Andrea Gamba Research Department - BPVN - UniBG · Andrea Gamba Research Department - BPVN. 2 Investor Relations ... •Incentivation to use telematic channels ... VB VC VR VI 0%

1

Presentation of

Bergamo, 19 May 2004

BANK’S EVALUATION DRIVERS AND MODELS:A PRACTICAL APPLICATION TO BPVN GROUP

Andrea GambaResearch Department - BPVN

2Investor Relations

This document has been prepared by Banco Popolare di V erona e Novara solely for information purposes and for use in presentations of the Group’ s strategies and financials. The information contained herein has not been independently verifie d. No representation or warranty, express or implie d, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctnes s of the information or opinions contained herein. Ne ither the company, its advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from an y use of this document or its contents or otherwise a rising in connection with this document. The forwar d-looking information contained herein has been prepa red on the basis of a number of assumptions which may prove to be incorrect and, accordingly, actual results may vary.

This document does not constitute an offer or invit ation to purchase or subscribe for any shares and n o part of it shall form the basis of or be relied upo n in connection with any contract or commitment whatsoever.

The information herein may not be reproduced or pub lished in whole or in part, for any purpose, or distributed to any other party. By accepting this d ocument you agree to be bound by the foregoing limitations.

Disclaimer

Note on FY 2002 accounts:At the end of 2002, the bank made an accounting change con cerning the valuation of the securities and derivatives portfolio, adopting the mark-to-market cr iteria for the dealing component, in accordance withunderlying IAS standards. In the light of the complex ities resulting from the changes in the informationprocedures and changes in the underlying portfolios, no corresponding pro-forma data have beenprovided for the first three quarters of 2002. It is note d that for the full year 2002 the change in the valuation criterion resulted in a pre-tax gain of €37.1m illion, of which €32.8 million were included in profitsfrom financial transactions in the fourth quarter of 200 3.

3

Agenda

Bank’s valuation drivers and models: a practical application

to BPVN Group

•BPVN analysts presentation

•Major international investment banks equity researc hes: effects on valuation deriving from different modelscritic aspects pointed out by analysts: valuation t riggers

•Standard business practise valuation methods

•VBM: internal system for strategic planning and ent erprise valuemaximisation

4

Agenda

Slides

Section 1: Profile at a glance 5 - 6

Section 3:

Growth: BPVN business plan 2004-2006

26 - 49

Section 2:

BPVN merger restructuring

8 - 24

Section 4: 51 - 69BPVN Group Q1 results

Section 5: 70 - 95Major international investment banks equity researches

Section 6: 70 - 104VBM: internal system for strategic planning and enterprise value maximisation

Section 4: 96 - 116Standard business practise valuation methods

5

Section 1

Profile at a glance

6

Financial highlights (31/12/2003)

• customer loans: €32.9 bn (+0.0% y/y)

• direct cust. funds: €37.6 bn (+6.7% y/y)

• indirect cust. funds: €58.4 bn (+9.1% y/y)

of which: AUM €29.2 bn (+8.5% y/y)

• total cost/income: 59.9% (61.7% in FY 2002)

• ordinary adjusted ROE: 13.9%

• Tier 1 capital ratio: 7.85%

BPVN profile today

Business profile

• #7 financial services group in Italy

• strong local franchise: ~ 1,162 branches

• about 3 million customers

• less than 13,000 employees

• leveraging on co-operative bank status

• management team incentivised on value

creation

• market capitalisation: ~ €5.2bn

• shareholder base: ~ 60% retail, ~ 40%

institutional

Profile at a glance

9.6%

4.9%1.9%

8.7%

5.8%5.3%

2.2% 0.6%

1.3%

6.5%

0.3%

regional marketshare of branches

7

Retail Banking

Business development strategy at a glance

Corporate Banking

Private Banking& Finance

Strategy

• customer-driven business model / product diversification strategy in asset gathering

• market share growth in “semi-historical” areas (neighbouring areas in northern Italy

• targeted market share growth in historical market areas (Private)

• leverage on production capabilities for development of fee-generating services

• key success factor: confidentiality in private banking; risk management know-how in financeBanca Aletti

• business focus on mid-corporates

• optimisation of capital allocation

• strengthening asset quality

Profile at a glance

8

Section 2

Growth: BPVN business plan 2004-2006 (“Back to busi ness”)

9

Back to business

Time horizon 2002-2003 2004-2006

Strategic focus Integration process Business development

Action focus

• change management• innovation of products and

commercial alignment • IT system integration• cost and revenue synergies

• simplification of operating activity to relaunch the commercial development

• strengthening of internal best practice

• market share growth (northern Italy)


10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002

5. Other activities

4. Managementactivities

3. Administrativeactivities

2. Branch activities

1. Commercial activities21%

38%

19%

15%

7%

40%

Target

Simplification of activities

1.

