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ABI presentation Held on 17 July 2018

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Looking at the recent past: the economic crisis in Italy has been deeper than other European countries
The crisis in the real economy has been reflected hard on Italian banks, given their business mix traditionally oriented to lending, unlike other European banks more exposed to finance
The consequence was a sharp increase in loan loss provisions (with obvious negative impact on profitability)
Despite the intensity of the crisis, public interventions in favor of the banking sector in Italy were much lower than in other large European countries
Looking ahead: macro environment has changed and the performance of the Italian economy has been good last year and should continue to be positive in the next years
Italian banks state of health is increasing: (1) 70 billion euro of new private capital injections from 2017 ...
Capitalization increase: CET1 ratio of top 11 Italians banks has increased to 13.3%, close to the EU average; net of weighting methodologies IT banks stand over the EU average
Credit risk has normalized
NPL stock is declining quickly
NPL ratio is expected to speedily return to manageable value: under 10% in 2019 and at 6,1% at the end of 2021
NPL disposals are growing exponentially speeding up the reduction of the NPL ratio
The absence of an effective coordination in the regulation process doesn’t help
Despite this context, Italian banks’ profitability is increasing, close to pre-crisis level based on 1q 2018 annualized figure
Market appreciation of Italian banks progresses are confirmed by the increasing presence of foreign institutional investors in banks’ capital (higher than in the rest of major European banks)...
Banks’ holdings of domestic government bonds in the euro area
The maturity structure of public debt matters: In Italy the average residual life of outstanding government securities is of 7.4 years

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ABI presentation Held on 17 July 2018

  1. 1. July 18TH, 2018 THE ITALIAN BANKING INDUSTRY: KEY FIGURES, TRENDS, STATE OF HEALTH Giovanni Sabatini CEO - Italian Banking Association
  2. 2. 2 Looking at the recent past: the economic crisis in Italy has been deeper than other European countries
  3. 3. 3 The crisis in the real economy has been reflected hard on Italian banks, given their business mix traditionally oriented to lending, unlike other European banks more exposed to finance Figures referred to a sample of 80 large EU banking groups (ABI on banks balance sheets and EBA trasparency exercize figures as at June 2017) 12% 14% 25% 26% 25% 10% 13% 7% 9% 7% 22% 27% 32% 35% 32% ES IT FR UK DE Financial assets/assets 60.8% 55.8% 51.3% 45.6% 42.7% 50.1% ES IT DE FR UK EU4* Loans/Assets (Aggregate data; Dec ‘16) 58% 56% 42% 41% 38% 45% 0% 10% 20% 30% 40% 50% 60% 70% ES IT FR UK DE Loans/assets EU 4 average 22% 8% of which: Government securities EU 4 average 30% of which: Derivatives & other financialassets (1) Loans do not include exsposure to banks.(2) Domestic exposure to sovereign plus foreign sovereign exposure (3) Note that banks and banking groups sovereign on assets ratios are not perfectly comparable for accounting reasons ((inter-bank assets between institutions belonging to the same group are eliminated at the consolidated financial statements level)) 1 2 As at May 2018 Italian banks exposure towards domestic sovereign was 361 bln € (about 60 bln less than 2 year before), which is 9,6% of banks total assets3
  4. 4. 4 In some limited cases, these losses led to crisis situations Banks crisis, unlike what happened elsewhere in Europe, were managed and resolved : ▪ under a new framework of European rules, which did not provide for gradualness ▪ without any significant public intervention 4,6 4,7 5,5 9,9 13,5 12,6 13,8 24,2 31,4 30,5 20,9 31,8 19,1 5,0 12,5 26,3 - 5,0 10,0 15,0 20,0 25,0 30,0 35,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 average average average Italian banks: loan loss provisions (ABI on Bank of Italy data, bln €) The consequence was a sharp increase in loan loss provisions (with obvious negative impact on profitability)
