ANNUAL REPORT 2006 TRANSLATION FROM THE ITALIAN ORIGINAL WHICH REMAINS THE DEFINITIVE VERSION

Transcription

1 ANNUAL REPORT 2006 TRANSLATION FROM THE ITALIAN ORIGINAL WHICH REMAINS THE DEFINITIVE VERSION

2 Share Capital: 28,908,362 Euro fully paid in Bank License No.: 3205 Tax Identification No.: VAT No.: REGISTERED OFFICE AND HEADQUARTERS Via Terraglio, Mestre, Venice, Italy Internet Address: BRANCHES Via Astagno, , Ancona Via C. Rosalba, 47/z 70124, Bari Viale Bonaria, , Cagliari (Ca) Via Europa, , Florence Via A. Costa, , Imola (Bo) Via Volta, , Cologno Monzese (Mi) Via G. Porzio, 4 Centro Dir. Isola E , Naples Via De Paoli, 28/D 33170, Pordenone Viale B. Croce, , Rome Via G. L. Lagrange, , Turin Via Terraglio, , Mestre Venice REPRESENTATIVE OFFICES Boulevard Burebista, 3 Bucharest (Romania) Bajza U., 50 Budapest (Hungary)

3 BOARD OF DIRECTORS President Vice President Sebastien Egon Fürstenberg Alessandro Csillaghy CEO Giovanni Bossi (1) Directors Leopoldo Conti Roberto Cravero Andrea Martin (2) Riccardo Preve Marina Salamon GENERAL MANAGER Alberto Staccione BOARD OF STATUTORY AUDITORS President Standing Auditors Alternate Auditors Mauro Rovida Erasmo Santesso Dario Stevanato Luca Giacometti Francesca Rapetti AUDITING FIRM KPMG S.p.A Member of Factors Chain International (1) The CEO has powers for the ordinary administration of the company (2) Up to 20 December 2006 under DM161 of 18 March 1998

4 CONTENTS Group consolidated annual report for the year ending 31 December 2006 Board of Directors report on management of the group 6 Consolidated financial statements 44 Statement of changes in Equity 47 Consolidated financial accounts 49 Notes to the consolidated financial statements 50 Board of Statutory Auditors report on the consolidated 165 financial statements External auditing company s report on the consolidated financial statements 168 Statutory annual report for the year ending 31 December 2006 Board of Directors report on management 171 Financial statements 189 Statement of changes in Equity 192 Financial accounts 194 Notes to the financial statements 195 Attachments to the financial statements Financial statements for the controlled company Immobiliare Marocco Financial statements for the controlled company IFIS Finance Sp.Z.o.o Statement of important shareholdings 320 Board of Statutory Auditors report on the statutory financial statements 322 External auditing company s report on the statutory financial statements 327

5 THE BANCA IFIS GROUP CONSOLIDATED ANNUAL REPORT 2006

6 BOARD OF DIRECTORS REPORT ON MANAGEMENT OF THE GROUP

7 RESULTS AND OPERATING TREND Financing Small and Medium Enterprises through Factoring The Banca IFIS group continued its business profitably, aiming primarily at providing financing and management assistance to Italian and foreign small and medium enterprises through factoring. Together with advanced instruments of credit assessment and monitoring, factoring represents an excellent response to SMEs need for financial services, above all in the light of the new rules for capital consumption for banks (the Basel 2 Accord). In carrying out its activity, Banca IFIS purchases the accounts receivables of its client s enterprise and manages the collection of these receivables; in addition, it gives financing against the receivables purchased for amounts that, in some cases, reach the entire counter value of the receivables assigned by the client. Lastly, upon request, Banca IFIS can also take on the risk of bad debts on these receivables due to the debtor s failure to pay owing to insolvency. Small and medium enterprises find Banca IFIS s factoring to be a valid instrument for managing and financing working capital, especially where their economic or financial circumstances would normal make it difficult to obtain a traditional bank loan at the desired conditions. Banca IFIS s factoring service has developed to the favour of all Italian and international enterprises, from the smallest of companies to the medium and large category. The accounts receivables assigned by the client are the result of the client s enterprise s activity; they are usually of high quality and are short to very short term ( days). Banca IFIS s purchase of receivables is usually continuous and debtors are regularly notified that they must settle their commitment exclusively with the bank. The typical client is an enterprise with a turnover not normally exceeding 100 million Euro (but Banca IFIS does have clients with a turnover of between 1 million and 1 billion Euro) who, through their industrial or commercial activity, generate accounts receivables with another enterprise. Both the enterprises (the client s and the debtor s) are subject to in-depth and continuous risk assessment. In general, Banca IFIS s financing goes beyond the typical limits regarding the client s credit standing. This is due to the fact that such financing is also based on the client s debtors credit rating. Banca IFIS s business has developed in a segment heavily influenced by economic trends. Indeed, economic trends are frequently amplified for SMEs if compared to the target markets of general banks. A further difficulty is that the accentuated dynamics characterising the activities of Italian enterprises leads to an increasing need for information allowing the bank to make a knowledgeable decision when assessing whether to assume a risk or otherwise. Banca IFIS continues to distance itself from activities such as client savings management, operations in favour of subjects other than enterprises and those connected and the assumption of risks that are not the short-term risks that usually characterise traditional factoring operations. The assumption of risks in foreign currency, securities, derivative instruments and, more generally, all those activities that involve the assumption of market risk are limited to the management of the financial surpluses available. The results that Banca IFIS has achieved, therefore, are exclusively thanks to the factoring activity, i.e. the funding of working capital and the management of enterprises accounts receivables and activities connected to it. 7 * * * Over 2006, Banca IFIS has continued the strategy of increasing its number of clients and further developing relationships with existing clients through focusing on products with a higher service component and more added value, hence improving client loyalty. In particular, over the last part of the year, reinforcement in the development of new clients, penetration into partially new market sectors and the introduction of new services for existing clients (whilst still being based on financing Italian and international SMEs working capital through factoring) reached levels never before achieved in the history of Banca IFIS. The results of actions taken commercially and organisationally as from the second half of 2006, are largely positive and have had an effect on the bank s entire structure, presently subjected to physiological and beneficial evolutive pressure. Results in terms of: - strengthening the sales network;