2.

3.

4.

5.

Branch activity


11

To improve the quality of

customer relationships

• Elimination of low value activities

To increase the

commercial productivity

• Slimming and friendly use of IT system and procedures

• Automatic scoring and credit evaluation

• Product simplification (variety reduction program of product range and design to cost)

• Incentivation to use telematic channels

• CRM and strengthening of commercial processes

• Upgrade planning and control of commercial activities systems and structures

• Brand network structure and “shorter” in areas

• 7.5%

• 6.5%

• 2.5%

• 2 %

• 1.5%

increase of 10% in the commercial

productivity

Simplification focus: strengthening of service quality and commercial productivity

20% full time equivalent freed in the

network


12

4.00%

3.46%

3.19%

2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

3.7%

3.9%

4.1%

Market share growth target

Italian market share4.00%

3.70%

3.54%

2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

3.7%

3.9%

4.1%

Direct + indirect funds Customer loans

March2003

Long-term objective

March2003

Long-termobjective

Italian market share

2006 2006

focus on mid

corporate


13

BPN productivity alignment: customer loansGrowth: BPVN business plan 2004-2006

1. full penetration gap closure = ~€5bn in additional customer loans in the long-term

2. only ~20% of the total potential included in BPVN’s 2004-2006 business plan

STRUCTURE (09/2003):

• domestic branches

• customer funds (direct)

• customer loans (gross)

Total BPVN Group

1,155

€35.3bn

€33.0bn

of which: former BPN

46% (534)33% (€11.5bn)

27% (€8.9bn)

CORE REGIONAL MARKET SHARE (06/2003):

• customer funds (direct, excl. repos)

• customer loans

CUSTOMER LOANS/BRANCH (09/2003):

average in Verona, Modena, Reggio Emilia and Bergamo

BPV parent + CB

~19%

~16%

~€39.4m

BPN

~21%

~9%

~€16.6m

average in Novara, Verbania and Vercelli

penetration gap

Prior tobranch re-

organisation

14

Group capital ratios

BPVN group capital position

30/06/02(pro forma)

tier 1 capital ratiototal capital ratio

= core capital

6.75%

8.69%

4.0%5.0%

6.0%

7.0%

8.0%

9.0%

10.0%9.59%

7.65%

31/12/02

8.92%

7.31%

30/06/03


The strength of BPVN’s capital position fully supportsthe Group’s growth strategy

