate applied to the amount earmarked for deferred IRAP tax assets and liabilities on account of the increase in the base rate for banks from 3.9 to 4.65% (as set out in Legislative Decree no. 98/2011), with a consequent net benefit of EUR 59.3 mln, of which EUR 61.6 mln posted to Line Changes in deferred tax assets net of the negative impact of EUR 2.3 mln recognised in Line Changes in deferred tax liabilities. Changes in deferred tax assets also includes, under increases, the deferred tax assets concerning the Parent Company's tax loss of EUR mln and, under decreases, the cancellation of deferred tax assets corresponding to the deduction of the yearly amortisation of goodwill re-aligned in 2008, pursuant to art. 15 of Legislative Decree no. 185/2008, posted as a result of the mergers by absorption of Banca Agricola Mantovana S.p.A. and Banca Antonveneta S.p.A. for an amount of EUR 192,0 mln and deduction of the yearly amortisation of goodwill posted as a result of the banking business transferred by the Parent Company to Banca Antonveneta on 1 january 2009 (EUR 46.4 mln). Adjustments to current tax of prior years" includes the amount of EUR mln, paid in taxes (by the Parent Company for an amount of EUR mln and by the subsidiary, MPS Capital Services, for an amount of EUR 1.5 mln) and included in the overall payment of EUR mln for settlement of claims [raised by the Revenue Agency] against certain securities trading transactions (see Part E of the Notes) completed in the period straddling dividend payout dates and certain repurchase agreements in foreign securities. Specifically, undue tax benefits were claimed for these transactions in the period (so-called "abuse of law"), although they were obtained by legitimate application of existing rules and regulations.. 270

271 20.2 Reconciliation of theoretical to actual tax charge Notes to the consolidated financial statements - Part C Consolidated income statement Items/Amounts (A) Pre-tax profit (loss) from continuing operations (4,729,766) 1,327,181 (B) Pre-tax profit (loss) from assets held for sale and discontinued operations 19,347 3,620 (A+B) Pre-tax profit (loss) (4,710,419) 1,330,801 Current rate of corporate income tax (IRES) Theoretical tax rate 1,295,365 (365,970) Permanent differences (1,262,411) (49,826) Other (3,194) 174,584 Regional tax on productivity (IRAP) - ordinary rate (8,079) (102,606) Income taxes for the year 21,681 (343,818) of which: Taxes on income from continuing operations 23,353 (341,850) Taxes on the income of groups of assets held for sale and discontinued operations (1,672) (1,968) The line Permanent differences reflects the effect of changes made to the profit (loss) in the income statement to determine the IRES taxable income.. - With respect to increases, the amount refers primarily to: the impairment loss provision for goodwill; nondeductible interest expense (Art. 96 of the Consolidated Act on Income Tax, TUIR); and losses from disposal or valuation of PEX equity investments (art. 87 TUIR). - With respect to decreases, the amount relates mainly to tax exemption of capital gains arising from the disposal of existing equity investments under the participation exemption, PEX (Art. 87 of the Consolidated Act on Income Tax, TUIR). "Other" primarily reports the net balance between the positive effect arising from the Parent Company's opting for tax re-alignment - pursuant to art. 23 of Legislative Decree no. 98/2011- of the value of goodwill and other intangible assets recognised in the consolidated financial statements and embedded in the value of the equity investments posted to the separate financial statements with respect to the Cassa di Risparmio di Biella e Vercelli and Banca Antonveneta S.p.a. and the negative effect of taxes paid by the Group for settlement of pending claims raised by the Italian Revenue Agency against certain transactions completed between 2002 and 2008 under abuse of law (repurchase agreements in foreign securities and securities trading transactions, completed in the period straddling dividend payout dates) described in the notes to Table 20.1 Tax expense (recovery) on income from continuing operations item 290 and in Part E Information on risks and relative hedging policies - Risks from tax disputes. Line "Regional tax on productivity (IRAP)" was impacted positively by the afore-mentioned tax alignment and by the adjustments to net deferred tax assets following the increase in the base rate for banks from 3.9 to 4.65% (as set out in Legislative Decree no. 98/2011). 271

272 Notes to the consolidated financial statements - Part C Consolidated income statement Section 21 Profit (loss) after tax from group of assets held for sale and discontinued operations Item Profit (loss) after tax from assets/liabilityies held for sale and discontinued operations: breakdown P&L items/sectors Total Total Income 10,118 15, Expense (5,131) (10,184) 3. Profit (loss) from valuation of groups of assets and related liabilities (223) (477) 4. Profit (loss) from disposal 14,583 (1,239) 5. Taxes and duties (1,672) (1,968) Profit (Loss) 17,675 1,652 Completion in 2011 of the transactions that were under way as at , have led to the 100% disposal of subsidiary Monte Paschi Monaco S.A.M.and disposal of a 22% shareholding in MPS Venture (with consequent reduction to a 48%stake and transition from control to investment in an associate). These disposals resulted in net profit for an amount of EUR 9.7 mln (Monte Paschi Monaco SAM) and 8.0 mln (MPS Venture) Breakdown of income taxes on assets/liabilities held for sale and discontinued operations Total Total Current taxes (-) (1,721) (1,966) 2. Changes in Deferred Tax assets (+/-) 49 (2) 3. Changes in deferred tax liabilities (+/-) Income taxes for the period (-1 +/-2 +/-3) (1,672) (1,968) The amount shown in the table reflects the tax impact from afore-mentioned discontinued operations. 272

273 Notes to the consolidated financial statements - Part C Consolidated income statement Section 22 Profit (loss) for the period attributable to non-controlling interests Item 330 The amount recognised under item 330 Profit (loss) for the year: non-controlling interests is accounted for by profit for an amount of EUR 1.1 mln and loss for an amount of EUR 4.6 mln Breakdown of Item 330 "Profit for the period attributable to non-controlling interests" The amount of EUR 1.1 mln is almost entirely accounted for by the profit contributed by MP Venture SGR S.p.a. until its removal from the Group's scope of consolidation in October Breakdown of Item 330 "Loss for the period attributable to non-controlling interests" The amount of EUR 4.6 mln is almost entirely accounted for by the loss of subsdiary Biverbanca Cassa di Risparmio di Biella e Vercelli S.p.a.. Section 23 Other informations No additional disclosure to that presented in accordance with the international accounting standards and Circular letter no. 262 of the Bank of Italy is required. 273

274 Notes to the consolidated financial statements - Part C Consolidated income statement Section 24 Earnings per Share (EPS) 24.1 Reconciliation of weighted average number of ordinary shares outstanding (No. of shares) Items/Amounts Weighted average number of ordinary shares outstanding (+) 8,137,196,950 5,541,170,406 Dilutive effect from put options sold (+) - - Dilutive effect from ordinary shares to be assigned as a result of treasury share-based payments (+) - 932,643 Dilutive effect from convertible liabilities (+) - 2,090,562,823 Dilutive effect from convertible liabilities (+) - - Weighted average number of ordinary shares outstanding by diluted earnings per share 8,137,196,950 7,632,665, a Reconciliation of net profit (loss) for the period numerator for basic earnings per share ì Item/Amount Relating to continuing operations and pertaining to the Parent Company Relating to discontinued operations and pertaining to the Parent Company Total pertaining to the Parent Company Relating to continuing operations and pertaining to the Parent Company Relating to discontinued operations and pertaining to the Parent Company Total pertaining to the Parent Company Net Profit (Loss) (4,702,638) 17,364 (4,685,274) 823, ,555 Profit (loss) attributable to other types of shares Net profit (loss) attributable to ordinary shares - numerator for basic earnings per share 282,099 (1,042) 281,057 (147,394) (22) (147,416) (4,420,539) 16,322 (4,404,217) 676, , b Reconciliation of net profit (loss) for the period numerator for diluted earnings per share 274

275 Notes to the consolidated financial statements - Part C Consolidated income statement Item/Amount Relating to Relating to continuing discontinued operations operations and pertaining and pertaining to the Parent to the Parent Company Company Total pertaining to the Parent Company Relating to continuing operations and pertaining to the Parent Company Relating to discontinued operations and pertaining to the Parent Company Total pertaining to the Parent Company Net Profit (Loss) (4,702,638) 17,364 (4,685,274) 823, ,555 Dilutive effect from convertible liabilities Profit (loss) attributable to other types of shares Interest expenses on convertible instruments (+) , , ,099 (1,042) 281,057 (147,394) (22) (147,416) Other (+/-) Net profit (loss) attributable to ordinary shares - numerator for diluted earnings per share (4,420,539) 16,322 (4,404,217) 816, , c Basic and diluted earnings per share (in EUR) Item/Amount Relating to continuing operations and pertaining to the Parent Company Relating to discontinued operations and pertaining to the Parent Company Total pertaining to the Parent Company Relating to continuing operations and pertaining to the Parent Company Relating to discontinued operations and pertaining to the Parent Company Total pertaining to the Parent Company Basic Earnings per Share (0.543) (0.541) Diluted Earnings per Share (0.543) (0.541)

276 Notes to the consolidated financial statements - Part D Consolidated comprehensive income Part D Consolidated Statement of Comprehensive Income 276

277 Notes to the Consolidated Financial Statements -Part D Consolidated Statement of Comprehensive Income Consolidated Statement of Comprehensive Income Items Gross Income Tax Net 10 Profit (loss) for the period (4,710,420) 21,681 (4,688,739) Other income components Financial assets available for sale: (5,421,845) 1,736,330 (3,685,515) a) changes in fair value (5,454,971) 1,699,438 (3,755,533) b) reversal to profit and loss 106,138 (38,266) 67,872 - impairment provisions 121,345 (26,526) 94,819 - realised net gains/losses (15,207) (11,740) (26,947) c) other changes (73,012) 75,158 2, Tangible assets Intangible assets Hedges of foreign investments: a) changes in fair value b) reversal to profit and loss c) other changes Cash flow hedges: (53,563) 19,951 (33,612) a) changes in fair value (53,563) 19,803 (33,760) b) reversal to profit and loss c) other changes Exchange differences: 2,057 (640) 1,417 a) changes in fair value b) reversal to profit and loss c) other changes 2,057 (640) 1, Non-current assets classified as held for sale (278) 77 (201) a) changes in fair value b) reversal to profit and loss c) other changes (278) 77 (201) 90 Actuarial gains (losses) on defined benefit plans Share of valuation reserves of equity investments valued at equity: (45,095) 14,612 (30,483) a) changes in fair value (45,095) 14,612 (30,483) b) reversal to profit and loss impairment provisions realised net gains/losses c) other changes Other income components (5,518,724) 1,770,330 (3,748,394) 120 Total comprehensive income (Account ) (10,229,144) 1,792,011 (8,437,133) Consolidated comprehensive income attributable to non-controlling interests Consolidated comprehensive income attributable to Parent Company (61,030) 17,006 (44,024) (10,168,114) 1,775,005 (8,393,109) 277