8 - capacity of risk analysis and risk management of counterparts; - increases in the client base and contextual risk spreading; - the presence of the bank in domestic and international markets; - increases in operational parameters, volumes of business managed and income and profitability; are presently being realised and will continue to play an important part in Banca IFIS s near future. The strong recovery in development activities, at the end of 2006, followed a period that was somewhat problematic. During the second and third quarter 2006, development had slowed down due to exogenous and endogenous factors. In the middle of 2006, certain operations with public debtors that had positively influenced the entire 2005 accounting year and the first quarter of 2006, were not realised. In the meanwhile, as set out in the strategic plans, Banca IFIS had initiated expansion and strengthening activities in certain organisational and control areas. This has been, and is being, achieved through the employment of new resources and the adoption of new and more efficient procedures, ideal for supporting the bank s domestic and international growth, over the next few accounting years. Such activities were a necessary step after the bank s actions on its own capital at the end of 2005 (the capital increases, both paid and unpaid and the cum warrants) and in 2004 (the issue of a convertible bond) which were all a result of the short-medium term development strategy. The implementation of such activities understandably led to a slow-down in development, in particular in the middle of Such a slow-down is now in the process of a complete recovery. Over the course of 2006, the Bank of Italy carried out a general inspection of Banca IFIS, effected under the Consolidation Act for banks and credit institutions. During the same period, Banca IFIS was duly notified of the conclusions to such an inspection. This inspection did not result in the application of any sanctions but, rather, encouraged rapid reinforcement in the bank s organisational and control functions, also in order to better support its domestic and international expansion. In the light of the above, the results achieved by Banca IFIS are very positive, in terms of both profitability and the quality of assets. These results allow for optimism as far as concerns the bank s capacity to generate future stable profit flows, even in negative problematic economic conditions. Profit and Net Equity Group profit reached 15,012 thousand Euro, a growth of 0.4% over This result is due, on the one hand, to the increase generated by internal expansion in Banca IFIS s activities, and, on the other, to market pressure for better financial conditions, together with the increase in the number of employees and the development in organisational and control structures leading to increased costs. Increases in write-downs on loans were not considered necessary; rather such write-downs have been particularly contained. The amount of net adjustments for the period is the result of a decision made to book any write-downs as soon as presuppositions arise but, also, to rewrite, either partially or totally, the previous values where such presuppositions cease to exist. In this respect, the ratio of bad debts on loans over total loan commitments stood at 0.9% (against 0.8% as at 31 December 2005) a clear indication of the excellent result achieved by the bank in this area. ROE fell to 16.6%, a decrease from 31 December 2005 (27.7%) due to the capital increase that took place at the end of 2005 having an effect on the entire accounting period of Group net equity as at 31 December 2006 equalled 108,318 thousand Euro, an increase of 8% when compared to the 100,313 thousand Euro of 31 December It is important to state that, at the end of 2009, should the convertible bond loan expiring on 16 July 2009 be totally converted, and the outstanding warrants (exercisable from 1 August 2007 to 31 July 2008) be exercised in full, together with the exercising of the two remaining stock option plans existing today (during 2007 and 2008), net equity will increase by 84 million Euro, further to the part of profit that will not be distributed and to the variations in reserves resulting from the accounting according to IAS. Net profit per share, calculated considering the weighted average of the ordinary shares 8

