The year 2012 overall showed moderate growth in the global economy. Growth was driven by the trend in domestic demand in the United States and in emerging countries. Monetary policies were very accommodating.
The economy in the Eurozone remained weak. Gross Domestic Product underwent a slight decline, due to recessive pressures that impacted the peripheral continental countries and the Netherlands. The deceleration in growth rates reflects the consequences of highly restrictive fiscal policies and unfavourable financial conditions as a result of the debt crisis. The sovereign debt crisis has affected the market trends and economic policy decisions of many European countries. After a temporary improvement linked to the sizeable injection of liquidity by the ECB via three-year refinancing operations, tensions rapidly resumed growing. A significant improvement in the climate of financial markets was recorded starting from the end of July. In August, the ECB announced its programme for the conditional purchase of government bonds, known as the OMT (Outright Monetary Transactions). Following this announcement, the markets reassessed their risk evaluations of public debt in Spain and Italy.
Italy has suffered a year of recession, with GDP falling by 2.4% and the unemployment rate rising by more than two percentage points. The weakness in investments and consumption was only partly offset by the improvement in the trade balance.
In July, the European Central Bank cut official rates by 25 basis points. The excessive liquidity remained high throughout 2012. Consequently, money market rates dropped steadily. On the Italian debt market, yields on government bonds underwent a significant decline, following the wide fluctuations during the period January-July.
The emerging economies were also affected by a deterioration of the business cycle, while remaining on a growth course. The economic slowdown affected all the main geographical regions, albeit to varying degrees. It was more contained in the Asiatic countries, in Latin America and in the CIS countries (Commonwealth of Independent States). Conversely, the slowdown in growth was particularly marked in Central and South-Eastern Europe, which were more highly impacted by the recession in the Eurozone. Moving against the trend were the non-oil producing countries of the MENA area (Middle East and North Africa), where the economy accelerated, also due to the favourable comparison with 2011, which was impacted by the effects of the political upheavals.
In Italy, the trend in bank rates was impacted by the development of the sovereign debt crisis. The decline observed in the initial months of 2012 following injection of liquidity by the ECB was inverted by a return of tensions. The decline resumed in the summer, but the movement of bank rates subsequently became more uncertain. Conditions on the credit market were better than at the peak of the restrictive phase at the end of 2011, due to easing of the liquidity position of banks and strengthening of their capitalisation levels, which were offset, however, by the increase in credit risk.
The cost of funding continued to be high, at record highs for the last four years, while the spread between average interest rates on the amounts of loans and deposits fell to new lows.
Lending activities continued to weaken. The decline in loans to non-financial companies intensified during the second half of the year, with growth rates hitting their record lows for the available historical series from the end of the 1990s. Although they showed greater resilience, even loans to households recorded a decline, after a gradual slowdown. Credit risk remained high. Throughout the year all credit quality indicators revealed a deterioration. In particular, as regards loans to non-financial companies, the new doubtful loan ratio exceeded 3%, a level which had not been reached since the late 1990s.
Bank funding improved, returning to a growth trend from September onwards, driven by deposits by residents. With a steady annual reduction in current accounts, which has eased at the end of 2012, the growth in time deposits continued. In absolute terms, the increase in time deposits has more than offset the decline in current accounts and repurchase agreements with ordinary customers. There was also improvement in terms of bond funding. The improved climate on the financial markets during the second half of the year allowed a number of leading Italian banks to successfully return to the international market of institutional investors, with unsecured bond and covered bond issues.
The results for 2012
Despite the difficult economic environment which in 2012 negatively affected banking activity both in Italy and in all the foreign countries where the Group has operations, the Intesa Sanpaolo Group closed financial year 2012 with positive results: operating income, amounting to 17,881 million euro, was 6.5% higher than in 2011. The growth in revenues – where the strong increase in profits on trading and in income from insurance business more than offset the decline recorded in net interest income – together with the structural cost containment measures, made it possible to achieve an operating margin of 8,968 million euro, up by 17.3%. The greater need for adjustments to loans (+11.1%), which is attributable to the widespread deterioration in credit quality, was offset by lower impairment losses on other assets, which in 2011 included the heavy impact of the Greek government bonds’ restructuring. Consequently, income before tax from continuing operations, amounting to 3,610 million euro, increased by almost 80%. The net income was 1,605 million euro, from the 8,190 million euro loss recorded in the previous year, which had been brought about by the impairment of goodwill, with reference to the deterioration of the economic environment and the changed income forecasts for the credit system as a whole.