278 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Part E Information on risks and relative hedging policies Section 1 Credit Risk Section 2 Market Risk Section 3 Liquidity Risk Section 4 Operational Risk As required by law (BoI Circular no. 263 of 27 December 2006, Title IV), the Pillar 3 (of Basel 2) public disclosure report will be published on the Montepaschi Group s website 278

279 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Section 1 Credit risk Qualitative Information 1. General Within the guidelines of the Business Plan approved by the Board of Directors of the Parent Company, the Group's top priority continues to be that of improving the quality of the managed loan book and consequently reducing credit costs. More specifically, through Credit Policies and Planning in particular, the Credit Governance division sets out the strategic guidelines for the loan book, both at Group level and for each individual subsidiary. The Group's credit activity is managed with a view to monitoring risk and enhancing growth opportunities, through the development of credit policies and systems aimed at making the most of trend data in connection with individual borrowers, against a background of in-depth knowledge and strategic management of positions (credit culture). 2. Credit risk management policies 2.1 Organisational aspects The Credit Governance division is organised into the following units: Model and Credit System Validation (staff unit); Credit Performance Monitoring (staff unit); Credit Policies and Planning Area, including the "Special-purpose Loans and Securitisations service", the "Credit Policies and Quality service" and the "Rating Units Coordination service". The latter is reported to by the 'credit rating units' operating across Italy (evolving directly from previous local Loan Labs); Group Risk and Restructuring Area, which includes the 'Groups and Country Risk Monitoring' service (which took over part of the activities of the former "Foreign Counterparties and Financial Institutions Credit service" in 2011) and the "Loan Restructuring" service. During the year, Credit Policies and Planning continued to upgrade the customer loan disbursement and monitoring processes. More specifically, several activities were put in place to: improve operating procedures for an early review of assigned process ratings whenever there are symptoms of a possible deterioration in the customer risk profile; produce quality-assessment questionnaires with the aim of obtaining and assessing corporate information for the current period; continue reviewing the methodology for the processing of expired or invalid internal ratings; update pricing models for an increasingly more accurate determination of the cost of credit, differentiated by lending products and user clusters; adjust disbursement processes to the provisions of the "Fight the Crisis" and "Joint Notice" initiative by the Italian Banking Association; update main internal regulations on credit processes; The processes outlined by the Parent Company are rolled out to all banks (whose organisation includes a special Function for loan disbursement and management) through well defined units which are duly delegated through a discretionary limit system authorised by the Board of Directors and adopted by the individual banks in accordance with current regulations on this matter. All units involved, within their areas of competence as defined on the basis of customer segmentation and customer risk profiles, are called to grant/manage credit and monitor credit risk, using appropriate procedures (based on the internal rating system) to determine the borrower's creditworthiness, file the credit facility application, follow up on changes in the account over time and predict any emerging non-performing situations. Credit quality, which is determined in accordance with Supervisory guidance, is constantly monitored by central and outer units. For a better tracking of credit quality, new roles of responsibility specialised in credit quality management were introduced in the local market areas to integrate existing functions, in the course of

280 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies The management and recovery of non performing loans that have become doubtful loans are assigned by the banks to the Group company specialising in this area (MPS Gestione Crediti Banca S.p.A.). Within the Group Risk and Restructuring Area, in 2011 the specific Loan Restructuring "service" continued its strong commitment to following up on the restructuring of corporate clients in financial difficulty as a result of the ongoing economic crisis Management, measurement and control systems Starting in 2008, statistical models aimed at creating the Internal Rating Model and rating assignment processes were authorised by the Supervisory Authority for the calculation of capital requirements using the Advanced IRB approach (AIRB). Basel 2 requires the Group to adopt the following credit risk measures needed to calculate regulatory capital (AIRB approach): Probability of Default (PD), Loss Given Default (LGD), and Exposure At Default (EAD). The new methodology with the greatest impact on risk measurements is "Probability of Default, which is a reflection of the borrower s rating, meaning its ability to meet obligations assumed over a time horizon of one year. Thus, a rating is a probability-based approach to risk assessment, and represents a projection of portfolio quality that forms a part of daily processes of credit facility assessment, loan management and pricing, as well as of the procedures used to determine loan loss provisions and reports used by management The statutory adoption of risk criteria has made it possible for the Bank to obtain significant operational advantages, both in terms of a higher accuracy in credit budgeting forecasts and in terms of a more effective monitoring of credit aggregates: based on the risk criteria, the Group sets the process for the yearly budgeting of credit items and makes accurate and sustainable forecasts in relation to the loan book, substandard and doubtful loan flows and loan-loss provisions. Forecast sustainability is ensured by the definition of concrete loan book actions which are communicated to the outlying networks through an internal regulatory document as well as by amending the credit disbursement and management processes and criteria. All credit processes use the borrowe rating as a decision-making driver, and they are conceived of on the basis of the specific nature of various customer segments in order to optimise the use of resources employed in loan management/monitoring and to achieve the right balance between the pursuit of sales opportunities and an effective loan management system. The internal rating system, which affects the Corporate and Retail portfolios, is based on the development of several statistical models specialised by customer type with the aim of assigning a solvency rating for prospective borrowers (first-time lending models based on financial and demographic information taken from outside databases) and for existing borrowers (for which behavioural models have also been used, which incorporate internal performance data) Credit policies Since 2008, the credit policy definition process has been based on analytical portfolio estimates and has continuously been optimised and finetuned. In 2011, activities focusing on the development of a model for the definition of credit policies for businesses continued with the purpose of providing more in-depth information during the forthcoming budgeting processes, from a geosectoral perspective. In particular, the following is assessed for each area of business: the level of "attractiveness" based on the growth and risk prospects estimated from system data, which is then used to determine the allocation to the various business sectors of the expected net growth flows (as defined during the budgeting process for each individual business unit); the "positioning" of the Group in terms of market risk and market shares with respect to the banking system; on this basis, the operating practices are set out which are needed to obtain the expected growth level (requalification required, internal or external development); the geographical breakdown of prospective customers, for risk levels to be in line with the credit policies put in place to support lending. In the course of 2011, the loan book growth forecasts (both "trend" and "target") for 2012 were set out and formalised, in collaboration with the Planning Area, within the framework of the overall budgeting process. 280

281 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Disbursement processes Loan disbursement processes are aimed at improving the effectiveness, efficiency and level of service in loan management with the goal of: standardising and automating loan proposals and risk assessment to the extent possible; adapting processes to the branch network s organisational and operational requirements; assessing creditworthiness, also through the assignment of internal ratings to individual borrowers; improving customer response time. The procedure available to the branch network and the Head Office for managing all phases of the loan disbursement process, consists in the Electronic Loan File (it. Pratica Elettronica di Fido or P.E.F.). This tool is continually optimised with the aim of improving both response time and the selection of acceptable risk. The assessment and approval methods implemented in the P.E.F. reflect the principles and rules of the internal rating system. Thus, methods differ depending on whether the customer is an individual/consumer (retail) or a business (a corporation with revenues under EUR 2.5 million, or a corporation with revenues over EUR 2.5 million) and on whether the customer is a prospect or existing customer. In keeping with the regulatory provisions issued by the Supervisory Authority, the P.E.F. was designed to use one single rating when borrowers have relationships with several MPS Group banks. In terms of activities aimed at complying with AIRB requirements, the assignment of decision-making authorities in the loan disbursement process based on risk-based approaches is one of the key elements in meeting the experience requirements mandated by the Bank of Italy. These approaches, which escalate to decision-making bodies having higher levels of power in the event of higher levels of risk underlying the credit facility, made it possible to achieve regulatory and operational advantages. In 2011, the P.E.F. was further enhanced with the possibility to intervene on specific details of the loan application (including information on 'income-producing real estate'). New decision-making powers were defined in the course of 2011 for both the Group's outer units and local market areas Monitoring processes As to post-disbursement management and monitoring of the credit portfolio, the Loan Performance Management process continues to be used by the branch network which, on the basis of the forecasting features of rating models, makes it possible to monitor changes in the Bank s loan book over time, while focusing the attention of relationship managers only on customers who statistically have a medium to high likelihood of default within one year. Loan Performance Management is based on an Early Warning system leveraging four subprocesses: System Surveillance, which focuses and directs monitoring activities on major risk positions. With this process, the bank has opted for a predictive approach to better safeguard the performing loan book: the purpose is to diagnose problems in advance and use measures aimed at upgrading the quality of the loan book; Operational Management which makes it possible to monitor the loan book daily so as to identify any irregular internal and external events indicative of potential risk with a view to anticipating deterioration occurring within a month that has not been reflected in the rating. The process uses an IT application that flags irregularities for operators and points them in the direction of operational measures that differ according to problem severity; Default Loan Management is the process that identifies for the branch network all situations where credit limits have been exceeded. For certain positions of a relatively low amount without sales targets, it is possible to manage the recovery process externally by mandating this task to a specialised credit collection bureau; "Simplified Renewals (for positions with limited risk) are aimed at automatically extending existing loans from year to year for internal purposes. 281

282 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies For the purpose of intercepting early signs of critical situations and improving the post-disbursement quality of the loan book, a new process was designed and pilot-tested in Under the name "Credit Monitoring", this process is intended to supersede today's "Loan Performance Management" system as of early To this end, over 5,000 employees have already received classroom training in collaboration with the Knowledge Management and Training service. Credit Monitoring is an effective aid to obtain credit cost reduction by leveraging two main factors: identification of high insolvency risk positions ('screening'); 'customer-type differentiated' treatment of positions (dedicated 'routing'). Identification of high insolvency risk positions Ordinary-risk positions are scanned by a 'screening' engine which selects the highest-risk positions on a weekly basis, so as to identify the counterparties bound to become insolvent at a sufficiently early stage. Screening is based on a 'performance risk indicator' (it.: "indicatore di rischio andamentale", IRA) which factors in and is reflective of a set of critical elements including the worsening of certain trend-revealing indicators, ratings, information of related counterparties and days past due (with thresholds being differentiated by customer segments and amounts used). "Customised" parameters make it possible to diversify the screening criteria for risk positions by type of customer with respect to the criteria used by the "Loan Performance Management" system. 'Customer-type differentiated' treatment of positions This choice was based on the need for differentiating the treatment of positions by customer segments, in the conviction that a corporate client cannot be treated in the same way as a retail client and that specific client management needs should be met with 'ad hoc' processes. Ordinary-risk positions, reported as higher risk by the 'screening' engine, are routed to specific processing queues depending on the type of customer and credit facility involved: 1. a 'Mass Retail' procedure for 'Retail Family' clients; 2. a 'Standard Retail' procedure for Retail, Affluent and Private customers, as well as small-sized businesses with limited exposure; 3. a dedicated Corporate procedure for corporate customers. In conclusion, as indicated in the paragraph concerning the organisational setup, the overall tracking of positions undergoing restructuring was centralised - as per the new debt crisis solution tools set out by the Bankruptcy Act (art. 67, paragraph 3 d), art. 182 bis)- into the "Group Risk and Restructuring Area", which includes a special "Restructuring service" staffed with highly qualified teams of specialists. Centralised management is mandatory when exposure at Banking Group level exceeds EUR 4 mln. Numerous agreements have been signed and a high number of files are being tracked. Credit risk mitigation policies The loan book forecasts for 2012 ('development over time' and targets ) have been developed. These estimates are the result of a well-established model which is subject to regular methodological fine-tuning and upgrading cycles by the Credit Policies and Planning Area and is organised into the following phases: analysis of the current portfolio, which has the aim of singling out the main factors that contribute to risk and identifying the most effective measures to contain expected loss. In addition, the portfolio's "degree of strength" is assessed; this is affected by the level of medium and long-term exposure and the existence of sectoral concentrations which could affect portfolio quality; estimate of the loan book trend and cost of credit for 2012 given certain sales and risk targets in the absence of credit policies; definition of credit policy measures deemed necessary to contain cost of credit and future risk; thus, the determination of credit policy actions is guided by the need to reconcile the portfolio s projected risk trends with the restrictions of Economic Capital and Expected Loss assigned to credit risk as part of the Capital Allocation process. In operational terms, for the allocation of new disbursements and the management of existing credit 282