  5. 5. 5 0 10 20 30 40 50 60 70 80 90 100 110 0 10 20 30 40 50 60 70 80 90 100 110 Despite the intensity of the crisis, public interventions in favor of the banking sector in Italy were much lower than in other large European countries Recapitalisation measures* to support banks (2008-2016 cumulated data, bln €) Recapitalisation measures* to support banks (2008-2016 cumulated data, as a % of 2017 GDP) (*) 2008-2016 cumulated data referred to State recapitalizations used Source: ABI on European Commission «State Aid scoreboard 2017 – Aid in the context of the financial and econoimic crisis» 26,3% 21,2% 18,1% 8,3% 7,5% 5,3% 4,8% 4,7% 4,3% 3,7% 3,2% 3,1% 2,0% 1,1% 0,7% 0,2%
  6. 6. 6 Looking ahead: macro environment has changed and the performance of the Italian economy has been good last year and should continue to be positive in the next years Confindustria 1,3 1,1 Consensus 1,3 1,1 OCSE 1,4 1,1 Istat 1,4 n.a. Prometeia 1,2 1,2 European Commission 1,3 1,1 IMF 1,5 1,1 ABI 1,5 1,4 Bank of Italy 1,4 1,2 Real Gross Domestic Product (% change) Economic Forecasters 20192018 1,2 1,0
  7. 7. 7 Raised €70 billions of additional private capital from 2007 CET1 ratio increased from 7% to 13.8% Italian banks state of health is increasing: (1) 70 billion euro of new private capital injections from 2017 … Source: ABI on Borsa Italiana and Italian Banks website Source: ABI on Bank of Italy 7,1% 11,5% 2207 2016 +6.7 pp 2) Core Tier1 ratio at 2008, CET1 ratio at December 2017 13.8% 7.1% 2007 2017 +70 bn € 1.8 5.8 5.8 5.7 11.0 7.5 0.1 10.8 3.8 3.8 13.9 2 8 13 19 30 38 38 48 52 56 70 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
  8. 8. 8 … (2) Capitalization increase: CET1 ratio of top 11 Italians banks has increased to 13.3%, close to the EU average; net of weighting methodologies IT banks stand over the EU average 13,2% 13,6% 14,5% 11,5% 10,4% 13,3% 0,0% 1,0% 2,0% 3,0% 4,0% 5,0% 6,0% 7,0% 8,0% 9,0% 10,0% 11,0% 12,0% 13,0% 14,0% 15,0% 16,0% 2015 2016 2017 Europa Italia 5,9% 6,0% 6,3% 7,1% 6,7% 7,5% 0,0% 1,0% 2,0% 3,0% 4,0% 5,0% 6,0% 7,0% 8,0% 2015 2016 2017 Europa Italia CET1 ratio (Dec. 2017; CET1/Risk Weighetd Assets) EQUITY/ASSETS ratio (Dec. 2017) Source: ABI on banks annual reports for 2015 & 2016 and banks press release (preliminary full year data) for 2017 14.5% 13.6% 13.2% 13.3% 10.4% 11.5% 5.9% 6.0% 6.3% 7.5% 6.7%7.1%
  9. 9. 9 0 2 4 6 8 10 12 2006,1 2006,3 2007,1 2007,3 2008,1 2008,3 2009,1 2009,3 2010,1 2010,3 2011,1 2011,3 2012,1 2012,3 2013,1 2013,3 2014,1 2014,3 2015,1 2015,3 2016,1 2016,3 2017,1 2017,3 2018,1 Total Households Firms (*) Annualized quarterly flow of adjusted NPLs (past-due by more than 90 days, other NPLs and bad loans) in relation to the stock of loans net of adjusted NPLs at the end of the previous quarter. Data seasonally adjusted where necessary. .. (3) Credit risk has normalized Loans risk evolution in Italy* (New NPL/loans; referred to total loans to households & firms) Source: Abi on Bank of Italy data Total Firms Households 2,6% 1,7% 1,2%
  10. 10. 10 40 50 60 70 80 90 lug-15 ago-15 set-15 ott-15 nov-15 dic-15 gen-16 feb-16 mar-16 apr-16 mag-16 giu-16 lug-16 ago-16 set-16 ott-16 nov-16 dic-16 gen-17 feb-17 mar-17 apr-17 mag-17 giu-17 lug-17 ago-17 set-17 ott-17 nov-17 dic-17 gen-18 feb-18 mar-18 apr-18 mag-18 -45% -43% Italian net bad loans (sofferenze) (total Italian banks; July 2015 – May 2018; bln €) 88.8 (Pick; Nov 2015) 86.8 (Dec 2016) 49.3 (May 2018) … (4) NPL stock is declining quickly Source: ABI on Bank of Italy data In particular, bad loans (“sofferenze”) down to 49.3 bln € (about 2.8% as a percentage of loans), 45% less than the pick touched at November 2015 (88.8 bln €)