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Report on operations - Executive summary
A detailed breakdown of operating income items shows that the income statement for the year recorded a net interest income of 9,430 million euro, with an overall decrease from 2011 (-3.6%), despite the recovery recorded in the first half of the year, which had been driven by the improvement in pricing. The lower contribution of operations with customers and higher interest expense in relations with banks – mainly due to the increase in exposure towards the ECB from third quarter 2011 – were not entirely offset by the higher contribution of investments in securities.
The services segment generated net fee and commission income of 5,451 million euro, largely unchanged from the previous year (-0.3%) as a result of the higher contribution from retail banking activities (+2.1%) and from financial instrument dealing and management (+0.8%), which were however offset by the fall in other fees and commissions (-7.7%), mainly consisting of commissions on loans issued and on other banking services.
The contribution from profits on trading, amounting to 2,182 million euro, more than doubled from 2011, as it benefited from the pick-up in trading activities and from the non-recurring positive effects of the Parent Company’s buyback of its subordinated Tier 1 notes (711 million euro). Furthermore, it should be noted that the figure for 2011 also included non-recurring income, specifically the capital gains from the disposal of investments in Prada and Findomestic (426 million euro).
Income from insurance business, which aggregates specific costs and revenues of the insurance business of the Group companies operating in the life and non-life segments, rose to 828 million euro from 540 million euro in the previous year, mainly due to the significant improvement in the net investment result, which was also supported by the rebound of the markets in the first and the fourth quarters of the year.
As a result of the trends described above, net operating income for the year amounted to 17,881 million euro, as stated, showing an increase of 6.5%.
Operating costs, which are continually and carefully monitored and subjected to additional targeted measures to ensure their structural containment, showed a decrease (-2.5% to 8,913 million euro) driven by the reduction in both personnel expenses (-1.5%) related to the staff downsizing and administrative expenses (-5.2%), the latter mainly due to the cut in consultants’ fees. Conversely, amortisation and depreciation showed moderate growth (+2.5%).
The combined revenue and cost trends generated a cost-income ratio below 50%. As indicated above, the operating margin came to 8,968 million euro, up 17.3%.
Adjustments and provisions for risks showed an overall reduction of about 5%, mainly due to lower impairment losses on other assets (from 1,069 million euro to 282 million euro), which in the previous year had included the major impairment losses on financial assets generated by the Greek sovereign debt crisis. This decrease fully offset the greater net adjustments to loans (+11.1% at 4,714 million euro), which were the consequence of the general deterioration in credit quality as a result of the worsening economic situation.
Income before tax from continuing operations was 3,610 million euro, as stated, almost 80% up compared to the previous year. Income tax for the period (1,523 million euro in 2012 compared to 910 million euro of tax credit in 2011) was impacted by non-recurring items in both years. In particular, the figure for 2012 reflects the positive effect of the deduction of Regional Business Tax (IRAP) relating to the taxable portion of personnel (employees and similar) expenses from the Corporate Income Tax (IRES) taxable amount. This deduction, permitted under Law Decree 201/2011, is applicable from the tax year ending 31 December 2012. The subsequent Law Decree 16/2012 supplemented the previous requirement, allowing taxpayers the option of requesting reimbursement for tax years 2007 to 2011, for which the total IRES taxes subject to a reimbursement application yielded a tax benefit for the Group of over 260 million euro. The 2011 amount, on the other hand, included the effects (approximately 2,130 million euro) of the realignment of goodwill recorded in the consolidated financial statements, as permitted by Law Decree 98/2011.
The charges for integration and exit incentives, net of tax, totalled 134 million euro, 89 million euro of which were generated – as will be discussed in greater detail below – by the change of the pension system and the ensuing need to cover the greater costs of implementing the agreement made with the trade unions in July 2011, which allowed more than 5,000 Group employees to exit the labour market.
After recognising the economic effects of purchase price allocation of 299 million euro as well as minority interests of 49 million euro, the Group’s income statement closed, as already indicated, with a net income of 1,605 million euro, against the loss of 8,190 million euro recorded for the previous year.