9.84%

7.85%

31/12/03

15

ALAO

AT

BN

BG

BIBS

CN IMMN

MO

NO

PR

PV

RE

SVVE

VBVC

VR

VI

0%

5%

10%

15%

20%

25%

30%

35%

0% 5% 10% 15% 20% 25% 30% 35%Market share employees

2002

Market sharetotal funds 2002

Significant growth potential in neighbouring areas

areas mainlyinterested in the branch opening

plan

= profitability premium


16

Branch plan: 86 net openings in three years

4,8%

3,5%

Fo: 20,7%

Al: 217,5%

At: 117,2%

Bi: 1410,9%

Cn: 326,8%

No:52

26,3%

To: 403,8%

Vb: 2226,2%

Vc: 2921,6%

Ao: 66,1%

Ge: 163,2%

Im: 87,3%

Sp: 53,9%

Sv: 169,3%

Bg: 8012,7%

Bs: 536,7%

Co: 103%

Cr: 10,4%

Lc: 41,9%

Mn: 154,9%

Mi: 642,8%

Pv: 289,1%

Va: 163,8%

SoTn: 31%

Bl: 42,1%

Pd:9

1,6%

Ro: 1 – 0,6%

Tv: 203,3%

Ve: 4910,4%

Vr: 14523,4%

Vi: 315,2%

Ts: 21,4%

Pn: 62,8%

Ud: 61,3%

Bo: 131,8%

Fe: 10,5%

Mo:75

16,7%

Pr: 206,4%

Pc: 10,5%

Ra: 41,3%

Re:49

13,7%

Lo

Ri

So

Bz

Go

Fo: 20,7%

Al: 217,5%

At: 117,2%

Bi: 1410,9%

Cn: 326,8%

No:52

26,3%

To: 403,8%

Vb: 22

26,2%

Vc: 29

21,6%

Ao: 66,1%

Ge: 163,2%

Im: 87,3%

Sp: 53,9%

Sv: 169,3%

Bg: 80

12,7%Bs: 536,7%

Co: 103%

Cr: 10,4%

Lc: 4

Mn: 154,9%

Mi: 642,8%

Pv: 289,1%

Va: 163,8%

SoTn: 31%

Bl: 42,1%

Pd:9

1,6%

Ro: 1 – 0,6%

Tv: 203,3%

Ve: 4910,4%

Vr: 145

23,4%

Vi: 315,2%

Ts: 21,4%

Pn: 62,8%

Ud: 61,3%

Bo: 131,8%

Fe: 10,5%

Mo:75

16,7%

Pr: 206,4%

Pc: 10,5%

Ra: 41,3%

Re: 49

13,7%

Historical areas (red)Neighbouring areas (blue)Other provinces with branches (grey)

Provinces without branches (white)

Lo

Ri

Bz

Go

Regional market share(June 2003)

Opening strategy

30 branches: BPVN32 branches: BPN21 branches: Credito Bergamasco

3 branches: Banca Aletti

Focus of openings in the historical and neighbouring

areas


17

31/12/1999 31/12/2000 31/12/2001 31/12/2002 30/06/2003 31/12/2006

+86

Period 2000-2001:

Period 2002-06/2003:

Period 06/2003-2006:

+54

+13

+86

Branch openings to support operating growthTotal branch evolution (1) Branches openings (net)

(1) BPVN Group branches; pro forma data for 1999, 2000 and 2001


1.085

1.112

1.1391.150 1.152

1.238

1.000

1.050

1.100

1.150

1.200

1.250

18

20 Italian average

Market attractiveness2001GDP

inhabitant(‘000€)

Competitive strengthBranch market share (%)

2002

PS

CR

LE

FE

MC

PC

BA

FR

TN

RO

LT

FO

AV

SR

FGSA

ANAR

MS

CE

UD

RATS

PO

PD

FIRM

LC

BO

BL

LI

PI

NA

PN

MI

LU

CO

GE

TV

PT

VA

TO

SP

CT

GR

MN

TR

VI

AO

PR

BS

CN

AT

IM

AL

PV

SV

VE

BI

BG

RE MO

BN

VC

VR

VB

NO

10

15

20

25

30

35

0,1% 1,0% 5,0% 100,0%10,0%

Branch opening focus

of which: historicalareas

of which: neighbouringand adjacent areas

58

18


19

2003 2004 2005 2006

0.40% 1.50% 2.20% 2.30%

Growth of Italian GDP 0.30% 1.40% 2.20% 2.00%

2.80% 2.10% 1.90% 2.20%

Growth of EU(12) GDP

Italian inflation

1.80% 2.70% 2.70%

1.80% 2.10% 1.60% n.a.

1.50% 2.70% 2.50% n.a.

2.50% 3.20% 2.70% 2.70%2.60% 3.60% 2.70% n.a.

Growth of US GDP - new- old (1)

- new- old (1)

- new- old (1)

- new- old (1)

Macroeconomic background(underlying the 2004-2006 business plan)

(annual % chg.)

3-month interest rate EU(12)

2.30% 2.10% 2.15% 2.55%- old (1) 2.85% 3.60% 4.10% n.a.

(1) Business plan 2003-2005 (December 2002)

n.a.

