EL INTERÉS ESTABLECIDO EN EL CÓDIGO CIVIL ECUATORIANO

1.1 Credit risk

QUALITATIVE INFORMATION General aspects

The established vocation of the Group, confirmed again in 2006, is to finance all the principal socio-economic players in its chosen territories. Multiple initiatives and innovations have focused on meeting the developing needs of the market, both in the Retail macrosegment and in the Corporate macrosegment. These activities, planned at Group level, have been implemented by all members of the Group, although with differing intensities and approaches having regard for the nature and requirements of their specific territories.

In the Retail segment, the range of home mortgages to individuals has been further extended to cover repayments of up to 30 years; in addition, the range of personal loans and consumer credit products has been completely renewed. In the same area, special attention has been focused on placement of the BperCard Revolving credit card issued by the Consumer Division – Banca di Sassari. With regard to Small Business customers, Group banks have confirmed their position as a point of reference in their local economies, especially in relation to firms operating in the commerce, tourism, business and personal services, and agricultural sectors.

Business in the Corporate segment has developed both with regard to short-term loans, supporting the current activities of firms at a time of steady economic recovery, and in relation to long-term lending. In this area, special attention has been dedicated to supporting the growth and development of the more dynamic firms; in particular, Finprogex has been launched to finance internationalisation projects with loans backed by 70% guarantees from SACE S.p.A. As part of initial trials, credit ratings were used in a number of these cases to determine loan pricing.

The importance of the “confidi” channel for guaranteeing the loans made to small and medium-sized businesses was confirmed over the past year, not least in the territories most recently entered by the Group.

Significant support has also been provided to the construction industry, given the ongoing buoyancy of the market in this important economic sector.

Again within the corporate segment, the Group has also worked intensively with partner companies that specialise in leasing and factoring transactions.

Lastly, there has been further expansion in the area of special lending. Coordinated by a dedicated team within the Parent Bank, these loans meet the needs of medium and large- sized companies, especially when faced with a change in business direction.

2. Credit risk management policies

The Group attributes great importance to the management of credit risk, represented by the unexpected deterioration of the credit standing of a counterpart, in order to ensure adequate profitability in an environment of controlled risk, as well as to safeguard the financial strength and properly measure and disclose the level of risk generated by relations with customers. This explains the considerable efforts and investments made over time to improve our systems for the management, measurement and control of credit risk, thereby gradually coming into line with the best practice envisaged by the new Basel 2 Accord.

consolidated financial statements for 2006 explanatory notes part E 352

2.1 Organisational aspects

The primary aspects of the process of credit risk management within the Group are based on a clear segregation of the lending functions, which report to the Loans Departments of each bank (working with reference to the guidelines established by the Parent Bank), from the functions that monitor first and second-level credit risk.

At Parent Bank level, the Board of Directors is responsible for establishing the degree of aversion to overall risk applied by the banking group; the Board of Statutory Auditors and Group Audit are, on the other hand, responsible for assessing the adequacy and effectiveness of the system of internal controls and, therefore, the system adopted for the control of risks and risk management activities. The Parent Bank is responsible for ensuring proper compliance with risk control policies and procedures, while general management at subsidiary bank level works within the established guidelines. Specific offices within each bank monitor the individual accounts, manage defaulting situations and recover loans, again with reference to the guidelines established by the Parent Bank and, where appropriate, outsourcing certain activities to it.

2.2 Systems for managing, measuring and monitoring

The Group uses many tools to measure and monitor credit risk in relation to both performing and non-performing loans: in addition to the normal techniques, a number of innovative tools are also being developed and tested internally. These include, in particular, the internal rating systems that are being worked on together by various business functions (especially those responsible for the measurement of risk), as part of work to comply with the requirements of the new Basel 2 Accord which has already been adopted in Italy. The objective, to be achieved in stages, is to implement and subsequently validate various advanced methodologies for the measurement of credit risk and the calculation of capital adequacy.

The Parent Bank has started testing the internal rating system for small and medium-sized firms and “backtesting” the probability of default (PD) found with 2005 amounts, using the actual information available at the end of 2006. The numeric results of this analysis were in line with those envisaged by the Basel 2 Accord in terms of the reliability of the ratings attributed to customers; despite this, the system will be further improved by the addition of an expert system for the qualitative assessment of business customers, and a system that will enable account managers to make exceptions to the ratings proposed by the model, within predetermined limits and for good reason.

With regard to the retail segment, the internal rating system for micro businesses and individuals has been released; this comprises a “behavioural module” used to determine a periodic rating for customers, and an “acceptance module” used when paying-out loans. The other credit risk parameters monitored are exposure at default (EAD) and loss given default (LGD). The operational model for LGD is used to determine the general loss provisions required in relation to performing loans. The loss coefficient is determined with reference to the recoveries and the costs incurred on non-performing positions over a period of years, as discounted using suitable rates and adjusted, using “cure-rate” methodology, to align the results with the definition of default used by the internal rating systems. This approach is already consistent with Basel 2 requirements, although it is now necessary to recover all relevant information regarding closed loan recovery actions, in order to achieve the standard of compliance required by the Bank of Italy. In this area, the Group is adopting innovative tools to build a database of all relevant information about current impaired loans needed to estimate easily and accurately the LGD.