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Operating income (millions of euro) 4Q 4,494 FY 17,881 2012 3Q 4,443 2Q 4,131 1Q 4Q FY 3Q 2Q 1Q 4,813 4,265 16,785 3,800 4,515 4,205 2011 Operating margin (millions of euro) 4Q 2,197 FY 8,968 2012 3Q 2,277 2Q 1,888 1Q 4Q FY 3Q 2Q 1Q 2,606 1,899 7,648 1,565 2,221 1,963 2011Net income (loss)
(millions of euro) 4Q FY 2012 3Q 2Q 1Q 4Q FY 3Q 2Q 1Q -10,119 -8,190 527 741 661 -83 1,605 414 470 804 2011
Report on operations - Executive summary
Comparison of results for the fourth quarter of 2012 with those for the third quarter shows a slight increase in operating income (+1.1% at 4,494 million euro) reflecting the higher contribution from net fee and commission income (+11% at 1,479 million euro) and from profits on trading (+9.5% at 682 million euro), which offset entirely the decline in net interest income (-5.9% at 2,181 million euro) and in income from insurance business (about -26% at 159 million euro). These trends, accompanied by the seasonal increase in operating costs recorded in the last quarter of the year, especially relating to administrative expenses (+9.8%), led to a contraction in operating margin (-3.5% at 2,197 million euro). The greater need for adjustments and provisions resulted in a fall of about 60% in income before tax from continuing operations. After recognition of taxes (291 million euro), of charges for personnel exit incentives (99 million euro) and the amortisation of purchase price allocation (79 million euro), the income statement for the fourth quarter closed with a loss of 83 million euro.
Whit regard to balance sheet figures, Intesa Sanpaolo Group loans to customers totalled 377 billion euro, largely unchanged from the end of 2011 (-0.1%). The decline in commercial banking loans (current accounts, mortgages, advances and loans, down -4.2% overall), and in loans represented by securities (-8.6%) was countered by growth in short-term financial loans. The performance of the various types of loans to customers reflected, to a significant extent, the increase in non-performing loans in the strict sense, caused by worsening of the general economic situation, as well as in past due loans, following the reduction by the Bank of Italy of the period for their classification under non-performing loans from over 180 to over 90 days, effective from 2012.
With regard to funding, direct deposits from banking business were up on the end of 2011 (+5.6% to 380 billion euro). The increase involved nearly all the deposit types that make up this aggregate. In detail, there were increases in the demand component represented by current accounts and deposits (+5.9%), bond funding (+3%) and certificates of deposit (+2%). The reduction in the amount of subordinated liabilities (-31%) was largely attributable to the buyback of own securities. The increase in short-term financial transactions also had a significant impact on the performance of deposits: indeed, repurchase agreements increased sharply, primarily owed to the finalisation of transactions for significant amounts with institutional counterparties.
The performance of direct deposits from insurance business, which include technical reserves, was also positive (+11.8% to 82 billion euro).
The overall increase was driven by both the higher value of financial liabilities of the insurance business designated at fair value (approximately +23%), particularly unit-linked products, and the increase in technical reserves (+7.7%), which represent the amount owed to customers who have taken out traditional policies. The new business for the period of Intesa Sanpaolo Vita (the company formed by the merger of Intesa Sanpaolo Vita, Eurizon Vita, Sud Polo Vita and Centrovita), Intesa Sanpaolo Life and Fideuram Vita, including pension products, amounted to 11.6 billion euro.
Indirect deposits increased compared to the end of 2011 (+2% to around 414 billion euro), due to the positive performance of assets under management, which more than offset the decline in the assets under administration component.
Indeed, assets under management, which account for more than one-half of the total aggregate with a stock in excess of 231 billion euro, benefited from the strong performance of the assets in portfolio, which offset the effects of the still negative net inflows, while the decrease in assets under administration and custody mainly concerned the deposits of institutional customers and, to a lesser extent, those of retail customers.
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Loans to customers (millions of euro) 30.9.12 375,037 FY 376,625 30.6.12 375,183 31.3.12 378,280 381,422 376,974 375,209 377,482 30.9.11 FY 30.6.11 31.3.11 31.12.2012 31.12.2011Direct deposits from banking business
(millions of euro) 30.9.12 376,454 FY 380,353 30.6.12 368,868 31.3.12 371,583 372,055 360,019 392,254 395,304 30.9.11 FY 30.6.11 31.3.11 31.12.2012 31.12.2011
Direct deposits from insurance business and technical reserves
(millions of euro) 30.9.12 79,512 FY 81,766 31.12.2012 30.6.12 76,844 31.3.12 77,003 75,399 73,119 77,245 76,704 30.9.11 FY 30.6.11 31.3.11 31.12.2011
Report on operations - Executive summary
Results of the business units
The breakdown of the contribution to operating income in 2012 for the Group's five business units shows that the greatest contribution continues to come from retail banking activities in Italy (approximately 57% of operating income), although there was also a significant contribution from corporate and investment banking activities (approximately 24%) and international retail banking activities (about 12%).