- new

Source: Prometeia (October 2003)

taken from external provider


20

Profitability targets(€m)

+6.5%

+1.7%

+12.9%

-1.2%

+22.7%

+22.7%

+17.4%

Total revenues

Operating costs

Operating income

Total net value adjustments (ii)

Net income

Income before taxes

Income before extraord. items

CAGR2003-2006 (i)

2,696

2006F

(ii) total net provisions include those for loans, guarantees, financial fixed assets and other risks, net of write backs, and amortisation of goodwill

of which: amortisation of goodwill -24.1%

1,287

1,050

597

1,408

237

1,050

28


2,233

2003A

895

649

323

1,339

246

569

64

(i) the business plan was approved on 11/11/2003, whereby the then indicated growth targets were based on preliminary FY 2003 performance estimates. The 2003-2006 CAGR indicated here is based on actual FY 2003 performance data, disclosed on 23/03/2004, calculated with unchanged 2006 performance targets.

21

+8.3%

+8.0%

-3.0%

+7.4%

+9.3%

-4.1%

Indirect customer funds

Loans to customers (gross)

Non-performing loans (gross)

2006F

+5.8%+6.5%Direct customer funds

+7.4%+7.1%Total direct & indirect customer funds

of which: assets under management +11.3% +11.4%

Volume targets2004F

+10.7%

+5.8%

-3.0%

+5.4%

+8.7%

+12.0%

2005F

+6.9%

+9.1%

-1.7%

+5.5%

+6.4%

+10.9%

(% chg. y/y - average values) CAGR2003-2006

alignment of BPN corporate banking penetration cur rently factored in only by ~20% of total potential


22

53.5%55.0%54.1%53.6%

1.3%1.4%1.5%1.9%

38.7%39.3%39.8%38.8%

5.0%5.1%5.1%5.8%

2003A 2004F 2005F 2006F4. Profits from financial transactions3. Net commissions and other net income2. Divid.+inc. from equity inv. valued at equity method1. Net interest income

Total revenues

2004F 2005F 2006F

CAGR 2003-2006 = +6.5% (i)

Revenue trend Revenue mix

+3.4%

+6.8%

+9.3%

100% 100% 100% 100%

1.

2.

3.

4.


(i) the business plan was approved on 11/11/2003, whereby the then indicated growth targets were basedon preliminary FY 2003 performance estimates.The 2003-2006 CAGR indicated here is based on actual FY 2003 performance data, disclosed on 23/03/2004, calculated with unchanged 2006 performance targets.

23

62.0%

27.8%

10.2%

2 0 0 3A

2. Other administrative costs

2003A3. Value adjustmts. on tangible and intangible fixed as sets1. Personnel costs

Total operating costs

1.

2.

3.

Operating cost mix %

(i) the business plan was approved on 11/11/2003, whereby the then indicated growth targets were based on preliminary FY 2003 performance estimates.The 2003-2006 CAGR indicated here is based on actual FY 2003 performance data, disclosed on 23/03/2004, calculated with unchanged 2006 performance targets.

+1.6%

+4.5%

-6.1%

+1.7%100%Total


= €830.5m

= €371.9m

= €136.2m= €1,338.6m

CAGR 2003-2006 (i)

24

13,013

12,564

12,387

11,600

11,800

12,000

12,200

12,400

12,600

12,800

13,000

13,200

2002 2003 2004F 2005F 2006F

N°of employees at period-end

-626(CAGR:-1.2%)

Operating costs/employees(on average data)

Total revenues /employees (on average data)

13,013

12,387

983

357

11,500

12,000

12,500

13,000

13,500

2002 New branches Efficiency gains 2006F

- 626(CAGR:-

1.2%)

Headcount trend

CAGR2003-2006 (i)

+7.7%

+2.9%

N°


(i) the business plan was approved on 11/11/2003, whereby the then indicated growth targets were based on preliminary FY 2003 performance estimates.The 2003-2006 CAGR indicated here is based on actual FY 2003 performance data, disclosed on 23/03/2004, calculated with unchanged 2006 performance targets.

