Red viaria

Classification

Loans to customers include short and long-term finance granted directly to customers or pur- chased from third parties, which is repayable on fixed or determinable dates and is not quoted in an active market.

This category also includes unlisted debt securities acquired on initial placement, where the lending element prevails over the investment element, and the purchase essentially represents the granting of a loan.

Recognition

The initial recognition of a loan takes place on the grant date or, in the case of debt securities, on the settlement date, with reference to the fair value of the financial instrument. This is the amount paid out, or the subscription price, including the directly-related and determinable costs and commissions applying from the start of the transaction.

Costs with the above characteristics are excluded if they are reimbursable by the borrower or represent normal internal administrative costs.

Measurement and recognition of components affecting the income statement

Subsequent to initial recognition, loans to customers are measured at amortized cost. This is their initially-recorded value as decreased/increased by repayments of principal, write- downs/write-backs and the amortization – determined using the effective interest method – of the difference between the amount paid out and that repayable on maturity, which typically rep- resents costs/income directly attributable to the individual loans.

The effective interest rate is the rate that discounts the flow of estimated future payments over the expected duration of the loan so as to obtain exactly the net book value at the time of initial recognition, which includes directly-related transaction costs and all fees paid or received be- tween the contracting parties. This financial method of accounting distributes the economic ef- fect of costs/income over the expected residual life of each loan.

Estimates of the flows and the contractual duration of the loan take account of all contractual clauses that could influence the amounts and due dates (such as early repayments and the vari- ous options that can be exercised), but without considering any expected losses on the loan. The initially-recognized effective interest rate (the “original” rate) is always used to discount expect- ed cash flows and to determine amortized cost subsequent to initial recognition.

The amortized cost method is not applied to short-term loans, since the discounting effect would be negligible, and these are therefore stated at historical cost. The same measurement cri- terion is applied to loans without a fixed repayment date or which are repayable upon demand. In addition, an analysis is performed to identify any problem loans for which there is objective evidence of possible impairment. This category includes loans classified as “non-performing”, “watchlist”, “restructured” or “overdue or overdrawn for more than 180 days”, as defined by the supervisory regulations.

Non-performing loans are evaluated on a case-by-case basis, regardless of the amounts involved. Watchlist and restructured loans in excess of 150,000 euro are assessed on a case-by-case basis,

the counterpart and the type of guarantees given.

The adjustment to the value of each loan represents the difference between its amortized cost (or historical cost for short-term and demand loans) at the time of measurement and the discounted value of the related future cash flows, determined using the original effective interest rate.

Key elements in determining the present value of future cash flows include the estimated real- izable value of any available guarantees, the expected timing of recoveries and the forecast loan-recovery costs. Cash flows relating to loans due to be recovered in the short term are not discounted.

In particular, the approach taken to determining the recoverable value of non-performing loans depends on their amount:

• up to 25,000 euro, the positions are analyzed case-by-case but are not discounted, since they are frequently not taken to court, but sold after the usual attempts to obtain recovery on an amicable basis - these loans generally remain in this category for not more than 12/18 months, representing the short term;

• from 25,000 euro to 150,000 euro, the positions are analyzed on a case-by-case basis to esti- mate the amount recoverable, which is discounted over the average recovery period, as deter- mined with reference to historical-statistical information;

• amounts exceeding 150,000 euro are analyzed on a case-by-case basis to estimate the amount recoverable, which is discounted over the likely recovery period, as determined by the re- sponsible business functions;

Watchlist and restructured loans exceeding 150,000 euro are analyzed on a case-by-case basis to estimate the amount recoverable, which is discounted over the likely recovery period, as deter- mined by the responsible business functions.

Watchlist and restructured loans falling below the above threshold, and higher amounts that are not subject to specific lending risk, are assessed on an overall basis that considers the estimated future cash flows, as adjusted for the expected losses determined using probability of default (PD) and loss given default (LGD) parameters. The resulting cash flows are discounted using the original effective rate for each loan outstanding at the reporting date.

Loans overdue and/or overdrawn for more than 180 days are evaluated on an overall basis that considers the estimated future cash flows, as adjusted for the expected losses determined using probability of default (PD) and loss given default (LGD) parameters. With regard to these fi- nancial statements, the historical information available is insufficient to model this phenomenon and, accordingly, suitable PD and LGD parameters have been applied to reflect the higher risk associated with the above loans with respect to “performing” loans.

Loans for which no objective evidence of loss has been individually identified, i.e. performing loans, including those to residents in countries at risk, are subjected to impairment testing on an overall basis. This assessment is performed by grouping loans into categories that reflect a simi- lar degree of lending risk. The related loss percentages are then estimated with reference to his- torical information, in order to measure the inherent loss for each category of loan. The estimat- ed future cash flows are determined using probability of default (PD) and loss given default (LGD) parameters and the resulting flows are discounted using the effective rate for each loan. The write-down is represented by the difference between the amortized cost, or historical cost, of the loans in each category and the corresponding estimated recoverable amounts.

proved to the extent that timely recovery of the principal and interest, with respect to the original terms for the loan contract, is reasonably certain, or if the amount actually recovered exceeds the amount estimated previously. Write-backs include the positive effect of discount- ing adjustments made due to the progressive reduction in the estimated time required to re- cover the related loans.

No write-downs are recorded in relation to loans represented by repurchase agreements, since they are not subject to lending risk, or to loans to non-profit organizations and local and public administrations.

Adjustments, net of previous provisions and the partial or total recovery of amounts previously written down, are recorded in the “net adjustments for the impairment of loans” caption of the income statement.

Derecognition

Loans are derecognized as assets when they are deemed to be unrecoverable or are transferred together with substantially all the related risks and benefits.