  11. 11. 11 10,7% 9,2% 7,9% 6,1% 6,8% 18,1% 17,3% 14,5% 9,9% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% Dec2008 Dec2009 Dec2010 Dec2011 Dec2012 Dec2013 Dec2014 Dec2015 Dec2016 Dec2017 Dec2018 Dec2019 Dec2020 Dec2021 Abi (July 2018 forecast) Actual figures* Abi (June 2016 forecast) NPL ratio of Italian banks Abi June 2016 forecast1 vs Abi July 2018 forecast2 vs actual data updated to December 20173 (referred to Italian Significant and Less Significant banks) 1) Abi baseline estimates released on June 2016, based on 2015 year-end figure; 2) further acceleration in NPL disposals not considered; 3) December figure estimated on ABI own data 4) December 2017 figure adjusted to considered NPLs disposals of MPS (closed in 2018) .. (5) NPL ratio is expected to speedily return to manageable value: under 10% in 2019 and at 6,1% at the end of 2021 ❑ Our estimates (released on June 2016 and based on 2015 year-end figure) forecasted a fast reduction in the NPL ratio. ❑ Latest official figures (December 2017) show an acceleration over our forecasts due to massive sales of NPL portfolios ❑ NPL ratio as at December 2017 stood at around 14.5%; it was 13,4% once included one relevant deal in the pipeline4 ❑ In 2019 NPL is expected under 10% ❑ At year end 2021 the NPL ratio to 6.1% Source: ABI based on own calculation and Bank of Italy figures 13,4%4 December 2017 data adjusted including pending deals June ‘16 forecast July ‘18 forecast
  12. 12. 12 NPL disposals are growing exponentially speeding up the reduction of the NPL ratio Source: Abi calculations and estimates on PWC data, Banca IFIS data and banks’ statements. (*) NPLs disposals of MPS, BPV & Veneto Banca (total of €42 bln) included in 2017 figures Amount of disposals of NPLs in Italy (billions of euros; NPLs gross figures) 5 4 9 19 17 75 24 2012 2013 2014 2015 2016 2017* June 2018
  13. 13. 13 20 Mar2017 Draft guidance to banks on non-performing loans (ECB/SSM) Guidance on the management of non- performing loans for Italy’s ‘less significant institutions (Bank of Italy) Calendar provisioning (Proposal for a REGULATION) (EU Commission) Addendum NPL (Calendar provisioning) (ECB/SSM) Draft Guidelines on management of non- performing and forborne exposures (EBA) EC proposal for a Directive on credit servicers, credit purchasers and the recovery of collateral (Proposal for a DIRECTIVE ) (EU Commission) Launched Status: Implementation date 12 Sep 2016 In force - 30 Jan 2018 -23 Mar2018 - - 11 July 2017 Under development 29 Sep 2017 In force 04 Oct2017 In force 10 Oct2017 Consultation Closed 26.05.2018 8 Mar 2018 Consultation Closed 8.6.2018 14 Mar2018 14 Mar2018 Consultation Closed 8.06.2018 - Action Plan NPL (EU Commission) Blueprint on the set-up of national asset management companies (AMCs) (EU Commission) - The absence of an effective coordination in the regulation process doesn’t help Overall, we recognize the need for: • ensure consistency between primary regulations, secondary regulations and guidelines on NPLs (Addendum SSM vs Provisioning EC; EBA Guidelines vs SSM Guidance on NPL) • protect consistency between supervisory and accounting rules • ensure transparency choices (i.e. calendar provisioning thresholds) • cost–benefit analysis to minimize economic costs • Ensure a Level playing field (i.e EU vs USA) NPL PACKAGE: MAIN REGULATORY AND SUPERVISORY MEASURES 11 July 2018 - -
  14. 14. 14 Adjusted* ROE of largest European banking groups** (Income net of extraordinary costs & revenues; FY data, 1q 2018 annualized) (*) (profit & loss account result net of extraordinary costs & revenues)/Equity (**) 100 EU banks, of which 11 Italian groups (corresponding to 14 groups untill 2015) Despite this context, Italian banks’ profitability is increasing, close to pre-crisis level based on 1q 2018 annualized figure Source: ABI on banks annual reports 11,8% 10,3% 2,2% 3,0% 6,4% 1,4% 1,6% 3,4% 4,9% 5,6% 5,0% 6,7% 6,7% 8,9% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1Q* Europe Italy
  15. 15. 15 Percentage of banking capital held by foreign funds (main 4 banking groups by country*) Market appreciation of Italian banks progresses are confirmed by the increasing presence of foreign institutional investors in banks’ capital (higher than in the rest of major European banks)… Source: Abi calculation on Reuters data 19,6% 21,7% 21,5% 13,7% 31,3% 27,7% 26,4% 21,8% 12 6 5 8 - 2 4 6 8 10 12 14 0% 5% 10% 15% 20% 25% 30% 35% Italy Germany Spain France Percentage of banking capital held by foreign funds (main 4 banking groups by country) 2011 September 2017 Variation 2017/2011 (percentage points) pp% (*) weighted average by banking groups for each country 31.3% 19.6% 27.7% 21.7% 21.5% 26.4% 21.8% 13.7%