9 outstanding, equalled 0.52 Euro (52 cents), a decrease with respect to the 0.68 Euro of 2005 due to the capital increase of the end of Net equity per share as at 31 December 2006 came to 3.80 Euro, compared to 3.50 Euro in With regards to share prices on the Italian Telematic Stock Market as at 31 December 2006, a price/earnings ratio of 19 and a price/book value of 2.67 were achieved. Such figures, while slightly above those of the bank context to which Banca IFIS belongs, are justified by the high growth rates of the bank and are based on the forecasted continued expansion in the mid-term. Group Area The composition of the group as at 31 December 2006 is composed of the parent company, Banca IFIS, and the controlled companies Immobiliare Marocco S.p.A., an instrumental subsidiary (held at 100%), and IFIS Finance Sp.Z.o.o., a factoring company located in Poland and purchased on 31 July 2006, as described in the details under other information. Operating Revenue Net operating revenue increased considerably compared to the previous accounting year, climbing from 34,206 thousand Euro in 2005 to 39,423 thousand Euro in 2006 (+15.3%). The earning margin registered an increase, rising 7.9% from 38,182 thousand Euro to 41,211 thousand Euro. It is worth mentioning that the ever increasing client tendency towards products with a significant service component, income from which being classified under factoring commission only, has brought about differing growth in the individual components making up the earning margin and makes a comparison between them senseless. Still, in detail, the interest margin reached 14,749 thousand Euro, against 15,479 thousand Euro at the end of 2005 (-4.7%). This margin has been affected by the booking of substantial payable interest for the retention of a debt by the Civil Service, mostly collected only at the end of the year, and whose default interest, running from the end of 2005, hasn t been booked as is it not possible, to date, to forecast how much of this interest will be recovered, depending on legal action taken and so forth. Net commissions also shot up by 26.1%, from 19,179 thousand Euro to 24,190 thousand Euro, thanks to development in factoring activities and business volumes and the ability to offer a high quality service to clients. Commissions payable as at 31 December 2005 included 3,443 thousand Euro from operations on securities. It is important to take into account the fact that this item has been negatively affected by the business not concluded with the Civil Service health service that existed throughout Such business is in the progress of being positively replaced. Making up the earning margin are profits from the sale of listed shares, held in the available-forsale portfolio, in the last quarter of the year. The capital gains on the remaining portfolio equalled 3,390 thousand Euro, at market prices at the end of the period. Such earnings are booked according to IAS in the equity reserve, net of taxes. In 2006, net write downs on loans reduced slightly from 2005, due to constant attention being paid to the granting of credit and, above all, to monitoring trends in operations with assigning clients and assigned debtors. Net value adjustments stood at 1,788 thousand Euro, a decrease of 55% with respect to the 3,976 thousand Euro of Net Profit operating costs stood at 15,811 thousand Euro, an increase of 15.5% compared to 13,691 thousand Euro in Specifically, personnel expenses rose from 8,416 thousand Euro in 2005 to 9,479 thousand Euro in 2006 (+12.6%) and other administrative expenses increased from 4,973 thousand Euro in 2005 to 6,173 thousand Euro in 2006 (+24.1%). Value adjustments on intangible and tangible fixed assets also rose from 873 thousand Euro in 2005 to 1,160 thousand Euro in 2006 (+32.9%). Other net operating income also climbed, from 571 thousand Euro in 2005 to 1,001 thousand Euro in 2006 (+75.3%). This income is mainly from redebiting third party expenses, costs of which are shown in other administrative expenses. The cost/income ratio for 2006 stood at 38.4% (35.9% as at 31 December 2005) confirming that it is one of the best on the entire national banking scene, despite increases in operating costs due to strengthening the structure and revising organisational and control structures. Pre-tax profit for current operations, equal to 23,612 thousand Euro, increased by 15.1% from the 20,515 thousand Euro of the previous accounting year. After tax on income for 8,600 thousand Euro (5,567 thousand in 2005, +54.5%) and in the absence of any profit deriving from third parties, net profit totalled 15,012 thousand Euro, compared to 14,948 in The higher level of taxes in 2006 is due to the fiscal benefits 9

10 realised in 2005 being unrepeatable. The parent company and the effects of consolidation The parent company, Banca IFIS, closes its yearly balance sheet with a net profit of 14,732 thousand Euro, drawn up in compliance with the IFRS International Accounting Standards. The instrumental subsidiary, Immobiliare Marocco S.p.A., suffered a net loss of 197 thousand Euro, redetermined according to IAS/IFRS standards for consolidation purposes; this loss refers mainly to expenses incurred for the restructuring and restoration of one of the buildings owned by this subsidiary and partially rented to the bank since January Such rent will increase over 2007, as soon as work on the rest of the villa has been completed. The controlled company, IFIS Finance Sp.Z.o.o. had a net profit of 834 thousand Euro, redetermined according to IAS principles for consolidation purposes; 458 thousand Euro of this refers to the period following IFIS Finance s purchase. Finally, the value in currency for goodwill booked in zloty (the currency used in Poland where the controlled company is located) at the end of the period, brought about profit on currency exchanges equal to 19 thousand Euro. The reconciliation between parent company profit and net equity and those consolidated is shown in the table set out later in this report. Commitments In general, the credit market in Italy remains characterised by a moderate gap between supply and demand owing to traditional banks and credit institutes continuing to shy away from granting SMEs the financing necessary for their quantative and qualitative improvement. From the supply side, the enterprise system, in particular SMEs, has had to once again face a poor, although improving, financing situation. In this scenario, adhering completely to predetermined strategies, Banca IFIS still succeeded in improving its position, achieving a growth in due from clients of 10.1%, reaching a total of 783 million Euro in 2006, compared to 711 million Euro in The quality of receivables also improved, giving a ratio of bad debts on loans over total loan commitments at the end of December 2006 equal to 0.9% (0.8% at the end of 2005). In order to optimise treasury management, particularly towards the end of the year, short term operations for 267 million Euro (+107.5%) with other banking counterparts were effected. In 2005, such operations amounted to 129 million Euro. Funding Over 2006, Banca IFIS successfully continued to diversify its funding, both in terms of duration and in terms of technical form, with the aim of increasing deposits and lengthening banking counterparts commitment to maintaining deposits. funding reached 962 million Euro, an increase of 27.1% compared to 756 million Euro for the year ending 31 December In detail, 836 million Euro were the result of transactions with banking counterparts, of which 313 million Euro were regulated on e-mid, 119 million Euro from net funding obtained through the revolving securitization of performing receivables, 83 million Euro from client deposits and 43 million from the issue of a convertible bond in July The latter, issued for a total of 50 million Euro, is booked under liabilities, net of the buybacks on such which are considered, according to IFRS IAS standards, as settlement of debt even though such instruments, acquired with the aim of investing liquid resources, are destined to be resold, which is treated as the issue of a new debt. Fitch s BBB- investment rating, assigned in early in 2006, and confirmed at the beginning of 2007, allows the quality of deposits and funding to be maintained. The structure At the end of 2006, the group had a total of 152 employees, of which 149 in the parent company, Banca IFIS, and 3 in the controlled Polish company, IFIS Finance Sp.Z.o.o.. The structure of the group is made up of 11 Branches (Ancona, Bari, Cagliari, Florence, Imola, Cologno Monzese, Naples, Pordenone, Rome, Turin and Venice-Mestre) and two representative offices (Bucharest and Budapest), together with the controlled company in Poland. 10