25

1.40%6.0%

3.2% 3.1% 3.00%

2,40%

9.80%

5.30% 4.88% 4.83%

3.60%

BPV 31/ 12/ 2001 BPN 31/ 12/ 2001 BPVN 31/ 12/ 2001PF BPVN 31/ 12/ 2002 BPVN 31/ 12/ 2003 BPVN 2006F

183

139160

170 175

218

BP V 3 1/ 12 / 2 0 0 1 B P N 3 1/ 12 / 2 0 0 1 B P VN

3 1/ 12 / 2 0 0 1P F

B P VN

3 1/ 12 / 2 0 0 2

B P VN

3 1/ 12 / 2 0 0 3

B P VN 2 0 0 6 F

Productivity: total revenues/employees (avg.) Cost efficiency: operating costs/total revenues

Credit quality: gross & net NPL ratios

Financial restructuring targets (i)

standalone

standalone

€’000

gross NPL ratio

Focus on productivity, cost

efficiency and credit quality,

also through alignment to

Group internal best practice

(i) All data are indicated at consolidated Group level both for BPV and BPN standalone as well as for the new BPVN Group

58,0%

68,9%63,0% 61,7% 59,9%

52,0%

BP V 3 1/ 12 / 2 0 0 1 B P N 3 1/ 12 / 2 0 0 1 B P VN

3 1/ 12 / 2 0 0 1P F

B P VN

3 1/ 12 / 2 0 0 2

B P VN

3 1/ 12 / 2 0 0 3

B P VN 2 0 0 6 F

standalone


26

Section 3


27

Delivering the IT integration first

Defining the first and second linesof managers on a preliminary basis

ahead of the merger

Defining the new business model and targets in detail,

supported by separate incentivation mechanism

• immediate focus on merger implementation and delivery• clear separation between ordinary business development and delivery ofmerger/restructuring synergies

GOALS

BPVN approach to merger restructuringBPVN merger restructuring

1. 2. 3.

28

Overview of merger delivery

Headcount reduction

Total

· Cost synergies in Q1 2004

· Revenue synergies in Q1 2004

Total one – off integration costs

(non cumulative)

(cumulative since 06/2002)

929

€168m

€114m

€54m

€150m (ii)

Target 2005Delivery as at

31/03/2004

77%

18

87%

717(i)

€34m

€23m

€11m

€131m

Achievement level of Target 2005

(as at 31/03/2004)

well on track

(total FTE)


(i) based on new phasing which in Nov. 2003 saw an anticipation of integration costs, coupled with a downward revision of total costs from €155m to €150 m

(i) as at 01/04/2004

synergies in Q1 2004

29

BUSINESS PLAN TARGETS DELIVERY AS AT 31/03/2004amounts in €m

33

2002A 31/03/04A

34

Actual achievement as at 31/03/04Targeted phasing of total annual pre-tax synergies

2002E 2003E 2004E 2005E

12

60

128168

Analysis of total merger synergies - net of costs

1010

26

104

2002A 2003E 2004E 2005ET

OT

AL

=€15

0m

26

2002A 31/03/04A

2Actual expenses as at 31/03/04Targeted new phasing of integration costs

2002A 2003E 2004E 2005E

+7

2002A 31/03/04A

Value as at 31/03/04(pre-tax)

Targeted phasing of net value (pre-tax)

-14 -44

+118

+158+168

+

-

=

+

-

=

168

2006E

2006E


31/12/03A

91.8

31/12/03A

103

31/12/03A

-11.2

+32

30

n°of employees

Trend in total Group headcount

date of BPVN merger (01/06/02)

858

13,002

13,246

12,388

12,555

13,132

12,564

13,013

12,855

11,800

12,000

12,200

12,400

12,600

12,800

13,000

13,200

13,400

31/12/01 30/06/02 31/12/02 31/12/03

increase still due to standalone BPV business plan

reaping cost efficiency benefits from the merger

reduction in the period 30/06/02-01/04/04

30/06/03 31/03/04

n°of employees at01/04/2004


31

Rationalisation of the Group’s regional franchiseBPN Spa

Fi

CrLo

Pi

LiGr

SiAr

Bo Ra

Fo

PsRnPo

ReMoPr

Lu

PcPvTo

Al

Ge

As

Cn

Im

Sa

PdVrMn

BsBg

Fe

So

Ts

Pn Ud

VeTvVi

TnBl

Bz

Go

Ro

LcCo

MiNoVa

Vc

Vb

AoBi

PsSpMs

Pg

An

McAp

534 417 -117Total

Lombardy 89 56 -33Veneto 33 0 -33Friuli VG 4 0 -4Emilia Romagna 12 0 -12Tuscany 37 6 -31Marche 4 0 -4