283 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies facilities, guidance is formulated on the basis of the assigned rating, customer segment, business sector, geographical area and type of facility. Impaired financial assets Credit Governance oversees the process for the definition, updating and usage of non-performing loan assessment criteria, availing itself of the Loan Performance Monitoring Staff. Within its area of competence, the Staff ensures appropriate implementation of the operating rules and processes of assessment; it operationally coordinates the Functions involved in the various steps of the process, verifies and organises data and information received, defines and validates the criteria to be used on a yearly basis and monitors the economic impact monthly. The second half of 2011 saw the centralisation under the Loan Performance Monitoring Staff of all activities concerning the validation of BMPS NPL recovery forecasts (for NPL balance amounts exceeding EUR 100,000.00), which then translates into approval of the Business Plans submitted by MPS Gestione Crediti Banca. 283

284 Doubtful loans Substandard loans Restructured Past-due Other assets Impaired Other Total Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Quantitative Information A. CREDIT QUALITY A.1 Non performing and performing loans: amounts, value adjustments, changes, breakdown by business sector and geographical area A.1.1 Breakdown of financial assets by portfolio and credit quality (book values) Banking Group Other companies Portfolio/quality 1. Financial assets held for trading 2. Financial assets available for sale 3. Financial assets held to maturity 8,222 22,488 20,140 5,032 31,536, ,592,026 3,482 2,122 10,182-20,712, ,728, Loans to banks 2,020 1, ,692, ,695, Loans to customers 6,441,728 4,459,082 1,434,652 1,144, ,127, ,607, Financial assets designated at fair value 7. Financial assets held for sale , , Hedging derivatives , ,351 Total 31/12/2011 6,455,452 4,485,080 1,464,974 1,149, ,470, ,025,588 Total 31/12/2010 5,501,940 4,042,134 1,262, , ,637, ,078,597 With regard to the various portfolios of financial assets, the table provides a breakdown by credit quality using the definition of non performing exposure set out by the Bank of Italy and adopted for the purposes of the financial statements. Pursuant to Banck of Italy's circular letter no. 262, lines 1. Financial assets held for trading" and "2. Financial assets available for sale do not include equity securities and units in UCITs. On the other hand, it is noted that lines "4. Loans to banks" and "5. Loans to customers" include debt securities. All amounts are book values, and thus, net of any related doubtful amounts. 284

285 Gross exposure Specific writedowns Net exposure Gross exposure Portfolio adjustments Net exposure Total (net exposure) Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.1.2 Breakdown of credit exposure by portfolios and credit quality (gross and net values) Non performing assets Performing Portfolio/quality A. Banking Group 1. Financial assets held for trading 2. Financial assets available for sale 3. Financial assets held to maturity 61,820 5,938 55,882 x x 31,536,144 31,592,026 36,052 20,266 15,786 20,712,849-20,712,849 20,728, Loans to banks 45,668 42,260 3,408 20,706,956 14,917 20,692,039 20,695, Loans to customers 23,013,382 9,533,465 13,479, ,903, , ,127, ,607, Financial assets designated at fair value x x 38,231 38, Financial assets held for sale Hedging derivatives x x 363, ,351 Total A 23,156,922 9,601,929 13,554, ,323, , ,470, ,025,588 B. Other consolidated companies 1. Financial assets held for trading 2. Financial assets available for sale 3. Financial assets held to maturity x x Loans to banks Loans to customers Financial assets designated at fair value x x Financial assets held for sale Hedging derivatives x x - - Total B Total 31/12/ ,156,922 9,601,929 13,554, ,323, , ,470, ,025,588 Total 31/12/ ,711,850 8,271,132 11,440, ,906, , ,637, ,078,597 The table provides a breakdown of the various portfolios of financial assets by credit quality using the definition of non performing exposure set out by the Bank of Italy and adopted for the purposes of the financial statements. Pursuant to Banck of Italy's circular letter no. 262, lines 1. Financial assets held for trading" and "2. Financial assets available for sale do not include equity securities and units in UCITs. On the other hand, it is noted that lines "4. Loans to banks" and "5. Loans to customers" include debt securities. All amounts are book values, and thus, net of any related doubtful amounts. 285

286 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Pursuant to Bank of Italy's requirements set out in its communication of 16 February 2011, the following table reports performing loans to customers (line 5 of previous table, "performing" column), broken down into exposures whose terms were renegotiated in collective agreements and other exposures. For both groups, past-due positions are reported by months behind schedule (the amounts of past due loans to be repaid in instalments includes both the amount past due and the amount becoming due and payable). 5. Performing loans to Portfolio / quality customers (net exposure) Exposures renegotiated under collective agreements: 6,970,061 a) not past due 5,768,390 b) past due: 1,201,671 up to 3 months 627,056 3 to 6 months 191,940 6 months to 1 year 360,222 over 1 year 22,453 Other exposures: 126,157,918 a) not past due 120,725,674 b) past due: 5,432,244 up to 3 months 3,544,518 3 to 6 months 908,934 6 months to 1 year 806,858 over 1 year 171,934 Total net exposure of performing loans to customers 133,127,

287 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.1.3 Banking Group - Balance sheet and off-balance sheet exposure to banks: gross and net values Type of exposure/ Amount Gross exposure Specific writedowns Portfolio adjustments Net exposure A. Balance-sheet exposure a) Doubtful loans 33,372 31,238 x 2,134 b) Substandard loans 16,725 13,215 x 3,510 c) Restructured loans - - x - d) Past due - - x - e) Other assets 24,424,102 x 14,917 24,409,185 Total A 24,474,199 44,453 14,917 24,414,829 B. Off-balance-sheet exposure a) Non performing 2, x 2,655 b) Other 14,367,274 x ,366,733 Total B 14,370, ,369,388 Total (A+B) 38,844,284 44,609 15,458 38,784,217 The table provides a breakdown of dealings with banks by credit quality, using the definition of non performing exposures set out by the Bank of Italy and adopted for the purposes of the financial statements. Thus, all balance-sheet exposure amounts are stated at book values, before and after any doubtful amounts. In particular, Line "A. Balance-sheet exposures" encompasses all financial assets related to banks arising from financial statement Item 20 Financial assets held for trading", Item 30 Financial assets measured at fair value, Item 40 Financial assets available for sale" and Item 60 Loans to banks with the exception of derivative contracts, which are considered as off-balance-sheet in this section, and debt securities and UCITS. Line "B. Off-balance-sheet exposures" includes all financial transactions other than balance-sheet transactions (guarantees issued, commitments and derivatives, including those used for hedging purposes) involving the assumption of credit risk and valued using the measurement criteria set forth by the Bank of Italy. 287

288 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.1.4 Banking Group - Balance-sheet exposure to banks: changes in gross non performing loans Source / Categories Doubtful loans Substandard loans Restructured loans Past-due A. Gross exposure, opening balance 47,934 40, of which: sold but not derecognised B. Increases 92 2, B.1 transfers from performing loans - 2, B.2 transfers from other impaired loans B.3 other increases C. Other decreases 14,654 26, C.1 transfers to performing loans C.2 write-offs - 16, C.3 collections 14,654 9,467-4 C.4 amounts realised upon disposal of positions C.5 transfers to other categories of impaired exposure C.6 other decreases D. Gross exposure, closing balance 33,372 16, of which: sold but not derecognised With regard to balance-sheet exposures to customers, the table shows changes in non performing exposures during the year. Since the entire portfolio of financial assets is subject to classification by credit quality, exposure includes not only loans but also other types of assets (securities, etc.). Balance-sheet exposures are expressed at book value. 288

289 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.1.5 Banking Group - Balance-sheet exposure to banks: changes in overall value adjustments Source / Categories Doubtful loans Substandard loans Restructured loans Past-due A. Opening balance of overall adjustments 41,889 29, of which: sold but not derecognised B. Increases 382 1, B.1 value adjustments 45 1, B.2 transfers from other categories of impaired exposures B.3 other increases C. Other decreases 11,033 17, C.1 write-backs from valuation C.2 write-backs from collection 10, C.3 write-offs - 16, C.4 transfers to other categories of impaired exposure C.5 other decreases D. Closing balance of overall adjustments 31,238 13, of which: sold but not derecognised With regard to balance-sheet exposures to banks, the table shows changes in overall value adjustments on non performing exposure during the year. Since the entire portfolio of financial assets is subject to classification by credit quality, value adjustments shown refer not only to loans but also to other types of assets (securities, etc.). Balance-sheet value adjustments are expressed at book value. 289

290 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.1.6 Banking Group - Balance sheet and off-balance sheet exposure to customers: gross and net amounts Type of exposure/ Amount Gross exposure Specific writedowns Portfolio adjustments Net exposure A. Balance-sheet exposure a) Doubtful loans 14,508,933 8,058,412 x 6,450,521 b) Substandard loans 5,728,844 1,269,762 x 4,459,082 c) Restructured loans 1,588, ,058 x 1,444,833 d) Past due 1,223,763 79,308 x 1,144,455 e) Other assets 166,098,447 x 775, ,322,808 Total A 189,148,878 9,551, , ,821,699 B. Off-balance-sheet exposure a) Non performing 308,108 41,006 x 267,102 b) Other 47,783,345 x 32,267 47,751,078 Total B 48,091,453 41,006 32,267 48,018,180 Total (A+B) 237,240,331 9,592, , ,839,879 The table provides a breakdown of dealings with banks by credit quality, using the definition of non performing exposure set out by the Bank of Italy and adopted for the purposes of the financial statements. Please see the report on operations for quantification of and reporting on capital ratios for coverage of lending relationships. All balance-sheet exposures are stated at book values, before and after any doubtful amounts. In particular, Line "A. Balance-sheet exposure" encompasses all financial assets related to banks arising from financial statement Item 20 Financial assets held for trading", Item 30 Financial assets measured at fair value, Item 40 Financial assets available for sale" and Item 70 Loans to customers with the exception of derivative contracts, which are considered as off-balance-sheet in this section, and debt securities and UCITS. Line "B. Off-balance-sheet exposure" includes all financial transactions other than balance-sheet transactions (guarantees issued, commitments and derivatives, including those used for hedging purposes) involving the assumption of credit risk and valued using the measurement criteria set forth by the Bank of Italy. Balance-sheet exposure also includes loans sold but not derecognised in relation to performing and non-performing securitisation transactions. 290