11 MAIN GROUP FIGURES KEY FIGURES CONSOLIDATED BALANCE SHEET (in thousands of Euro) ACCOUNTING YEAR VARIATION 31/12/ /12/2005 ABSOLUTE % Due from banks 267, , , % Due from clients 782, ,901 72, % Intangible and tangible fixed assets 31,031 24,307 6, % Other asset items 11,343 12,653 (1,310) (10.4)% assets 1,092, , , % Due to banks 836, , , % Due to clients 82,560 93,874 (11,314) (12.1)% Outstanding securities 42,693 35,510 7, % Net equity 108, ,313 8, % Other liability items 22,681 19,964 2, % liabilities 1,092, , , % CONSOLIDATED INCOME STATEMENT (in thousands of Euro) ACCOUNTING YEAR 31/12/ /12/2005 VARIATION ABSOLUTE % Earning margin 41,211 38,182 3, % Net write downs on receivables (1,788) (3,976) 2,188 (55.0%) Operating revenue 39,423 34,206 5, % Operating costs (15,811) (13,691) (2,120) 15.5% Gross ordinary profit from current operations 23,612 20,515 3, % Net Profit 15,012 14, % 11

12 ECONOMIC-FINANCIAL INDEXES AND OTHER FIGURES ACCOUNTING YEAR 31/12/ /12/2005 VARIATION Profitability indexes ROE (1) 16.6% 27.7% (11.1)% ROA 2.2% 2.3% (0.1)% Cost/income ratio 38.4% 35.9% 2.5% Risk indexes Net bad debts on loans/due from clients 0.9% 0.8% (0.1)% Net bad debts on loans/net equity 6.4% 5.9% 0.5% Solvency ratios Tier 1 capital/risk weighted assets 13.4% 15.4% (2.0)% Regulatory capital/risk weighted assets 13.6% 15.6% (2.0)% Figures per employee (2) (3) Earning margin/number of employees 271,1 320,9 (49,8) assets/number of employees 7,188,5 7,367,3 (178,8) Personnel cost/number of employees 62,4 70,7 (8,3) (1) Net profit compared with the weighted average of capital, share premiums and reserves excluding the valuation reserves. (2) Number of employees-end of fiscal year. (3) Ratios in thousands of Euro. 12

13 RECLASSIFIED CONSOLIDATED BALANCE SHEET (in thousands of Euro) ASSETS ACCOUNTING YEAR 31/12/ /12/2005 ABSOLUTE VARIATION % Receivables due: - from clients 782, ,901 72, % - from banks 267, , , % Financial assets available for sale 6,288 5, % Assets: - tangible 29,324 23,562 5, % - intangible 1, % Other asset items 5,055 6,659 (1,604) (24.1)% assets 1,092, , , % LIABILITIES ACCOUNTING YEAR 31/12/ /12/2005 ABSOLUTE VARIATION % Payables due: - to clients 82,560 93,874 (11,314) (12.1)% - to banks 836, , , % Outstanding securities 42,693 35,510 7, % Retirement/severance allowance 1,433 1, % Tax liabilities 2,452 2, % Other liability items 18,796 16,567 2, % Net equity: Capital, share premiums and reserves 93,306 85,365 7, % Net profit 15,012 14, % liabilities 1,092, , , % 13

14 RECLASSIFIED CONSOLIDATED PROFIT AND LOSS ACCOUNT (in thousands of Euro) ACCOUNTING YEAR 31/12/ /12/2005 ABSOLUTE VARIATION % Interest margin 14,749 15,479 (730) (4.7)% Net commission 24,190 19,179 5, % Dividends and similar 7 6,912 (6,905) (99.9)% Net trading result (35) (3,438) 3,403 (99.0)% Profit from reassignment of receivables 559 (559) (100.0)% Profit from sale of available for sale assets 2,300 2, % Losses from buybacks of financial liabilities (509) 509 (100.0)% Earning margin 41,211 38,182 3, % Net write downs on loans (1,788) (3,976) 2,188 (55.0)% Operating revenue 39,423 34,206 5, % Personnel expenses (9,479) (8,416) (1,063) 12.6% Other administrative expenses (6,173) (4,973) (1,200) 24.1% Net value adjustments on tangible and intangible fixed assets (1,160) (873) (287) 32.9% Other operating income/expenses 1, % Operating costs (15,811) (13,691) (2,120) 15.5% Gross profit 23,612 20,515 3, % Income Tax (8,600) (5,567) (3,033) 54.5% Net profit 15,012 14, % 14