Piedmont 217 217 0Aosta Valley 6 6 0

Liguria 43 43 0

BPVN (Parent)

Fi

CrLo

Pi

LiGr

SiAr

Bo Ra

Fo

PsRnPo

ReMoPr

Lu

PcPvTo

AlGe

As

Cn

Im

Sa

PdVrMn

BsBg

Fe

So

Ts

Pn Ud

Ve

TvVi

TnBl

Bz

Go

Ro

LcCo

MiNoVa

Vc

Vb

AoBi

PsSpMs

Pg

An

McAp

Veneto 187 254 +67

Friuli VG 8 14 +6

Emilia Rom. 149 161 +12

Tuscany 7 38 +31

Marche 1 5 +4

384 504 +120Total

Creberg

Fi

CrLo

Pi

LiGr

SiAr

Bo Ra

Fo

PsRnPo

ReMoPr

Lu

PcPvTo

Al

Ge

As

Cn

Im

Sa

PdVrMn

BsBg

Fe

So

Ts

Pn Ud

VeTvVi

TnBl

Bz

Go

Ro

LcCo

MiNoVa

Vc

Vb

AoBi

PsSpMs

Pg

An

McAp

Lombardy 157 190 +33

Veneto 7 -34

Friuli VG 2 0 -2

221 218 -3Total

Domestic franchise

Before After change

Domestic franchise

change

Domestic franchise

change

41

Other regions (i)

Other regions (i)Other regions (i) 89 89 0

Lombardy 27 27 0

5 5 0

21 21 0

(i) include branches in non traditional market areas


Before After Before After

32

Objectives of the regional branch rationalisation(completed in Nov. 2003)

• to enhance the Groups’ retail banking brands

• to strengthen focus on the respective traditional home territories

• to contain the risk of “internal” competition

• to sustain the sharing of best commercial competence and managerial effectiveness


33

Group structure after merger restructuring

Private Banking &

FinanceRetailCorporate Operations

Business AreasService area

Banco Popolare di Verona e NovaraBPN S.p.A.Credito Bergamasco

Banca Aletti

Aletti Suisse

Aletti Gestielle A.M.

Aletti Merchant

Leasimpresa

Sestri e SA.RI.

Aletti Invest Sim(FA network)Novara Vita

BPV Vita

SGSProduct & Service Companies

Commercial Banks

Regional branding strategy

Merger restructuring & growth strategy

34

Inte

grat

ion

proj

ect s

truc

ture

Inte

grat

ion

Fun

ctio

n

Ste

erin

g C

omm

ittee

Org

anis

atio

n of

Pro

cess

es

IT Per

sonn

el

Operations Division

Credit

Participations & General Affairs

Legal & LitigationA

dmin

istr

ativ

eD

ivis

ion

Administration / Fiscal

Group Organisation

Procurement

IT

Back office

Ope

ratio

nsD

ivis

ion

Maintenance

Cor

pora

teR

etai

lP

.B.&

F

inan

ce

Bus

ines

s D

ivis

ions Private

Group Finance / Investment

Gestielle / Sogepo

Group Direct banking

Personnel

P&C / Risk Management

Internal Audit

CorporateForeign branches

SIMRetail

BranchesHeadquarters

BP

NG

vt.&

co

ntro

l

Group Communication

Div

isio

ns/

Fun

ctio

ns

Pro

ject

of r

etai

l fr

anch

ise/

bran

d re

orga

nisa

tion

Mer

ger

rest

ruct

urin

g &

gro

wth

str

ateg

y

35

Key factor: IT integration first

TRADE - OFFS IN IT INTEGRATION

FOCUS ON SYSTEM OPTIMISATION= building a new target system picking

the best from the two existing systems

FOCUS ON TIME TO DELIVER= picking the best existing system as it is,

avoiding any integration discussion

Pros: Cons: Pros: Cons:system quality delay in implementation

complexity

most rapid IT delivery second best IT solution

BPVNCHOICE

…and, consequently,

delivery of synergies


36

31 Dec 02 30 June 03

Phased Roll Out of BPN SpAbranches

Start of BPN SpA IT central system

March 02

IT integration in BPVN merger

Management of personnel mobility, training and early retirement

IT integration completedaccording to plan: elimination

of merger execution risks

Design of migration software forBPN H.O. functions and branches

June 02

The new Group immediately decided to adopt former B PV’s IT system:• better alignment with the “multi-banca” organisati onal model• less complexity in IT migration and fastest possibl e IT integration


37

Assignment of synergy targets

Breakdown of synergy objectives (in Euro m): (i)

Government and

ControlBPN Corporate Retail Finance/

PrivateAdm.