2.3 Credit risk mitigation techniques

One of the most significant aspects of the Basel 2 Accord consists of the broadening of the credit risk mitigation techniques considered when determining capital adequacy. This is accompanied by a more precise definition of the legal, economic and organisational requirements for the recognition of tools as suitable for this purpose.

consolidated financial statements for 2006 explanatory notes part E 353

With reference to secured guarantees, the Group usually obtains first and/or other mortgages on residential and other property, as part of retail lending and loans to building firms, as well as liens on securities and cash. An internal procedure is being developed in relation to property mortgages, with a view to gathering information in a more organised fashion on the property assets of borrowers and on the property given in guarantee. This will be useful in future for assessing the quality of such guarantees, as required by the new regulations.

The principal types of unsecured guarantees consist of “specific guarantees” and “restricted omnibus guarantees”, mainly given by entrepreneurs in favour of their companies and by parent companies in favour of their subsidiaries in the form of binding letters of patronage. The guarantees given by various guarantee consortiums in favour of their members firms are becoming more significant.

2.4 Impaired financial assets

Impaired financial assets are managed with reference to a series of internal classifications based on the quality of the debtor and the risks associated with each transaction, as required by the supervisory regulations. The classification of each anomalous position is decided with reference to an internal regulation that governs in detail the level of monitoring required give the type of anomaly that has occurred: certain changes in status are automatic, while others are made after a subjective assessment of the performance of the positions concerned. The tools available identify on a timely basis any signs of deterioration in the relationship that might lead to its classification as an anomalous position.

The consistency of the classification of an anomalous position with respect to the internal regulations is assured by automated periodic checks that apply these regulations to the entire population, comparing the results with the current classification. An assessment of the adequacy of the adjustments made with respect to the requirements of the internal regulations is also made in the same way. If the anomalous conditions cease, the position is reclassified to a less serious status after the completion of subjective and analytical assessments. These may result, in the best cases, in a return of the position to “performing” status. Similar monitoring is performed in relation to receivables that are past due by more than a given period of time.

consolidated financial statements for 2006 explanatory notes part E 354

QUANTITATIVE INFORMATION Lending quality

A.1 Impaired and performing loans: size, adjustments, trends, economic and territorial distribution

A.1.1 Distribution of financial assets by portfolio and quality of lending (book values)

Portfolio/quality Banking group Other

businesses Non- performin l Watchlist loans Restructured exposures Exposures past due Country risk

Other assets Impaired

loans Other

Total

1. Financial assets held

for trading - - - 4,373,934 - - 4,373,934

2. Financial assets

available for sale - - - 422 3,501 1,428,566 - - 1,432,489

3. Financial assets held to

maturity - - - -

4. Due from banks - - - - 15,932 3,884,116 - - 3,900,048

5. Due from customers 469,893 494,229 44,376 183,951 879 30,080,686 - - 31,274,014

6. Financial assets at fair

value - - - 420 2,322 1,313,880 - - 1,316,622

7. Financial assets being

sold - - - 5,435 - - 5,435

8. Hedging derivatives - - - -

Total 2006 469,893 494,229 44,376 184,793 22,634 41,086,617 - - 42,302,542

Total 2005 409,887 462,273 90,694 217,288 14,590 39,237,654 - - 40,432,386

A.1.2 Distribution of financial assets by portfolio and quality of lending (gross and net values)

Impaired loans Other assets

Portfolio/quality Gross exposure Specific adjustments General portfolio adjustments Net exposure Gross exposure General portfolio adjustments Net exposure Total (net exposure) A. Banking group 1. Financial assets held for

trading - - - - # # 4,373,934 4,373,934

2. Financial assets

available for sale 422 - - 422 1,432,892 825 1,432,067 1,432,489

3. Financial assets held to

maturity - - - -

4. Due from banks - - - - 3,900,239 191 3,900,048 3,900,048

5. Due from customers 2,292,313 1,094,066 5,798 1,192,449 30,410,449 328,884 30,081,565 31,274,014

6. Financial assets at fair

value 420 - - 420 # # 1,316,202 1,316,622

7. Financial assets being

sold - - - - 5,435 - 5,435 5,435 8. Hedging derivatives - - - - # # - - Total 2006 2,293,155 1,094,066 5,798 1,193,291 35,749,015 329,900 41,109,251 42,302,542 Total 2005 2,299,495 1,119,353 - 1,180,142 33,436,163 294,467 39,252,244 40,432,386 consolidated financial statements for 2006 explanatory notes part E 355

A.1.3 Cash and off-balance sheet exposures to banks: gross and net values

Type of exposure/Amounts Gross exposure Specific adjustments General portfolio adjustments Net exposure A. Cash exposures A.1 Banking group

a) Non-performing loans - - - -

b) Watchlist loans - - - -

c) Restructured exposures - - - -

d) Exposures past due - - - -

e) Country risk 18,862 # 191 18,671

f) Other assets 5,460,801 # - 5,460,801

Total 5,479,663 - 191 5,479,472

B. Off-balance sheet exposures B.1 Banking group

a) Impaired - - - -

b) Others 1,005,069 # 1,123 1,003,946

Total 1,005,069 - 1,123 1,003,946

A.1.4 Cash exposures to customers: dynamics of gross impaired loans and loans subject to “country risk”