15 RECLASSIFIED CONSOLIDATED BALANCE SHEET- QUARTERLY EVOLUTION (in thousands of Euro) ACCOUNTING YEAR 2006 ASSETS 31/12 30/09 30/06 31/03 Receivables due: - from clients 782, , , ,515 - from banks 267,294 87,051 68,094 21,661 Financial assets available for sale 6,288 8,670 7,631 8,054 Assets: - tangible 29,324 28,569 26,877 25,181 - intangible 1,707 1, Other asset items 5,055 6,583 4,971 5,030 assets 1,092, , , ,213 ACCOUNTING YEAR 2006 LIABILITIES 31/12 30/09 30/06 31/03 Payables due: - to clients 82,560 18,063 17,858 27,812 - to banks 836, , , ,005 Outstanding securities 42,693 42,172 43,511 42,905 Retirement/severance allowance 1,433 1,343 1,305 1,428 Other liability items 21,248 24,592 20,247 23,073 Net equity: Capital, share premiums and reserves 93,306 95,838 95, ,129 Net profit 15,012 9,841 6,638 3,861 liabilities 1,092, , , ,213 15

16 RECLASSIFIED CONSOLIDATED PROFIT AND LOSS ACCOUNT: QUARTERLY EVOLUTION (in thousands of Euro) ACCOUNTING YEAR th Q. 3 rd Q. 2 nd Q. 1 st Q. Interest margin 3,664 3,620 3,733 3,732 Net commission 5,627 5,443 5,329 7,791 Dividends and similar income 1 6 Net trading result 49 (34) 13 (63) Profit from sale of available for sale assets 2,300 Earning margin 11,640 9,029 9,076 11,466 Net write downs on loans 1,053 (335) (1,010) (1,496) Operating revenue 12,693 8,694 8,066 9,970 Personnel expenses (3,137) (1,987) (1,980) (2,375) Other administrative expenses (1,881) (1,432) (1,440) (1,420) Net value adjustments on tangible and intangible fixed assets (429) (300) (182) (249) Other operating income (expenses) Operating costs (4,860) (3,642) (3,471) (3,838) Gross profit 7,833 5,052 4,595 6,132 Income tax (2,662) (1,849) (1,818) (2,271) Net profit 5,171 3,203 2,777 3,861 16

17 MARKET TRENDS AND GROUP ACTIVITY The macroeconomic scenario After some years of modest or no growth, Gross Domestic Product in Italy in 2006 showed significant changes for the better, some of which were unexpected. The recovery in the economic cycle spread from Germany, which once again demonstrated that it plays a leading role in the continental production system. Italian GDP recorded an increase of 2%, against an increase in Europe as a whole (Euro zone) of 2.6%. Once again, GDP growth in countries outside the European Union was greater. The United States grew by 3.3%, Japan by 2.2% and, in emerging countries, China had a GDP of +10.5% and India +8.3%. Asian productions, in particular, are rapidly freeing themselves of their underdeveloped past, becoming ever more avant-garde in terms of technology, commerce and finance. The value of the Euro against the Dollar and other currencies remains important. This element did not help exportation of European products but did allow the taking of provisions at contained costs, in particular raw materials and energy. A slight increase in interest rates accompanied this growth in European GDP. Interest rates briefly touched 4% on the short curve. Rates on Dollars are still higher, even though the signs of the United States economy slowing down are expected to lead to a reduction in present growth rates. Relevant factors of instability will also remain in 2006, such as the evolution of the Euro/Dollar exchange rate, fluctuations in the price of raw materials, particularly increases in the cost of energy, and the emergence of China and ever more, India, in powerful roles in industrial production. Scenarios for 2007 forecast a growth in Italian Gross Domestic Product of approximately 1.5%, against an average expected European growth rate of around 2.1%. The growth rates in China and India will remain higher, whereas that of America will slow down to a growth rate of approximately 2.9%. It is possible that the European Central Bank will decide to intervene further in interest rates, even if the United States slowdown would still effect any changes. The strategic context Banca IFIS group s core business is the financial support and management of small and medium Italian and international enterprises through the purchase of accounts receivables generated by the client s business. The use of factoring contracts is considered an ideal instrument to improve the quality of credit and, in cases of default on payment by the financed party, the recovery rate on commitments. Banca IFIS has been carrying out this activity since 1983, perfecting its different methods and operational instruments along the way. Traditional approaches to factoring of a recourse, domestic nature, without any guarantees against bad debts being granted to the assigning client, are slowly being replaced by a new way of factoring. This new way sees the bank as a protagonist between the assigning client and the debtors and involves assessing the risk, the counterpart and the operation as a whole, taking on, in certain cases, an ever-growing element of risk sharing regarding bad debts. The role of the factor is highly specialised and requires a high level of competence and professionalism, together with an innovative approach to credit risks. Room for growth in factoring activities is potentially unlimited, also considering the increased attention to the intrinsic quality of credit requested from credit institutions. In Italy, but also throughout industrialised and developing countries, the utilisation of assets such as commercial credit in order to obtain liquidity represents a must. In most cases, prompt payment of trade credit allows SMEs to develop their potential to the max, obtaining the financial resources that otherwise the banking system, in the form of credit in current accounts, would have been unlikely to grant. In an international credit context that is moving towards ever more sophisticated approaches set out by the Basel Committee, factoring can make the difference for enterprises that are unable to systematically and continuously access mid-long term debt capital or risk capital. The objective of the Banca IFIS group is to increase its presence in favour of domestic, European 17