DivisionOperations

DivisionCreberg TOTAL

Cost synergies

Revenue synergies

Total% on total

4 25 2 2 10 9 60 114

35 10 3 6 54

4 60 2 12 13 9 60 8 168

2% 36% 1% 7% 8% 6% 36% 4% 100.0%

2

(i) indicated targets show the revised update as of March 2003, which saw a full confirmation of total synergy targets, with minor adjustments to the composition of targets assigned to the single project areas


38

Merger integration/restructuring focusActivity ex BPV ex BPN Integration focus

for BPVN Group

Timing/status of

integration

Retail Banking •

essentially in north-

601 domestic retail

branches, located

eastern Italy

• 533 domestic retail

branches, located

essentially in north-

western Italy

• due to the overwhelming

complementarity of the networks,

a branch rationalisation is not

necessary• brand strengthening through

territorial exchange of branches

• adoption of BPVN businessmodel

• action focus is on aligning the

number of employees per branch

to the internal best practice

completed Nov. 2003

well under way

Corporate Banking • relationship managers &

corporate centres• support through finance

specialists

• development through

branch network

• adoption of ex BPV business

model for BPVN• focus on small and medium-sized

business segment

• generation of fee-generating

services

well under way

Group Operating

Machine

• SGS, separate company • within parent bank • concentration under SGS and

reorganisation

• IT integration

completed in July 2003


39

Merger integration/restructuring focus

Asset Management • Gestielle A.M. (mutual

funds)• Banca Aletti

(discretionary AUM)

• Sogepo (mutual

funds)• BPN (discretionary

AUM)

• concentration of management

activities under Aletti Gestielle

A.M. (mutual funds) and Banca

Aletti (discretionary AUM)

completed

December 2002

Private Banking • Banca Aletti (private

banking)• Aletti Suisse

• BPV Intl.

• BPN Private Centers • alignment of Private banking

segmentation• concentration of activity in Banca

Aletti with new private centers

completed July 2003

Financial Advisors • Creberg Sim network

(356 advisors)

• Novara Invest

(151 advisors)

• integration and rationalisation of

the two companies under the

single network of Aletti

Investment Sim

completed April 2003

Bancassurance • BPV Vita (50%) • Novara Vita (50%)

• Nuova MAA (10%)

-

Activity ex BPV ex BPN Integration focus

for BPVN Group

Timing/status of

integration

• competitive management


40

Merger integration/restructuring focus

Investment

Banking

• Banca Aletti (investment

banking)

• Finance BPN • concentration under Banca Aletti

and reorganisation of Group

finance

completed April 2003

Merchant Banking • Gestielle Merchant

• Gestielle Private Equity

- • concentration under Aletti

Merchant with

rationalisation of group activities

completed June 2003

Activity ex BPV ex BPN Integration focus

for BPVN Group

Timing/status of

integration


41

Timing of achievement

� Integration of the Creberg Sim and Novara Invest Sim financial promoter networks under the single network of Aletti Investment Sim

April 2003

April 2003� Migration of IT “big bang” �

�

� Reorganisation of the Private Bkg. and Finance Division April 2003 �

� Roll-out of three “pilot” branches April 2003 �

� Successful roll-out of branches June 2003 �� Concentration of corporate finance activities under Aletti Merchant

� Creation of new workout function for problem loans

� Rationalisation of London branch

June 2003

�May 2003 �

May 2003

�

Nov. 2003� Closure of ex BPV branch in Luxembourg �Nov. 2003� Spin-off of 84 branches from BPN to BPVN �Dec. 2003� Transfer of 33 branches from Creberg to BPVN