  16. 16. 16 AT; 3,2% DE; 2,3% FLN; 0,7% FR; 1,6% NL; 1,4% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1997Sep 1998May 1999Jan 1999Sep 2000May 2001Jan 2001Sep 2002May 2003Jan 2003Sep 2004May 2005Jan 2005Sep 2006May 2007Jan 2007Sep 2008May 2009Jan 2009Sep 2010May 2011Jan 2011Sep 2012May 2013Jan 2013Sep 2014May 2015Jan 2015Sep 2016May 2017Jan 2017Sep 2018May PT; 9,0% IT; 9,6% GR; 3,7% ES; 7,4% IRL; 1,6% BE; 3,4% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 1997Sep 1998May 1999Jan 1999Sep 2000May 2001Jan 2001Sep 2002May 2003Jan 2003Sep 2004May 2005Jan 2005Sep 2006May 2007Jan 2007Sep 2008May 2009Jan 2009Sep 2010May 2011Jan 2011Sep 2012May 2013Jan 2013Sep 2014May 2015Jan 2015Sep 2016May 2017Jan 2017Sep 2018May Banks’ holdings of domestic government bonds in the euro area (as a percentage of total assets; monthly data; Sep. 1997 – May 2018) • The increase in banks’ holdings of government bonds during the crisis was mainly a consequence, rather than a cause, of the crisis • In stressed periods banks acted as shock absorbers 430 364 300 320 340 360 380 400 420 440 2015May 2015Aug 2015Nov 2016Feb 2016May 2016Aug 2016Nov 2017Feb 2017May 2017Aug 2017Nov 2018Feb 2018May Italian banks’ holdings of domestic government bonds (bln €)
  17. 17. 17 The maturity structure of public debt matters: In Italy the average residual life of outstanding government securities is of 7.4 years Source: Will Rising Interest Rates Lead to Fiscal Crises? Olivier J. Blanchard and Jeromin Zettelmeyer July 2017; Peterson Institute for International Economics Governments will have time to adjust to rising interest rates: - because the rise in rates is expected to be slow - due to the maturity structure of public debt (In Italy the average residual life of outstanding government securities is of 7.4 years)
  18. 18. 18 1. ITALIAN BANKING SECTOR ON A RECOVERY PATH. Following the precautionary recapitalisation of MPS and the orderly liquidation of Banca Popolare di Vicenza and Veneto Banca, headline risks have been removed. Favourable macro environment is supporting improvments in credit quality and banks soundness & profitability. 2.LENDING TO PRIVATE SECTOR GROWING AS OF 2016. In May 2018 loans to households and firms (net of repos and taking into account securitisation of NPLs) grew at around 2.5% YoY (loans to firms +1.2% YoY) 3.CREDIT RISK BELOW THE PRE-CRISIS LEVEL. The flow of new non-performing loans (NPLs) has been decreasing since 2014. It is now about 1.7% of total loans, below the pre-crisis average. 4.NPL STOCK DIMINISHING AT A REMARKABLE PACE. Banks are selling large amounts of NPLs in the market. Including the sales that will be completed in the next months, by mid-2018 the volume of NPLs net of provisions will amount to around €120 billion (6,8% of total loans). The gross NPL ratio stands at 13.4%, against over 18% in 2016. 5.NPL RATIO EXPECTED TO DECLINE AT ACCELERATED PACE: in our June 2016 forecasts (based on 2015 year-end data) we expected NPL ratio at 2020 lower than 10%. Latest actual figures (Dec. 2017) show the ratio is declining more quickly than we expected. In our updated forecasts (July 2018), gross NPL ratio is expected to fall below 10% by mid 2019 and at around 6% by year end 2021. 6.COVERAGE RATIO INCREASING: it now stands at 54% for total NPLs and 65% for bad loans; the implict recovery rate on bad loans is 35%, well above the effective recovery rates (about 43% in average for all the NPL position closed between 2006 and 2015). 7.PRUDENTIAL CAPITALIZATION LEVELS CONTINUE TO RISE: common equity tier 1 ratio standed at around 13.8% at year end 2017, up from 10.4% in 2016. 8. EXPOSURE TO THE DOMESTIC SOVEREIGN AROUND 9,5% OF TOTAL ASSETS 9.PROFITABILITY GROWING: ROE increased to 4% in 2017 net of extraordinary costs and revenues (reported ROE was over 7%). Annualized 1Q 2018 ROE increased at around 9% 10.RESTRUCTURING & CONSOLIDATION GOING ON: 300 cooperative banks will soon form 3 large banking groups. The largest «banche popolari» were transformed into joint stock companies. All in all, the sector is less fragmented than often claimed: around 110 groups and independent banks in total Final remarks
  19. 19. 19 Thank you for you attention

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