291 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Exposure to sovereign debt risk Below is a breakdown of the Group's exposure to sovereign debt risk in government bonds, loans and credit derivatives as at 31 December The exposures are broken down by accounting categories. For securities classified as 'Loans and Receivables (L&R)' and "Loans", the book value (amortised cost) is also reported. The overall exposure amounts to approx. EUR 26.1 bln, consists almost entirely in Italian debt and is concentrated in the Parent Company under the AFS accounting category. COUNTRY Financial assets held for trading DEBT SECURITIES Financial assets available for sale L&R L&R L&R CREDIT DERIVATIVES Financial assets HFT (EUR/mln) TOTAL Nominal Fair value= book value Nominal Fair value= book value Book value Book value Nominal Nominal Argentina Austria Belgium Bosnia Brazil Bulgaria Canada China Croatia Denmark Ecuador United Arab Emirates Philippines Finland France (2.45) Georgia Germany (26.56) Greece Ireland Israel Italy 4, , , , , , Latvia Lithuania Mexico Norway The Netherlands Peru Poland Portugal Qatar United Kingdom Romania Russia Spain United States South Africa Turkey Ukraine Hungary Venezuela TOTAL 4, , , , , , These financial instruments were measured according to the standards applicable to the category they belong to. In particular, securities classified as Financial assets available for sale - AFS and Financial assets held for trading - HFT were measured at 291

292 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies the fair value of the consideration receivable as at 31 December Loans and securities included in the L&R portfolio are recognised at amortised cost. Exposure to credit derivatives is measured at their nominal value. It should be noted that the Group's exposure to the Greek financial crisis amounts to EUR 2.96 mln and reflects one single type of government bonds held by the Group, which was impaired for an amount of 17,2 mln posted to item 130 Net impairment losses/reversals of the income statement for

293 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.1.7 Banking Group - Balance-sheet exposure to customers: changes in gross non performing loans Source / Categories Doubtful loans Substandard loans Restructured loans Past-due A. Gross exposure, opening balance 12,478,231 5,087,549 1,343, ,729 - of which: sold but not derecognised ,219 B. Increases 2,949,936 2,899, ,338 1,418,945 B.1 transfers from performing loans 854,307 1,937, ,986 1,315,856 B.2 transfers from other impaired loans 1,649, ,321 51,481 18,636 B.3 other increases 446, , ,871 84,453 C. Other decreases 919,234 2,257, , ,911 C.1 transfers to performing loans 2, ,978 9, ,210 C.2 write-offs 225,310 28, ,599 C.3 collections 569, , , ,220 C.4 amounts realised upon disposal of positions 107, C.5 transfers to other categories of impaired exposure 1,810 1,588, , ,868 C.6 other decreases 12,016 6, ,014 D. Gross exposure, closing balance 14,508,933 5,728,844 1,588,891 1,223,763 - of which: sold but not derecognised 471 2,271-4,397 With regard to balance-sheet exposures to customers, the table shows changes in non performing exposures during the year. In particular, write-offs include reductions due to loan redemptions. Since the entire portfolio of financial assets is subject to classification by credit quality, exposure includes not only loans but also other types of assets (debt securities, etc.). Balance-sheet exposures are expressed at book value. Item C.2 Write-offs also includes write-offs of positions that have been completely amortised. Exposures sold but not derecognised, under captions A and D - of which: sold but not derecognised" refer to non performing assets in performing securitisations. 293

294 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.1.8 Banking Group - Balance-sheet exposure to customers: changes in overall value adjustments Source / Categories Doubtful loans Substandard loans Restructured loans Past-due A. Opening balance of overall adjustments 6,984,381 1,072,963 95,103 43,485 - of which: sold but not derecognised B. Increases 1,909, ,198 79, ,648 B.1 value adjustments 1,364, ,746 65,102 60,844 B.2 transfers from other categories of impaired exposures 384, ,398 5, B.3 other increases 160,496 11,054 9,157 99,645 C. Other decreases 835, ,399 30, ,825 C.1 write-backs from valuation 449, ,941 13,308 19,974 C.2 write-backs from collection 81,351 23,421 1,890 3,548 C.3 write-offs 225,310 28, ,599 C.4 transfers to other categories of impaired exposures ,560 15,672 97,142 C.5 other decreases 79,325 2,628-2,562 D. Closing balance of overall adjustments 8,058,412 1,269, ,058 79,308 - of which: sold but not derecognised With regard to balance-sheet exposures to customers, the table shows changes in overall value adjustments on non performing exposure during the year. Since the entire portfolio of financial assets is subject to classification by credit quality, exposure includes not only loans but also other types of assets (debt securities, etc.). Balance-sheet exposures are expressed at book value. Item C.3 Write-offs also includes write-offs of positions that have been completely amortised. Exposures sold but not derecognised, under captions A and D - of which: sold but not derecognised" refer to non performing assets in performing securitisations. 294

295 A.2 Classification of exposure by external and internal ratings class 1=AAA/AA- class 2=A+/A- class 3=BBB+/BBB- class 4=BB+/BB- class 5=B+/B- class 6=lower than B- The external rating categories used to complete the table are from Standard & Poor s. The exposures shown are those reported in Table A.1.3 (exposures to banks) and A.1.6 (exposures to customers) above. If multiple external ratings are assigned, the rating is selected based on Bank of Italy's criteria (when two ratings are available, the lower of the two is used, and when three or more ratings are assigned, the second highest rating is selected). To ensure relevance of information, internal cross-reference tables were used to convert classification by various rating agencies into classification by Standard & Poor s. External ratings cover about 41% of total exposure. 78% of exposure covered by external ratings is with customers having a credit rating equivalent to S&P classes between AAA and A-. From a combined analysis of internal ratings (thus, limited only to portfolios that are subject to possible validation) and external ratings, it was shown that about 88% of total exposures are covered by an external rating or a rating from an internal model, while the remaining 12% is not rated. Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.2.1 Banking Group - Breakdown of balance sheet and off-balance sheet exposures by external ratings 295

296 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.2.2 Banking Group - Breakdown of balance sheet and off-balance sheet exposures by internal ratings The table provides a breakdown of customers of the MPS Group by risk categories assigned on the basis of ratings arising from internal models. For this purpose, account is given only of exposures (borrowers) for which an internal rating is periodically recorded for models/legal entities/portfolios which have been subject to a validation process with the regulatory authorities without any cross-reference from official ratings to internal ratings especially with regard to the following customer segments: Banks, Non-banking financial institutions, and Governments and Public Administration. Thus, based on this proviso, exposures related to the latter segments, even if covered by official ratings, were reported as unrated in the internal rating models. The table shows that 12.8% of exposures rated internally come from High Quality customers (Master Scale categories AAA and A1), 26.7% from Standard Quality Customers (Master Scale categories A2, A3 and B1), 33.9% from Average Quality customers (Master Scale categories B2, B3, C1 and C2), 13.1% from Below-Average Quality customer s(master Scale categories C3, D1, D2 and D3) and 3% from low Quality customers (Master Scale categories E1, E2 and E3). Customers rated as Investment Grade (Master Scale categories AAA-B1) accounted for 39.5% of total internally rated exposures. UNRATED exposures totalled approx. EUR 130 bln, or 48.9 % of the total portfolio amount. 296

297 Amount of Net Property Securities Other collaterals CLN Governments and central banks Other public entities Banks Other entities Governments and central banks Other public entities Banks Exposure Other entities Total (1) + (2) Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.3 Breakdown of secured exposures by type of collateral A.3.1 Banking Group - Secured exposures to banks Personal guarantees (2) Real guarantees (1) Credit derivatives Unsecured signature loans Other derivatives 1. Secured balance-sheet exposures: 4,815,054-4,323, , , ,737, totally secured 1,985,340-1,502, , , ,915,849 - of which impaired partially secured 2,829,714-2,821, ,822,047 - of which impaired Secured off-balance sheet exposures: 459,028-7, , , totally secured 251, , ,755 - of which impaired partially secured 207,312-7, , ,303 - of which impaired The table shows the amount of balance-sheet exposures to banks that are partially or fully secured. Thus, the table does not correspond to total balance-sheet exposures since it excludes the unsecured portion. As in the tables above, balance-sheet exposures to banks include not only loans but all financial assets, except for derivative contracts. As regards personal guarantees, the economic segments to which guarantors and sellers of protection belong (in the case of unsecured loans and credit derivatives, respectively) are identified making reference to the classification criteria provided for in the brochure classification of customers by segments and groups of economic activity published by the Bank of Italy. The column "Amount of exposure" posts the amount of net exposure. The exposure amount includes performing and non-performing securitisation transactions, whose receivables have not been derecognised. The fair value of collaterals estimated as at balance sheet date is shown in the column "Real guarantees" and "Personal guarantees"; if such information is not available, the contractual value is reported. 297

298 Amount of Net Exposure Property Securities Other collaterals CLN Governments and central banks Other public entities Banks Other entities Governments and central banks Other public entities Banks Other entities Total (1) + (2) Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A.3.2 Banking Group - Secured exposures to customers Real guarantees (1) Credit derivatives Other derivatives Personal guarantees (2) Unsecured signature loans 1. Secured balance-sheet exposures: 101,978, ,840,756 10,397, , , , ,175 77,607, ,107, totally secured 96,638, ,602,237 8,324, , , , ,243 76,324,527 ####### - of which impaired 8,751,231 13,872, ,934 26, ,142 17,556 34,690 9,009,867 23,169, partially secured 5,340, ,519 2,072,523 72, ,945 24,932 1,282,510 3,711,501 - of which impaired 756, , ,323 4, , , , Secured off-balance sheet exposures: 5,668,341 1,838, , , , ,351 6,727,859 9,546, totally secured 4,799,232 1,828, , , , ,507 6,394,732 9,069,600 - of which impaired 164, ,188 5,645 5, , , partially secured 869,109 9,908 50,698 66, , , ,262 - of which impaired 16,091-1, ,133 11,211 The table shows the amount of balance-sheet and off-balance-sheet exposures to customers, including derivative contracts, which are fully or partially secured and the value of collaterals received. Therefore, the table excludes the amount of unsecured positions. As regards personal guarantees, the economic segments to which guarantors and sellers of protection belong (in the case of unsecured loans and credit derivatives, respectively) are identified making reference to the classification criteria provided for in the brochure Classification of customers by segments and groups of economic activity published by the Bank of Italy. Following guidance provided by the Bank of Italy in 2011, guarantees in the table were reported at their fair values; when the fair value were not measurable, guarantees were reported at their contractual values up to the net exposure amount. 298