In 2012, Banca dei Territori – which oversees the traditional lending and deposit collecting activities in Italy and related financial services – reported operating income of 10,069 million euro, up 4.4% compared to the previous year. The rebound in net interest income (+1%), which benefited from the higher contribution of loans to customers and the effects of hedging of demand deposits, was accompanied by the increase in net fee and commission income (+4.3%) – driven, among other things, by the current accounts and assets under administration and under management segments – and by income from insurance business, which rose by almost 45%, mainly as a result of the improvement in the net investment result. Following the recognition of lower operating costs (-2%), the operating margin was 4,450 million euro, up approximately 14% on 2011. Income before tax from continuing operations grew 23.5% to 1,729 million euro, despite higher net adjustments to loans related to the general worsening of the economic situation. Net income, which includes taxes of 622 million euro, charges for integration and exit incentives of 104 million euro, and the economic effects of purchase price allocation of 173 million euro, came to 830 million euro, against the loss of 6,411 million euro recorded in 2011 mainly as a consequence of considerable goodwill impairment.
The balance sheet figures at the end of 2012 showed decreasing loans to customers (-2.9% to 182,077 million euro) compared to December 2011, mainly as a result of the decrease in loans to SMEs and small business customers. On the other hand, direct deposits from banking business recorded growth (+2.2% to 201,540 million euro), that was essentially attributable to amounts due to customers (+3% at 133,987 million euro) and to direct deposits from insurance business (+6.5% to 67,597 million euro), predominantly due to technical reserves.
The Corporate and Investment Banking Division – which deals with corporate banking, investment banking and public finance in Italy and abroad – achieved operating income of 4,243 million euro, up 9.2% on 2011. The positive contribution of net interest income (+1.5%), attributable to the higher contribution of loans to customers and, above all, profits on trading (approximately +77%), due to the higher income in capital market and proprietary trading, was absorbed only in part by the decline in net fee and commission income (-5.9%), notably in the investment banking segment, and by the moderate increase in operating costs (+2.4%). As a result of these trends, the operating margin, amounting to 3,254 million euro, increased by 11.4%. Income before tax from continuing operations (1,848 million euro) almost doubled, due to lower adjustments to investments held to maturity and on other investments, which amply offset the effects of the higher adjustments to loans.
The income statement closed with a net income of 1,253 million euro, against the loss of 1,815 million euro recorded in 2011, which was due to the considerable goodwill impairment.
Balance sheet aggregates show slightly declining loans to customers (-1.6% to 143,134 million euro), related to less use of cash by large Italian and international corporate groups, while direct deposits from the banking business recorded a significant increase (+24.6% to 109,700 million euro), mainly attributable to deposits by leading financial institutions and large corporate groups, to
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Operating income: Breakdown by business area (1)
(1) Excluding Corporate Centre
Eurizon Capital 1.7% International Subsidiary Banks 12.4%
Banca Fideuram 4.7%
Corporate and Investment Banking 24.1%
Of which Capital Market and Investment Banking 7.0%
Banca dei Territori 57.1%
Banca dei Territori
Operating income
Operating margin
Net income (loss)
2012 10,069 4,450 830 9,645 3,912 -6,411 2011
Corporate and Investment Banking
Operating income
Operating margin
Net income (loss)
2012 4,243 3,254 1,253 3,887 2,921 -1,815 2011
Report on operations - Executive summary
the increase in repurchase agreement transactions and to the increase in securities funding undertaken by international subsidiaries against the issuance of certificates of deposit, commercial paper and medium-term securities.
In 2012, operating income of the Division – which oversees the Group’s commercial operations on international markets through subsidiary and associated banks – came to 2,188 million euro, down 8.2% compared to the previous year, due to the decline in revenues (net interest income: -5.4%; net fee and commission income: -4.4%; profits(losses) on trading: -40% approximately), accompanied by lower operating costs (-1.3%). As a result of the above revenue and cost trends, the operating margin came to 1,032 million euro, down 14.9%. Income before tax from continuing operations, amounting to 5 million euro, was impacted by the substantial increase in net adjustments to loans (+215 million euro) and to impairment losses on other assets (+98 million euro). After recognizing taxes of 193 million euro, the Division closed its income statement for the year with a loss of 190 million euro, against the loss of 763 million euro in 2011 due to the goodwill impairment recognised that year. The Division’s negative performance is largely attributable to the situation of the subsidiary CIB Bank, which has been severely affected by the economic downturn in Hungary.
As for the balance sheet figures, the drop in loans to customers (-4.4% to 29,312 million euro) was offset by growth in direct deposits from banking business (+1.6% to 31,163 million euro), in terms of amounts due to customers as well as funding through securities.
Eurizon Capital, which operates in the asset management segment, recorded an operating income for 2012 of 294 million euro, up 10.5% on 2011. This result was mainly driven by the increase in net fee and commission income (+14%). The operating margin amounted to 180 million euro, up 23%, due to the decrease in operating costs (-5%), achieved by means of targeted cost containment measures.