18 and international enterprises, providing the financial and management support that the credit system does not wish to guarantee with traditional instruments of credit, following assessments on the quality of credit. The Factoring Market in 2006 In 2006, the factoring market recorded a negative trend. The turnover (total credit purchased) recorded a change of about +8% in 2006, standing at 110 billion Euro. This data comes from Assifact and is calculated based on provisional figures at year-end closing. The market appears largely in the hands of general bank operators, with a significant reduction in the industrial group component. The top five operators make up approximately 65% of total turnover. Many other operators, amongst which some specialists, follow with a market share of between 0.07% and 4.3%. On an international level, however, factoring is still growing strongly. The members of Factor Chain International show growth rates for 2006 of +12% compared to 2005, up to a total turnover of 1,134 billion Euro. It would be opportune to point out that the factoring market is made up of operators following extremely different approaches, the only point in common being the factoring contract. Differences in the market lie in the average size of operations, the clients, the debtors, the type of operation put in place, the approach towards forming other business relations, the service activities put in place in favour of the group, banking or industrial, or the absence of these services, the availability or not of financial resources, the cost of such, capital consumption approaches, and even the legal form of the enterprises. The operators themselves are also different, ranging from financial institutions, industrial intermediaries, and specialised banks to general banks. All these elements render comparisons between the operators in the market difficult, in that the operators are often conditioned by the decisions of the group to which they are part or by other elements. Despite the apparent strong concentration of this sector, the operators present in the factoring market in Italy have made different choices, and research into new products or markets continues to characterise the sector more than the competitive approach of the operators. Many factors make up part of traditional banks. Development therefore depends on expansion of bank groups and is often characterised by high turnover rates with less significant financial returns. Other operators have reached a level of specialisation in non recourse guarantees, often requested by the banking group of which they are part. Others still belong to industrial groups instead, and extend their activities to suppliers of their own industrial group. It is important to mention that the factoring market is also characterised by wide reaching osmosis with other forms of financing net working capital, offered by commercial banks. 18

19 Banca IFIS s services and products for enterprises Factoring activities are, in substance, made up of three main combinable services: a management service, the granting of advances and protection against bad debts. Management services This involves the management and administration of the receivables assigned by the client, together with collection on these. This service does not involve the bank assuming the risks related to advances or guarantees against bad debts. Advances service This involves offering the client the possibility of obtaining a total or partial advance on the assigned accounts receivables. With such an advance, where the debtors are of favourable credit standing, the client obtains immediate payment on their trade credit. Guarantee Service Non Recourse Domestic Factoring This involves the management and collection of, and advances on, the accounts receivables of an Italian enterprise whose debtors are also Italian. With non recourse factoring, the client obtains either a partial or complete guarantee against bad debts. The bank assumes this risk, together with the risk of non-reimbursement of any advances given and hence in addition to the fee payable for the management and collection of the accounts receivables and the advance, the client also pays a fee for the guarantee against this loss. Recourse Export Factoring This product offers the management and collection of the client s assigned accounts receivables and the granting of an advance on such where the client is an Italian enterprise whose debtors are outside Italy. In cases of recourse factoring, the bank does not assume the risk of insolvency and non-payment by the debtors and, hence, if the client has been given an advance, the bank has the right to be reimbursed for this amount. The bank only assumes the risk connected to the advances given. This involves offering the client total or partial protection against the risk of non-payment caused by debtor insolvency. In such a way the risk of losses on commercial credit is eliminated and prompt settlement is obtained (if taking advantage of an advance), together with an in-depth evaluation of the quality of the portfolio. * * * The combination of different types of management, advances and guarantee services, the nature of the assigning client and/or their debtors and the possibility of applying different management solutions to the operation allows Banca IFIS to offer its clients a wide range of products. Here follow some typical examples of the factoring products proposed by Banca IFIS to its clients: Recourse Domestic Factoring This involves the management and collection of, and advances on, the accounts receivables of an Italian enterprise whose debtors are also Italian. In recourse factoring, the client assumes the risk of nonpayment of the accounts receivables and in the event of such bad debts, the bank has the right to claim back the advances given. The bank only assumes the risk of non-reimbursement of any advances given. Non Recourse Export Factoring This applies where the client assigning the accounts receivables is an Italian enterprise whose debtors are outside Italy and involves the management and collection of such accounts receivables, the granting of an advance on these and total or partial protection against bad debts. The bank assumes this risk together with the risk of nonreimbursement of any advance given. Unless the debtors are of particularly high credibility, this risk is covered by a third party, either a corresponding factoring company in the debtors country or credit insurance. Recourse Import Factoring This product offers the management and collection of accounts receivables and the granting of an advance on these where the client is not an Italian enterprise but whose debtors are resident in Italy. The bank assumes the risk of non-reimbursement of any advances but does not assume the risk of any bad debts on the accounts receivables and therefore, has the right to be reimbursed for the advance. In cases of recourse import factoring, the client pays the bank commission for the management service and a consideration for the financing. 19