299 B. BREAKDOWN / CONCENTRATION OF CREDIT EXPOSURE B.1 Banking Group - Breakdown of on- and off-balance sheet exposures to customers by business segment (book values) Balance-sheet exposures reported in the table above are the same as those reported in the financial statements (net of doubtful amounts and showing individual and collective value adjustments), while offbalance-sheet transactions include all financial transactions other than balance-sheet transactions (guarantees issued, commitments and derivatives) involving the assumption of credit risk and valued using the measurement criteria set forth by the Bank of Italy. The business segments to which borrowers and collateral providers belong are identified making reference to the classification criteria provided for in the brochure Classification of customers by segments and groups of economic activity published by the Bank of Italy. Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies 299

300 B.2 Banking Group - Breakdown of on- and off-balance-sheet exposures to customers by geographic area (book values) Balance-sheet credit exposures to customers reported in the table above are the same as those reported in the financial statements, while off-balance-sheet transactions include all financial transactions other than balance-sheet transactions (guarantees issued, commitments and derivatives) involving the assumption of credit risk and valued using the measurement criteria set forth by the Bank of Italy. The values are reported gross and net of doubtful amounts. Exposures are broken down geographically by the country of residence of the borrower. Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies 300

301 B.3 Banking Group - Breakdown of on- and off-balance-sheet exposures to banks by geographical area (book values) Balance-sheet exposures reported in the table reflect those recognised in the financial statements, while off-balance-sheet transactions include all financial transactions other than balance-sheet transactions (guarantees issued, commitments and derivatives) involving the assumption of credit risk and valued using the measurement criteria set forth by the Bank of Italy. Amounts are stated before and after any doubtful amounts. Exposures are broken down geographically by the country of residence of the borrower. Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies 301

302 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies B.4 Large exposures Item/Amount a) Amount 45,052,208 72,685,460 b) Weighted value 6,785,408 4,565,119 c) Number 8 9 Reporting criteria for "large exposures" were amended by the 6th update to Bank of Italy's Circular no. 263; the new regulations provide for positions to be defined as "large exposures" by making reference to credit-risk unweighted exposures. An exposure is deemed as a "large exposure" when its amount is equal to or greater than 10% of consolidated regulatory capital. Pursuant to Bank of Italy's requirements set out in its communication of 28 February 2011, the above table reports the number of "large exposures", as well as their weighted value and book value, i.e. the unweighted exposure based on which the position was defined as a "large exposure". Pursuant to the afore-mentioned regulations, government securities were also included. 302

303 C. ASSET SECURITISATION AND DISPOSAL TRANSACTIONS C.1 Securitisation transactions Qualitative Information Structures, processes and goals Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies In keeping with the organisational model established at Group level for the governance and management of risks, Securitisation Risk is governed by a specific Group directive. The Parent Company s Group ALM & Capital Management Service establishes general practices and coordinates activities in relation to securitisation transactions. The criteria and rules for managing securitisation transactions are instead determined by the Parent Company s Credit Policies and Planning Area. More specifically, the Special-purpose Loans and Securitisations service within this Area is responsible for establishing operational guidelines and general practices for the securitisation of performing loans. For this purpose, it looks after related aspects and obligations associated with servicing activities and monitors the performance of existing transactions through monthly and quarterly reports on collections of remaining principal, positions in arrears and disputed positions arising from securitisation transactions. In coordination with other originator banks, the Parent Company s Special-purpose Loans and Securitisations service prepares summary reports on portfolios sold ( total reports ) and follow-up reports on multi-originator transactions. In addition, as part of critical situation management, this service notifies cases that may pose potential risks for noteholders to the relevant functions in the organisation. In its capacity as third-level control body, the Internal Audit Area uses sampling procedures to periodically validate: whether the degree of recoverability of loans sold is accurate and, as a result, whether the fair value of securities issued is appropriate; whether line checks assigned to the various units have been carried out and roles and responsibilities properly identified; it also verifies: the compliance of reporting/accounting procedures with current regulations in collaboration with other units, as necessary; the existence of any conflicts of interest with respect to noteholders; and compliance, on a sampling basis, with the obligations of Law 197/91, as amended. Non-performing securitisations are managed by a specific unit of the subsidiary MPS Gestione Crediti S.p.A., whereas securitisations of consumer loans are taken care of by the subsidiary Consum.it S.p.a. Furthermore, a dedicated Group Directive requires a half-yearly report to be submitted to the Top Management showing performance of transactions executed by the Banking Group over time. Securitisation transactions of performing assets were structured with the aim of deriving economic advantages from the optimisation of loan book management, diversification of funding sources, reduction in funding costs and matching the maturities of assets and liabilities. Securitisations remained stable, an opinion also shared by the rating agencies who did not readjust the ratings originally assigned to the classes of notes issued. The portfolio securitised through the Siena Mortgages S.r.l. vehicles comprises real estate-backed loans issued by both the Parent Company and by other banks within the Group. Mantegna Finance S.r.l. and Mantegna Finance II S.r.l. were originated by Banca Agricola Mantovana S.p.A. (now merged into the Bank), and Spoleto Mortgages S.r.l. was originated by Banca Popolare di Spoleto S.p.A. 303

304 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Redemption of securitisations In March 2011, the Siena Mortgages 03-4 S.r.l securitisation was redeemed, with subsequent repurchase of residual receivables consisting in real estate-backed loans issued by both the Parent Company and other banks within the Group. The repurchase transaction contributed EUR 5.5 mln in profit to the Parent Company's financial results. Securitisations originated in previous financial years, outstanding as at Following is an outline of the Group s performing securitisation transactions originated in previous financial years, outstanding as at , all of which qualifiying for derecognition of the underlying assets, except for Siena Mortgages 10-7 S.r.l.: Mantegna Finance S.r.l. Mantegna Finance II S.r.l. Originated by former Banca Agricola Mantovana S.p.a., now merged into the Bank, both securitisations consist in residential mortgages and are characterised by derecognition of the underlying assets. Mantegna Finance S.r.l. dates back to Following authorisation received on 26 August 2011, on 15 January 2012 the Bank exercised its right to repurchase receivables sold, thereby proceeding to extinguish the securitisation and consequently repurchase receivables sold. The portfolio repurchase transaction, amounting to EUR 54 mln, did not have a significant impact on the income statement. Mantegna Finance II S.r.l. is a transaction that was completed in 2002 and has a remaining debt balance of EUR 45.7 mln. Gonzaga Finance S.r.l. Banca Agricola Mantovana S.p.A. originated the Gonzaga Finance S.r.l. securitisation of securities in 2000, which has a remaining debt balance of EUR 15 mln. Siena Mortgages 10-7 S.r.l. This securitisation was finalised in September Its portfolio consisted in 34,971 Parent Company's performing, residential loans which, as at reporting date, had a remaining debt balance of approximately EUR 3,156 mln. The vehicle financed purchasing of the portfolio by issuing RMBS (Residential Mortgage-Backed) securities. Classes A1 and A2 were placed with market investors, whereas the remaining classes of notes issued by the vehicle were underwritten by the Parent Company. Market placement of classes A1 and A2 did not entail the derecognition of the underlying assets from the balance sheet of the Parent Company (transferor), which has substantially retained all risks and rewards associated with the property of the assets sold. Consequently, an offsetting entry for the cashflows arising from the disposal of tranche A1 and A2 was posted on the liabilities side of the balance sheet. Casaforte S.r.l. This securitisation was carried out in 2010 and consisted in the transfer to vehicle Casaforte S.r.l of a pool of receivables arising from a mortgage loan granted to the consortium company, Perimetro Gestione Proprietà Immobiliari. The remaining debt balance amounts to EUR 1,557 mln. 304

305 Spoleto Mortgages S.r.l. Ulisse 4 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Finally, the Ulisse 4 and Spoleto Mortgages s.r.l. securitisations were carried out by Banca Popolare di Spoleto, a bank jointly controlled by the Parent Company and proportionately consolidated at %. Ulisse 4 is a securitisation of non-performing loans that originated in 2001 and has a remaining debt balance of EUR 13.4 mln as at The senior notes were fully redeeemed. Spoleto Mortgages S.r.l. is a securitisation of performing loans that originated in 2003; its remaining debt balance is EUR 37.3 mln. As at 31/12/2011 the special-purpose vehicle had repaid 87.82% of the senior notes. Securitisation transactions completed in 2011 In the course of 2011, the Group did not complete any new securitisations but, for the purpose of optimising its liquidity management, it continued with its covered bond issuance programme (as described in detail in section C.3). 305

306 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies C.1.1 Banking Group - Exposures arising from securitisation transactions broken down by quality of underlying assets Quantitative Information In relation to securitisation transactions with own and third-party underlying assets, the table indicates balance-sheet exposures, with and without guarantees, and other forms of 'credit enhancement'. Third-party securitised exposures exclusively include balance-sheet exposures and consist in securities issued by third-party vehicles. 306

307 C.1.2 Banking Group - Exposures arising from major own securitisation transactions broken down by type of securitised assets and exposures Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Balance-sheet exposure Guarantees issued Lines of credit Senior M ezzanine Junior Senior M ezzanine Junior Senior M ezzanine Junior A.1 M antegna Finance residential mortgages - - 9,386-10,654 (18) A.2 M antegna Finance II residential mortgages ,831 (862) A.3 Gonzaga Finance bonds and credit derivativesù , A.4 Spoleto M ortgages A.5 Ulisse non-performing loans ,252 (202) A.6 CASAFORTE residential mortgages 67,293-43, A.7 SIENA M ORTGAGES residential mortgages 115,532-2,518, , T ype o f securitised asset/ Expo sure Book value Book value Book value Net exposure Net exposure Net exposure Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Net exposure Net exposure Net exposure Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks A. Fully derecognised - landed mortgage loans secured by 1st mortgage 1, , B. P artially derecognised C. Not derecognised The table indicates the exposures assumed by the Group in relation to each of its own securitisation transactions, and also reports the contractual types of assets sold. The column Write-downs/write-backs indicates the amount of any write-downs or write-backs during the year as well as depreciations and revaluations posted to profit and loss or directly to an equity reserve. Line A. Fully derecognised includes own securitisation transactions put in place before 1 January 2004 for which the Group has taken advantage of the exemption from the requirements to comply with IAS/IFRS, as permitted by IFRS 1 upon first time adoption. As a result of this exemption, financial assets and liabilities sold and derecognised in relation to these transactions were allowed to be derecognised from the balance sheet, based on previous national accounting standards, provided such derecognition did not meet the requirements set out by IAS 39. The Siena Mortgages 10-7 securitisation included subscription of RMBS securities issued by the vehicle (classes: A3 senior for an amount of EUR 1,666.9 mln, B Mezzanine for a total amount of EUR mln, C Junior for an amount of EUR mln). 307

308 C.1.3 Banking Group Exposure arising from major third party securitisation transactions broken down by type of securitisied asset and type of exposure Balance-sheet exposure Guarantees issued Lines of credit Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Type of securitised asset/exposure Book value Senior M ezzanine Junior Senior M ezzanine Junior Senior M ezzanine Junior Writedowns/ write-backs Book value Writedowns/ write-backs Book value Writedowns/ write-backs Net exposure A.1 AIREM TV SE residential mortgages A.2 ARENAA2 TV NO residential mortgages 4, A.3 ARRAN RESIDENT residential mortgages 9, A.4 ATLAN TV JA residential mortgages 1, A.5 BCC M T TV SE residential mortgages 3, A.6 BELUGA residential mortgages 13, A.7 BERICA residential mortgages 19, A.8 BPM O TV JN residential mortgages 2, A.9 CANDIDE FINANCING 2006 BV residential mortgages 20, A.10 CCS TV JN residential mortgages 12, A.11 CLARF-TV 11/60 A residential mortgages 16, A.12 CLOVERIE TVSE Bond Net exposure Net exposure Net exposure Net exposure Net exposure Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks 308

309 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Balance-sheet exposure Guarantees issued Lines of credit Type of securitised asset/exposure Book value Writedowns/ write-backs Book value Writedowns/ write-backs Book value Writedowns/ write-backs Net exposure A.13 COLOM BO Srl residential mortgages , A.14 CORDUSIO TVDE residential mortgages 2, A.15 CREDF3 A1 TVM R Bond 7, A.16 DUTCH A1 M R residential mortgages 2, A.17 DUTCH A2 M R residential mortgages 9, A.18 DUTCH-TV 11/ residential mortgages 9, A.19 EM PYR TV AP Bond A.20 ENTASI Srl non performing loans 49, A.21 F-E GREEN SRL Real estate lease A.22 FIPFD 05/23 TV non.residential mortgages 23, A.23 FOSSE M ASTER ISSUER P.I.c residential mortgages 17, A.24 FOSSM TM OC non residential mortgages A.25 GOLDEN BAR SECURITISATION SRL Senior M ezzanine Junior Senior M ezzanine Junior Senior M ezzanine Junior Net exposure commercial loans 2, A.26 GRANITE M ASTER ISSUER P.l residential mortgages 2, A.27 GRANITE TV M R residential mortgages - - 4, A.28 GREYL TV M R Bond 11, Net exposure Net exposure Net exposure Net exposure Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks 309

310 Balance-sheet exposure Guarantees issued Lines of credit Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Type of securitised asset/exposure Book value Writedowns/ write-backs Book value Writedowns/ write-backs Book value Writedowns/ write-backs Net exposure A.29 HIPO TV JN Leasing A.30 ITALFIN TV JA Equipment Leases/IT 2, A.31 LOCAT SECURITISATION VEHICLE 2 SRL Real Estate Lease 1, A.32 LUDGATE FUNDING P.l.c residential mortgages 2, A.33 M ONTE 2008 B.V residential mortgages 304, A.34 PATAG ZC DE Bond 80, A.35 PATAGONIA FINANCE s.a Bond , A.36 PERM ANENT M ASTER ISSUER PLC Net exposure residential mortgages 11, A.37 PREP2TVDE loans SM E 4, A.38 PTRM O1A TV DE non.residential mortgages 448-1, A.39 RUTLNDRY TV JN Bond 1, A.40 SAECURE 5 BV residential mortgages 4, A.41 SANTANDER FINANCIACION residential mortgages A.42 SEMPER FINANCE G.M.B.H Senior M ezzanine Junior Senior M ezzanine Junior Senior M ezzanine Junior residential mortgages 2, , A.43 SHAM R TV JN Bond A.44 SPLIT2CLA OC Real Estate Lease/IT A.45 STICHING M EM PHIS 2006-I residential mortgages - - 2, Net exposure Net exposure Net exposure Net exposure Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks

311 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Balance-sheet exposure Guarantees issued Lines of credit The table indicates the exposures assumed by the Group in relation to each of the third-party securitisation transactions, and also reports the contractual type of assets sold. The column labelled Write-downs/Write-backs indicates the amount of any write-downs or write-backs during the year as well as depreciations and revaluations posted to profit and loss or directly to equity reserve in the case of available-for-sale securities. Type of securitised asset/exposure Book value Senior M ezzanine Junior Senior M ezzanine Junior Senior M ezzanine Junior Writedowns/ write-backs Book value Writedowns/ write-backs Book value Writedowns/ write-backs Net exposure A.46 STORM BV TV M R residential mortgages 4, A.47 TDA 28 FONDO DE TITULIZACI residential mortgages A.48 TITAN TV AP non.residential mortgages - - 1, T o t al 665, , , Net exposure Net exposure Net exposure Net exposure Net exposure Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks Writedowns/ writebacks 311

312 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies C.1.4 Banking Group - Exposures arising from securitisation transactions broken down by portfolio and type Exposure/portfolio Financial assets held for trading Financial assets designated at fair value Financial assets available for sale Financial assets held to maturity Loans Total 31/12/2011 Total 31/12/ Balance-sheet exposure 372,351-8, , , ,336 - Senior 297,194-4, , , ,165 - Mezzanine 56,472-4,014-21,489 81,975 63,868 - Junior 18, ,681 33,366 77, Off-balance-sheet exposures Senior Mezzanine Junior The table indicates the Group s exposures in relation to each of its own and third-party securitisation transactions, and also reports balance-sheet portfolios to which these assets were allocated. 312

313 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies C.1.5 Banking Group Total amount of securitised assets underlying junior securities or other forms of credit enhancement Asset / Amount Traditional securitisations Synthetic secularisations A. With own underlying assets: 3,277,423 - A.1 Fully derecognised 120, Non-performing loans 8,370 x 2. Watchlist loans 1,568 x 3. Restructured loans - x 4. Past-due - x 5. Other assets 110,490 x A.2 Partially derecognised Non-performing loans - x 2. Watchlist loans - x 3. Restructured loans - x 4. Past-due - x 5. Other assets - x A.3 Not derecognised 3,156, Non-performing loans Watchlist loans 1, Restructured loans Past-due 4, Other assets 3,150,465 - B. With third-party underlying assets: 350,113 - B.1 Non-performing loans - - B.2 Watchlist loans - - B.3 Restructured loans - - B.4 Past due - - B.5 Other assets 350,113 - The table indicates, in terms of junior securities and other forms of credit enhancement held, the amount of the existing portfolio of securitised assets on reporting date broken down by quality of securitised assets and origin (own or third-party assets). 313

314 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies C.1.6 Banking Group - Stakes in special purpose vehicles Name Registered Office Stake % Mantegna Finance I Srl Mantova - Corso V. Emanuele 2 7% Mantegna Finance II Srl Mantova - Corso V. Emanuele 2 7% Siena Mortgages 10-7 S.r.l. Conegliano (TV) - Via V. Alfieri n.1 7% This table shows the stakes held in special purpose vehicles. All of the above are stakes in own securitisation vehicles. Stakes in vehicles that have no pools of securitised assets are not shown in the table. 314

315 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies C.1.7 Banking Group - Servicer activities - Collections of securitised loans and redemptions of securities issued by special purpose vehicles Servicer Special Purpose Veicle BMPS BMPS BMPS BMPS BMPS Siena Mortgages S.r.l. Mantegna I Srl Mantegna II Srl Casaforte Srl Gonzaga Finance Srl The table shows own securitisations where the Parent Bank plays the role of servicer. With reference to multi-originator securitisation transactions, the originator banks are in charge of servicing for the portion of loans sold. Total 31/12/2011 Total 31/12/2010 Securitised assets (yearend data) Loans collected during the year Impaired Performing Impaired Performing Impaired Senior Percentage of securities redeemed (year-end data) Performing 88,88% 86,11% 100,00% Impaired Mezzanine Performing Impaired Junior Performing 42,19% 315

316 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies C.1.8 Banking Group - Special purpose vehicles controlled by the Banking Group A summary of the securitisation transactions of the Group's vehicle companies is provided in the Qualitative information section. 316

317 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies A B C A B C A B C A B C A B C A B C Debt securities 5,901, ,838, , , ,843,313 25,572, Equity instruments 6, x x x x x x x x x 6,639 5, UCITS x x x x x x x x x Loans ,156, ,156,995 3,416,348 B. D erivatives x x x x x x x x x x x x x x x - - T o tal 31/ 12/ ,908, ,838, , ,452, ,006,947 - of which impaired T o tal 31/ 12/ ,161, ,107, , ,349, ,994,998 of which impaired The table reports the book value of financial assets sold but not derecognised, and still partially or fully reported in the balance sheet assets. Line 1. Debt securities" exclusively includes securities sold in sale and repurchase agreements; the amount in line "4. Loans" refers to performing loans included in securitisation transaction without derecognition, Siena C.2 Transfers C.2.1 Banking Group - Financial assets sold and not derecognised T ype/ po rtfo lio F inancial assets held fo r trading F inancial assets designated at fair value F inancial assets available fo r sale F inancial assets held to maturity Lo ans to banks Lo ans to custo mers T o tal A. B alance-sheet assets 5,908, ,838, , ,452, ,006,947 28,994,

318 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies C.2.1.a cognised, and still partially or fully reported under bal Item/Amount Total Total Reverse repurchase agreements 19,432,391 25,578,650 Securisations 3,156,995 3,416,348 Securities lending 417,561 - Transfers - - Total 23,006,947 28,994,998 The table shows transferred financial assets that are not derecognised, by type of transfer. C.2.2 Banking Group - Financial liabilities associated with transferred financial assets that are not derecognised Liabilities/Asset Portfolios Financial assets held for trading Financial assets designated at fair value Financial assets available for sale Financial assets held to maturity Loans to banks Loans to customers Total 1. Deposits from customers 3,301,868-8,249, , ,594 12,231,270 a) relating to fully recognised assets 3,301,868-8,249, , ,594 12,231,270 b) relating to partially recognised assets Deposits from banks 2,301,403-5,246,984-57, ,429 8,274,047 a) relating to fully recognised assets 2,301,403-5,246,984-57, ,429 8,274,047 b) relating to partially recognised assets Debt securities issued a) relating to fully recognised assets b) relating to partially recognised assets Total 31/12/2011 5,603,271-13,496, ,308 1,221,023 20,505,317 Total 31/12/2010 2,377,299-17,872, ,792 1,298,700 21,687,269 The table indicates the book value of financial liabilities posted as offsetting entries to financial assets sold and not derecognised partially or in their entirety from balance sheet assets. This category only involves liabilities posted against repurchase agreements. 318