20 Non Recourse Import Factoring This product offers the management and collection of accounts receivables, advances and total or partial protection against risk of loss from debtor insolvency, to an enterprise non-resident in Italy whose debtors are resident in Italy. Often the client assigning the receivables is a corresponding factor carrying out an export factoring operation from its country. In these cases, the bank does not grant an advance on such receivables but only assumes the risk of bad debts on such accounts. If the assignment comes directly from an enterprise and not a corresponding factor, the bank will usually assume the risk of non-reimbursement of advances given. Recourse or Non Recourse International Factoring This product offers management and collection of the client s assigned accounts receivables, an advance on these and, in cases of non-recourse factoring, protection against bad debts. Both the assigning client and their debtors operate outside Italy. Regardless of whether the factoring agreement is recourse or non recourse, due to the potential operational difficulty in recouping credit from and /or advances granted to nonresident subjects, this service is offered where the debtors are of particular credibility and the accounts receivables assigned are confirmed by the debtor or, where the risk of bad debts is covered by a foreign factor or credit insurance. Recourse or Non Recourse Factoring Maturity In addition to that of the management and collection of a client s accounts receivables, advances, and in cases of non recourse agreements, guarantees against bad debts, maturity factoring also gives the possibility of opting for a cash payment at a later date, instead of an advance. In this way, the client can rely both on the secured payment of their accounts receivables on a set date and normalized cash flows, whilst debtors can benefit from delayed payment. The fee for such extended trade credit is borne by the debtors themselves. In the event of non-payment by the debtors at the extended due date, the bank has the right to claim back the sums paid to the client within the preestablished contractual limits, except in cases of nonrecourse maturity factoring where the bank absorbs such a risk. Full Definitive Purchase This involves immediate purchase of the whole nominal value of the accounts receivables assigned. In this case, the sum given to the client is not an advance but definitive collection of the assigned accounts receivables, hence, it doesn't constitute a debt for the assignor. Full Factoring This product is one of the most recently introduced by Banca IFIS, having evolved from the Full Definitive Purchase product. It is an advanced product, reserved for clients who, applying the International Accounting Standards and the International Financial Reporting Standards, think it opportune to derecognise their credit on the balance sheet, according to IAS 39. Banca IFIS s Full Factoring has all the requisites to allow cancellation of the assigned accounts receivables and can be optimised according to the client s specific needs. Financing Services This product offers the client the possibility of obtaining an advance on future accounts receivables based on contracts stipulated with previously approved debtors. In this case, the bank, against the assignment of these receivables, advances the client a percentage of the taxable value of the contracts, usually ranging from 10% to 20%. When these accounts receivables become due, the client will receive the rest of the previously accorded amount for these receivables. 20

21 Group position and plans The differences between the operators active in the factoring market have lead to many types of product and service but, generally, the different approaches fall into one of two models. A third model, which is effectively a combination of the other two, also exists: The first model is the offer of factoring and financing services (tending towards non recourse) to excellent quality assignors for whom the short term credit risk regarding the assigning debtor is particularly limited, and/or to assignors with a well-distributed receivables portfolio, apportioned according to a statistical approach based on global and market flows, maximisation of volumes and distribution of the portfolio. Remuneration for these types of transactions is in line with the underlying risk level; The second model involves credit management and financing of SMEs, based on a prompt and analytical assessment of both the assignor and the debtor risk. This approach requires the specific, and in some cases simultaneous, analysis of three elements: the assigned debtor, the type of receivables to be purchased and the assignor. The credit risk of the debtor, where assumed, is assessed based on specific analysis of this debtor and is remunerated based on the inherent risk of the transaction in order to always guarantee an adequate risk/yield ratio. The remuneration requested by the factor against such activity (both for recourse and non recourse) is significantly higher than that of the analytical dimensional approach or statistical insurance approach; The third model is a combination of the two above. Banca IFIS belongs to the second category of operators. The bank aims at a well-defined market segment, composed of small and medium assignors usually with debtors of a higher credit standing. Thus, this market is represented by average quality assignors, including those with little or no access to credit for the amount and quality desired from the traditional banking market. This is a particularly vast segment in Italy and Europe; a segment characterised by the relative absence of large bank operators and orientation towards larger assignors with better credit standings. After having strengthened some organisational and control structures and, in general, the operating capacity of Head Quarters, Banca IFIS s defined plans foresee further rapid increases in the size of the company and the number of clients. This expansion plan to the favour of Italian and foreign SMEs, in place for some years now, has allowed Banca IFIS to achieve very positive results, both in terms of volumes of business (the average annual growth in turnover from 1998 to 2006 was 32%) and in terms of profitability (the average annual growth in the operating revenue and in gross profit in the same period was 30.3% and 42.3% respectively.) In a context in which Banca IFIS continues along the path of elevated growth rates in terms of dimension, the following guidelines have been defined: 1) Focus on supporting the working capital of Italian and foreign SMEs has been confirmed. This support will be given utilising the factoring contract, which is considered an ideal instrument to guarantee better credit risk management. 2) Valorising internal growth and the expansion of the sales network with the employment of new resources, both from a factoring background and from other sectors. In the domestic market, increasing the bank s sales potential will occur through the employment of junior resources who will receive adequate training. In the international market, the bank aims to expand its presence further in terms of export, import and fully international factoring. It is important to note that Banca IFIS s volume of business coming from international factoring is slightly higher than other more structured international players. The parent company s objective is to continue to expand in this type of operation, increasing the turnover generated from it. 3) Expansion of the international network through enlarging existing markets abroad and perfecting the network, so as to break into new markets by providing financial support where business between emerging countries and more developed countries or advanced countries exists, or where particular market niches are present. 4) Increasing the efficiency of the organisation and operational processes within, and improving the structure of norms and regulations, internal controls and co-ordination of the group. 5) Increasing automated information systems, ensuring that they conform to the growth objectives previously described, hence improving their operational efficiency and effectiveness. 21