319 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies C.3 Banking Group os (liabilities).of financi Characteristics of the Covered Bond Issuance Programme In the course of 2010, the Parent Company launched a multi-year programme for the issuance of Covered Bonds for an amount of EUR 10,000 mln. The programme is intended to place a new product on the market, offering covered bonds as a preferred instrument for financial profile improvement in the short to mid term. In light of the developments in the financial markets, the programme should be considered as part of a wider strategy, aimed at: curbing the costs of funding: covered bonds are widely preferred, inasmuch as they are issued directly by the Bank and their repayment is guaranteed by a segregated pool of assets (in this case, residential mortgage loans); in the event of issuer bankruptcy, covered bond holders enjoy a right of recourse on a portfolio of segregated high-quality assets and are, therefore, willing to accept a lower yield than the one offered by similar uncovered bonds; diversifying the Bank's funding sources on the international market; lengthening its average debt maturity profile; meeting risk-averting investors' needs; In the course of 2011, the programme was also used as a guarantee in collateralised lending transactions. The deal is structured into the following stages: a) the Parent Company or another Group company transfers, without recourse, a pool of assets having certain characteristics to the vehicle, MPS Covered Bond S.r.l., thus forming a segregated Cover Pool; b) the Transferor grants a subordinated loan to the vehicle, for the purpose of financing payment of the assets' purchase price by the vehicle; c) the Parent Company issues covered bonds secured by an autonomous, irrevocable and unconditional first-demand guarantee issued by the vehicle for the only benefit of the bond-holding investors and hedging counterparties involved in the transaction; the guarantee involves limited recourse to the assets of the Cover Pool owned by the vehicle (guarantor). The structure of the deal is such that the Parent Company is the transferor (a), lender (b) and issuer (c) in the transaction. Financial Statement Recognition Pursuant to IAS 39, the derecognition of a financial instrument from the balance sheet of the transferor is determined on the basis of the substance of the contract, not its legal form. Having said this, the deal is recognised as follows: transferred loans continue to be reported in the Parent Company's balance sheet under sub-item "Loans" of item 70 "Loans to customers" on the asset side, inasmuch as the Parent Company retains the risks and rewards of ownership of the loans transferred; the loan disbursed by the Parent to the Vehicle is not classified as a separate item in the balance sheet, since it is offset with the amount due to the Vehicle in which the initial transfer price was recognised. The loan, therefore, is not subject to credit risk assessment, because this risk is entirely reflected in the assement of transferred loans, which continue to be reported in the Parent Company's balance sheet. loans are subject to movements based on own events (figures and assessment); instalments collected by the Parent (which also acts as a servicer) are reallocated daily to the Vehicle's "Collection Account" and accounted for by the Parent as follows: collection of principal from borrower is recognised as an offsetting entry to the reduction in the loan to the borrower; reallocation of principal to the Vehicle is recognised as an offsetting entry to the recognition of a loan to the Vehicle; - this loan is paid off upon repayment of the subordinated loan; - interest from borrower is recognised as an offsetting entry to Item 10 "Interest income: Loans to customers" (interest on loans continues to be recognised on an accrual basis); - reallocation of interest to the Vehicle is recognised as an offsetting entry to the recognition of a loan to the Vehicle; - this loan is paid off upon collection of the receive leg of the Cover Pool Swap; The Vehicle MPS Covered Bond S.r.l. is invested in by the Parent Company for a control stake of 90%, recognised under item 100 Equity Investments and included in the Group's consolidated financial statements under the comprehensive approach. Bonds issued are posted to Item 30 "Debt securities in issue" on the liabilities side, and related interest expense is recognised on an accrual basis. 319

320 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies In consideration of the characteristics and accounting treatment of the deal, the swaps associated to the transaction are not recognised in the balance sheet, since their recognition would entail, pursuant to par. AG49 of IAS 39, a duplication of rights and obligations already recognised due to loans transferred being maintained on the balance sheet. Risks and Control Measures In order to allow the transferee to meet the obligations of the collateral pledged, the Parent Company uses appropriate Asset & Liability Management techniques to secure a trend of substantial balance between the maturities of cash flows arising from the assets sold and maturities of payments due in relation with the covered bonds issued and other costs of the transaction. The Programme was structured in compliance with applicable rules and regulations which authorise the issuance of covered bonds only if the transfering and issuing banks meet certain capital requirements. The structure of the debt issuance programme of the Parent Company (transferor and servicer) is subject to stringent regulatory requirements and calls for continuous actions by the Credit, Treasury & Capital Management and Risk Management Areas, as well as supervision by an external auditor (Deloitte & Touche) as Asset Monitors. In particular, these actions include: assessment of capital requirements mandated by Supervisory Instructions when it comes to covered bond issuance programmes; assessment of the quality and integrity of assets transferred with regard, in particular, to the estimated value of properties, both residential and non-residential, on which a mortgage in relation with the asset-backed loans is placed; this assessment may result in repurchases, integrations and additional transfers of supplemental assets; assessment of an appropriate ratio being maintained between bonds issued and assets transferred as collateral (Cover Pool - mortgage and residential assets); assessment of transfer limits and integration practices; assessment on whether risks are effectively and adequately hedged by derivative contracts in relation to the transaction. 320

321 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Description of individual issuances As part of the programme, the Parent Company completed nine issuances for a total amount of EUR 5,920 mln in In brief: the two issuances launched on 09/02/11 and 15/03/11 were for the Euromarket; the three issuances launched on 13/5/11 were for private placement; the Parent Company also finalised four additional issuances (of which two new issuances and two reopenings of a previous issuance) for a total amount of EUR 3,470 mln which were not intended for the market but repurchased by the Group and used primarily as guarantee for collateralised lending transactions. Here follows a summary of the main characteristics of the transfers: Cover Pool transfer date Type of securitised assets Transferor Total value of assets transferred (in units of ) no. of mortgage loans transferred Breakdown of transferred debtors by business sectors Residential mortgage loans Banca Monte dei Paschi di Siena 4,413,282,561 36, % natural persons Residential mortgage loans Banca Monte dei Paschi di Siena 2,410,518,893 19, % natural persons Residential mortgage loans Banca Monte dei Paschi di Siena 3,887,509,799 40, % natural persons Residential mortgage loans Banca Antonveneta 2,343,829,924 26, % natural persons Residential mortgage loans Banca Monte dei Paschi di Siena 2,323,368,355 27, % natural persons 15,378,509, ,173 and issuances: ISIN code Issued amount (units/eur) Amount repurchased (units/eur) Covered Bond Issuance Programme Reoffer Price Date of issue Covered bond maturity IT ,000,000,000 5,577, /06/10 30/06/15 IT ,000,000,000 1,000,000, /08/10 03/08/14 IT ,250,000,000 21,865, /09/10 23/09/13 IT ,000,000,000 12,460, /02/ /02/2018 IT ,250,000,000 19,090, /03/11 15/09/16 IT ,000, ,000, /03/ /02/2018 IT ,000, /5/11 13/05/2026 IT ,000, /5/11 13/05/ Coupon interest Fixed annual rate 3.125% Floating rate, 6m Euribor + 6m 0.9% Fixed annual rate 2.500% Fixed annual rate 5.000% Fixed annual rate 4.875% Fixed annual rate 5.000% Fixed annual rate % Fixed annual rate 5.50% IT ,000, /5/11 13/05/2031 Zero Coupon IT ,600,000,000 1,600,000, /08/11 12/12/13 IT ,000, ,000, /08/ /02/2018 IT ,000,000,000 1,000,000, /09/11 01/07/2014 Fixed annual rate 3.250% Fixed annual rate 5.000% Floating rate, 3m Euribor + 3m 1.8% External rating (upon issuance) Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA Moody s: Aaa Fitch: AAA External rating (as at ) Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Moody's: Aa1 Fitch: AAA neg watch Book value as at (units/eur) 1,026,748,137 1,255,401,402 1,561,540,943 1,275,381,089 74,952,425 74,580,075 48,094,973

322 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies D.CREDIT RISK MEASUREMENT MODELS Credit risk is analysed using the Credit Portfolio Model, which was developed internally by the Parent Company and produces detailed outputs in the form of traditional risk measures such as Expected Loss, Unexpected Loss and intra-risk diversified Economic Capital with a representative period of one year and a confidence interval calibrated to the target rating assigned to the Group. There are numerous inputs: Probability of Default (PD), Loss Given Default (LGD) rates, number and types of guarantees supporting the credit facility, internal operational Exposure at Default (EAD). The Credit Portfolio Model developed within the Montepaschi Group uses a Merton approach to represent the insolvency of each counterparty in the portfolio. According to this approach, a counterparty becomes insolvent when a synthetic variable expressing its creditworthiness falls below a pre-determined threshold value for a representative period (normally one year). The synthetic variable expressing the creditworthiness of the counterparty is known as the Credit Worthiness Index (CWI) and consists in both the risk that is specific to a counterparty and the systemic risk. Each counterparty s creditworthiness sensitivity to changes in macroeconomic factors is estimated using an econometric model of multivariate regression between the counterparty s probability of default (PD) variable and selected credit drivers. The breakdown of losses is estimated with suitable statistical functions which approximate the breakdown of losses by counterparty through the use of conditioned default probabilities. The portfolio model output provides detailed measures for individual positions as well as the absorbed operating capital component and indicates the extent of portfolio diversification. The model displays the change in credit risk over time based on various combinations of the variables under analysis, by legal entity, customer type, geographical area, business area, rating class and continental areas. Other information derived from the Credit Portfolio Model concerns what-if analyses produced for certain discriminating variables such as probability of default, LGD rates, changes in the value of collaterals and in margins available on credit lines, in order to quantify the levels of Expected Loss and Economic Capital should the underlying (discretionary or trend-based) assumptions materialise. In accordance with the provisions of the Second Pillar of Basel 2, the Montepaschi Group is committed to the continuous development of methodologies and models in order to assess the impact on the loan portfolio of stress conditions produced using sensitivity analyses with respect to individual risk factors or through scenario analyses. The chart below provides a breakdown of the credit quality of the Montepaschi Group portfolio as at 31 December 2011 (excluding financial asset positions). The graph below shows that about 50% of risk exposure is to high and good quality customers. It should be noted that the ranking below also includes exposure to banks, government agencies and nonregulated financial and banking institutions, which are not included in the AIRB approaches. As borrowers, these entities are nevertheless subject to a credit standing assessment using official ratings, if any, or appropriate benchmark values that have been determined internally. - Performing loan book- Quality as at % 40% 30% 20% 10% 0% High Good Average Below-average Low % EAD % PA % CAP 322