22 RISK MANAGEMENT For information on group risk management, please refer to the consolidated notes herein. 22

23 MAIN CAPITAL AGGREGATES The group is involved almost exclusively in the factoring industry and funding for its activity, aside from its own, comes from the interbanking market, from the securitisation of performing receivables, from the issue of a convertible bond loan and, lastly, from direct client deposits. MAIN CAPITAL AGGREGATES (in thousands of Euro) PERIOD ABSOLUTE VARIATION BETWEEN 31/12/ /06/ /12/ /06-06/06 06/06-12/05 Due from clients 782, , ,901 78,439 (6,363) Due from banks 267,294 68, , ,200 (60,751) Other financial assets 6,288 7,631 5,994 (1,343) 1,637 Tangible and intangible assets 31,031 27,642 24,307 3,389 3,335 Balance of other items (17,626) (16,581) (13,305) (1,045) (3,276) net assets 1,069, , , ,640 (65,418) Due to clients 82,560 17,858 93,874 64,702 (76,016) Due to banks 836, , , , Outstanding securities 42,693 43,511 35,510 (818) 8,001 Net equity 108, , ,313 6,280 1,725 net liabilities 1,069, , , ,640 (65,418) Due from banks due from banks at the end of the accounting year stood at 267 million Euro against 129 million Euro as at 31 December 2005 (+107.5%). The utilisation of available financial resources care of other institutes does not represent a core activity for the bank and is due to maintaining a high level of liquidity to cover year-end expiries. The bank s aim remains only to utilise available resources in order to increase financing operations in the favour of the clients as a result. Due from clients At the end of the accounting year, total due from clients reached 783 million Euro, an increase of 10.1% compared to the end of Net total loans to clients, excluding bad debts on loans for 6,942 thousand, equalled 776 million Euro, an increase of 10.1% compared to the end of

24 BANKING PRODUCTS (in thousands of Euro) ACCOUNTING YEAR 31/12/ /12/2005 VARIATION ABSOLUTE % Current accounts and similar 31,545 26,845 4, % Advance accounts for future credit assignments 11,649 7,524 4, % Advance accounts for factoring 464, , , % Receivables from debtors for definitive purchase 265, ,310 (82,056) (23.6)% Loans 2,833 3,428 (595) (17.5)% net current loans 776, ,980 71, % Net bad debts on loans 6,942 5,921 1, % due from clients 782, ,901 72, % The breakdown of clients by geographic area in Italy, with a separate indication for those abroad, together with the breakdown of the clients by product category are as follows: BREAKDOWN OF CLIENTS BY GEOGRAPHIC AREA COMMITMENTS TURNOVER Northern Italy 37.8% 44.3% Central Italy 36.2% 31.5% Southern Italy 22.4% 11.2% Abroad 3.6% 13.0% 100.0% 100.0% 24

25 BREAKDOWN OF CLIENTS BY PRODUCT SECTOR (*) COMMITMENTS TURNOVER 051 Agriculture, forestry and fish products 0.2% 0.2% 052 Energy products 0.4% 0.1% 053 Minerals and ferrous and non-ferrous metals 0.5% 0.4% 054 Minerals and mineral based products 0.4% 0.6% 055 Chemical products 0.2% 0.3% 056 Products in metal excluding machines and equipment 7.9% 9.2% 057 Agricultural and industrial machines 1.2% 2.1% 058 Machines for offices and EDP machinery 0.2% 0.3% 059 Electrical material and supplies 4.3% 3.2% 060 Transportation vehicles 5.7% 11.0% 061 Food and beverage products 1.4% 1.1% 062 Textile, leather, shoe and clothing products 3.2% 3.3% 063 Paper, printing and publishing 0.2% 0.2% 064 Rubber and plastic products 1.1% 2.7% 065 Other industrial products 0.8% 0.6% 066 Construction and public works 11.5% 10.4% 067 Wholesale and retail trade, recoveries and repair 8.6% 10.8% 068 Hotel and public establishment services 0.6% 0.6% 069 Internal transportation services 1.3% 1.1% 070 Maritime and air transportation services 0.7% 0.4% 071 Transportation related services 2.8% 0.9% 072 Telecommunications services 0.2% 0.2% 073 Other services for sale 19.2% 27.0% 000 Non classifiable 27.4% 13.3% of which non-resident subjects 3.6% 13.0% of which financial institutions 0.1% 0.0% of which others(**) 23.7% 0.3% 100.0% 100.0% (*) List according to Bank of Italy s circular n.140 of 11/02/91. (**)The item in question includes Banca IFIS s commitments with companies operating in the healthcare and ancillary services sectors. Non performing loans and country risks bad debts on loans to clients, net of value adjustment write-downs, was 6,942 thousand Euro as at 31 December 2006, against 5,921 thousand Euro as at 31 December 2005 (an increase of 17.2%). The ratio of bad debts on loans over net equity at the end of 2006 equalled 6.4%, (5.9% at 31 December 2005). Gross of any value adjustments, bad debts on loans amounted to 29,554 thousand Euro, against 26,779 thousand Euro at the end of 2005 (+10.4%). Banca IFIS enters its gross bad debts on loans up to the point in which all legal procedures to recoup the credit have been exhausted. The longest standing bad debts on loans date back to Gross bad debts on loans for years up to 2000 stood at 2,263 thousand Euro. Also due to the strategy of risk spreading, the total amount of bad debts on loans is, on average, quite contained. As at 31 December 2006, 122 non performing loans, for an average amount of 57 thousand Euro net, were registered. The consolidated notes contain details on these by categories according to their size and the year in which they became overdue. The hedging index on gross non performing loans stood at 76.5% (77.9% as at 31 December 2005). This percentage is representative of the policy of setting aside prudential provisions over the years. Potential problem loans/difficult loans, net of estimated value adjustment write-downs amounted to 1,439 thousand Euro, against 1,698 thousand Euro as at 31 December 2005, (a decrease of 15.3%). Net past due loans, amounting to 79,395 thousand Euro at the end of 2006, compared to 24,757 25