323 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies On the other hand, the following chart provides a breakdown of credit quality only for Corporate and Retail portfolios (which are largely validated by regulatory authorities for the use of internal PD and LGD models). As at 31 December 2011, high or good quality exposure accounted for approximately 42% of total exposure. The following chart shows that the three retail banks (Banca MPS, Banca Antonveneta and BiverBanca) contribute to approximately 85% of the total Montepaschi Group s exposure to risk, whereas the companies MPS L&F, MPS Capital Services and Consum.it account for the remaining 15%. Risk Exposure Montepaschi Group MPS Bank 74,3% BAV 8,9% MPS L&F 4,1% Biver 1,5% MPS Capital Services 8,0% Consumit 3,2% 323

324 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies With regard to risk measures, the highest percentage of expected loss is attributable to the Parent Company at 71.8% followed by Banca Antonveneta with 10.5%, Consum.it and MPS Capital Services (6.8% and 5.4% respectively), while the remainder (5.5%) is assigned to cover the risks of MPS Leasing & Factoring and BiverBanca. Expected Loss Montepaschi Group MPS L&F 3,9% MPS Bank 71,8% BAV 10,5% Biver 1,6% MPS Capital Services 5,4% Consumit 6,8% Most of the overall amount of Economic Capital to cover credit risk is absorbed by the Parent Bank (about 70.2%), followed by Banca Antonveneta and MPS Capital Services (12.3% and 6.2% respectively) with the remaining 11.3% absorbed by the other legal entities. Economic Capital Montepaschi Group MPS Bank 70,2% MPS L&F 4,0% Biver 1,4% MPS Capital Services 5,9% Consumit 6,2% BAV 12,3% An analysis conducted at the end of 2011 shows that the risk exposure of the Montepaschi Group is mainly toward Manufacturing Companies (59% of total loans disbursed) and Households (28.3%). The remaining portion is broken down between "Government and Public Administration", which makes up 9.6% and "Banks and Financial Institutions" for 3.1%. Risk Exposure Montepaschi Group Banks and Financial Instit. 3,1% Manufacturing Companies 59,0% Consumers 28,3% Governments and Public Admin. 9,6% 324

325 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies In terms of risk measures, it should be noted that Manufacturing Companies account for 87.5% of the Expected Loss and 85.7% of the Economic Capital. The portion for Households comes to 11.4% for Expected Loss and 12.6% for Economic Capital respectively. Expected Loss Montepaschi Group Banks and Financial Instit. 0,8% Consumers 11,4% Manufacturing Companies 87,5% Governments and Public Admin. 0,3% An analysis of the geographical breakdown of customers of the Montepaschi Group shows that exposure to risk is primarily concentrated in Italy s Central regions (39.2%), followed by the North West and North East (20.6% and 16.8%), Southern Italy (14.3%), foreign countries (4.6%) and Italy's islands (4.5%). Risk Exposure Montepaschi Group South 14,3% Islands 4,5% Foreign 4,6% Central Italy 39,2% North East 16,8% North West 20,6% 325

326 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Overall risk measures (Expected Loss + Economic Capital) are also higher (29.6%) in central Italy due to the greater concentration of loans in that area. Next in the ranking are North-western Italy (22.9%), the North East (20.4%), the South (19%) and Italy's islands (5.8%), while the remainder comes from foreign customers (2.3%). Expected Loss + Economic Capital Montepaschi Group Central Italy 29,6% South 19,0% Islands 5,8% Foreign 2,3% North East 20,4% North West 22,9% Lastly, the following graphs show a percentage breakdown for Italian corporate customers of Default Exposure and overall risk measures (Expected Loss + Economic Capital) by Geographical Areas and Business Sectors. The largest share of Default Exposure for businesses in all Geographic Areas is accounted for by the "Services" sector. Out of the MPS Group's total exposure, the share of Services accounts for 50% and is followed by Industry (28%), Building (16%) and Agriculture (6%). Italian Corporate customers performing loan book as at EAD by geography and business segment North West 4% 13% 35% 48% North East 6% 14% 35% 45% Center 6% 19% 24% 51% South 4% 19% 23% 54% Islands 6% 20% 16% 58% Total MPS Group 6% 16% 28% 50% AGRICULTURE REAL ESTATE INDUSTRY SERVICES 326

327 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Overall risk measures, defined as the sum of Expected Loss and Economic Capital, are also higher for the Services business sector in all Geographic Areas, with the exception of the North West of Italy where the Industrial sector accounts for the largest share (42%). Italian Corporate customers performing loan book as at EL+ECAP by geography and business segment North West 7% 18% 42% 33% North East 5% 12% 34% 49% Center 7% 17% 31% 45% South 2% 19% 19% 60% Islands 2% 20% 15% 63% Total MPS Group 6% 17% 30% 47% AGRICULTURE REAL ESTATE INDUSTRY SERVICES 327

328 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies Section 2 Market Risk 2.1 Interest rate and price risk regulatory trading book Market risks in the trading book Market risk management model for the Trading Book The Montepaschi Group s Regulatory Trading Portfolio (RTP), or Trading Book, is made up of all the Regulatory Trading books managed by the Parent Bank (BMPS), MPS Capital Services (MPSCS) and, to a smaller extent, by BiverBanca and the Irish subsidiary Monte Paschi Ireland. The addition of Banca Antonveneta to the Group in 2008 had no effect on this area since the management approach in use called for centralising all market risks at BMPS and MPSCS. The portfolios of the other retail subsidiaries are immune to market risk since they only contain their own bonds held to service retail customers. Operations involving derivatives, which are brokered in favour of the same customers, also call for risk to be centralised at -and managed by- MPSCS. The market risks in the trading book of both the Parent Company and the other Group entities (which are relevant as independent market risk taking centres), are monitored in terms of Value-at-Risk (VaR) for operational purposes. The Group s Finance Committee is responsible for directing and coordinating the overall process of managing the Group s proprietary finance thereby ensuring that the management strategies of the various business units are consistent. The Montepaschi Group Trading Book is subject to daily monitoring and reporting by the Risk Management Area of the Parent Company on the basis of proprietary systems. VaR for management purposes is calculated separately from the operating units, using the internal model of risk measurement implemented by the Risk Management Unit in keeping with international best practices. However, the Group uses the standardised methodology in the area of market risks solely for reporting purposes. Operating limits to trading activities, which are established by the Board of Directors of BMPS, are expressed by level of delegated authority in terms of VaR, which is diversified by risk factors and portfolios and monthly and annual stop losses. Furthermore, the trading book s credit risk in addition to being included in VaR computations and in the respective limits for the credit spread risk component, is also subject to specific operating limits for issuer and bond concentration risk which specify maximum notional amounts by type of guarantor and rating class. VaR is calculated with a 99% confidence interval and a holding period of 1 business day. The Group adopts the method of historical simulation with daily full revaluation of all basic positions, out of 500 historical entries of risk factors (lookback period) with daily scrolling. The VaR calculated in this manner takes account of all diversification effects of risk factors, portfolios and types of instruments traded. It is not necessary to assume, a priori, any functional form in the distribution of asset returns, and the correlations of different financial instruments are implicitly captured by the VaR model on the basis of the combined time trend of risk factors. The daily management reporting flow on market risks is periodically transmitted to the Risk Committee, the Chairman and the Board of Directors of the Parent Company within the Risk Management Report, which keeps Top Management and other senior management areas up to date on the overall risk profile of the Montepaschi Group. The macrocategories of risk factors covered by the Internal Market Risk Model are IR, EQ, FX and CS as described below: IR: interest rates on all relevant curves and relative volatilities; EQ: share prices, indexes, baskets and relative volatilities; FX: foreign exchange rates and relative volatilities; CS: credit spread levels. VaR (or diversified or net VaR) is calculated and broken down daily for internal management purposes, even with respect to other dimensions of analysis: organisational/management analysis of portfolios, analysis by financial instrument, analysis by risk family. It is then possible to assess VaR along each combination of these dimensions in order to facilitate highly detailed analyses of events characterising the portfolios. 328

329 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies With particular reference to risk factors the following are identified: Interest Rate VaR (IR VaR), Equity VaR (EQ VaR), Forex VaR (FX VaR) and Credit Spread VaR (CS VaR). The algebraic sum of these items gives the so-called Gross VaR (or non-diversified VaR) which, when compared with diversified VaR, makes it possible to quantify the benefit of diversifying risk factors resulting from holding portfolios on asset class and risk factor allocations which are not perfectly correlated. This information can also be analysed along all the dimensions referenced above. The model enables the production of diversified VaR metrics for the entire Montepaschi Group in order to get an integrated overview of all the effects of diversification that can be generated among the various banks on account of the specific joint positioning of the various business units. Moreover, scenario and stress-test analyses are regularly conducted on various risk factors with different degrees of granularity across the entire tree structure of the Group's portfolios and for all categories of instruments analysed. Stress tests are used to assess the Group's capacity to absorb large potential losses in extreme market situations, so as to identify the measures necessary to reduce the risk profile and preserve assets. Stress tests are developed on the basis of discretionary and trend-based scenarios. Trend-based scenarios are defined on the basis of real situations of market disruption previously recorded. Such scenarios are identified based on a timeframe in which risk factors were subjected to stress. No particular assumptions are required with regard to the correlation among risk factors: use is made of the trend-based data for the stress period identified. Stress tests based upon discretionary scenarios assume extreme changes occurring to certain market parameters (interest rates, exchange rates, stock indices, credit spreads and volatility) and measure the corresponding impact on the value of portfolios, regardless of their actual occurrence in the past. Simple discretionary scenarios are currently being developed (variation of a single risk factor) as are multiple ones (variation of several risk factors simultaneously). Simple discretionary scenarios are calibrated to independently deal with one category of risk factors at a time, assuming the shocks do not spread to the other factors. Multiple discretionary scenarios, on the other hand, aim to assess the impact of global shocks that simultaneously affect all types of risk factors. *** 329

330 Notes to the Consolidated Financial Statements - Part E Risks and Hedging Policies In the course of 2011, market risk in the Group's Regulatory Trading Book in terms of VaR showed an overall upward trend, characterised by a high level of volatility particularly in the second half of the year. Tensions recorded in peripheral European countries - especially with regard to Italy s sovereign debt which began to draw attention as of July and intensified over the last quarter, reaching its peak at the start of November to coincide with the government crisis - heightened the volatility in financial markets across all major risk sectors. In December, the level of VaR returned to values closer to the annual average to stand at EUR mln as a consequence, among other things, of the reduced exposure in Italian government bonds by the subsidiary, MPS Capital Services. The Group s VaR came to EUR mln as at 31 December With regard to legal entities, the Group s market risks continue to be concentrated on MPSCS and Banca MPS. MPS Group VaR by bank as at Trading Book As at the end of December 2011, MPSCS accounted for 72% of overall risk, the Parent Company contributed approx. 25% while the remaining 3% was attributable to the other banks. MPS Capital Services 72% MPS Bank 25% Other Banks 3% 330

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