Dec. 2003� Transfer of 36 branches from BPN to Creberg

� Reorganisation of Sgs July 2003 �

��

Results achieved - actions already disclosed


42

Results achieved - actions already disclosed

� Transfer of BPN’s EDP center to SGS, the Group’soperating machine

Timing of achievement

September 2002

November 2002

November 2002

November 2002

� Migration of Banca Aletti IT on BPVN target system

� Conferment of BPN’s IT and back office functions to SGS

� Concentration of BPN and Creberg discretionaryinvestment management activities under Banca Aletti

� Rationalisation of Group presence in Luxembourg September 2002

��

�

�

�

December 2002� Centralisation of BPN’s financial marketactivities under Banca Aletti

December 2002

December 2002� Centralisation of Group purchasing activities

� Merger of Sogepo into Aletti Gestielle Sgr

�

�

�

March 2003� Centralisation of the call center �

March 2003� Extension of the parent bank’s organisational model into the area management structure of BPN

�

March 2003� Simulation of IT Migration “big bang” �


43

Merger/restructuring synergies

cost synergies(€114m p.a. by FY 2005)

revenue synergies(€54m p.a. by FY 2005)

• IT system integration• integration of product companies• rationalisation of governance and head

office functions

• cross selling with enhanced product range• productivity alignment: best practice

internal benchmarking

8.6% of FY 2001 PF Group operating costs

2.5% of FY 2001 PF Group revenues

Action Focus


44

47%53%

1. personnel costs 2. other operating costs

2002E 2003E 2004E 2005E

Cost synergies: targets & actual progress

Target: phasing of annual pre-tax cost synergies

amounts in Euro million

7

44

89114


11

2002A 31/12/03A

51

Actual achievement as at 31/03/04

Breakdown of total cost synergies as at 31/03/2004 (€23m)

1.2.

31/03/04A

40 23

45

Headcount reduction: targets & actual progress

624

223

82

Staff/ Operations/Administration

Branches Finance &asset mgmt.

Targeted phasing 2002-2005 Targeted breakdown by functional area

Total headcount reduction: 929

121

289

405114 929

2002E 2003E 2004E 2005E TOTAL

No. of employees (i)

390

287

40

Staff/ Operations/

AdministrationBranches

Total headcount reduction FY 2002 (7mths)+FY2003+3mths’04+01/04/04=717


TA

RG

ET

DE

L IV

ER

Y

(i) number of full-time equivalent employees that are part of integration area

Finance & asset mgmt.

167

717152

398

2002A 2003A 01/04/2004 TOTAL


46

Revenue synergies (i): targets & actual progressamounts in Euro million

2002E 2003E 2004E 2005E

22.5

2002A 31/12/03A

40.5


Target: phasing of annual pre-tax revenue synergies

516

39

54

(i) revenue synergies are defined as recovery of commercial productivity and profitability on specific product lines, based on an alignment to the Group’s internal best practice.

4%13%

36%3%

44%

1.Corporate 2. Retail 3. Finance 4. Private 5. BPN head office

Breakdown of total revenue synergies as at 31/03/2004 (€10.6m)

1.

2.

3.4.

5.

31/03/04A

10.6


47

Analysis of integration costsamounts in Euro million

Previous phasing (i)

4919 155

26

61

2002A 2003E 2004E 2005E TOTAL

amounts in Euro million

New targeted phasing (ii)

1010 150

26

104

2002A 2003E 2004E 2005E TOTAL

26

2002A 31/12/03A

103

Actual expenses as at 31/03/04

(i) phasing updated as of March 2003, which saw a downward revision of total integration costs, from €164 m (original business plan) to €155 m(ii) based on new phasing which in Nov. 2003 saw an anticipation of integration costs, coupled with a downward revision of total costs from €155 m to €150 m

70%

30%

1. Personnel-related integration costs 2. Other integration costs

Breakdown of total cumulative integration costs asat 31/03/2004 (€131m) amounts in Euro million

1.

2.

2

31/03/04A


48

Update on training programme

• The training regarding the new BPN SpA IT systems is being completed with success

• Training initiatives in the period January – June 2003:

– more than 470 courses in classes

– 16,189 training days in classes

– 5,935 days of on-the-job training

– some 26,500 e-learning hours on key procedures

• Recorded satisfaction level among attendants has been very high (3.6 points on a 1-4 scale)

• 150 employees of the Group, with expertise in the new IT procedures, will provide field support to BPN branches facilitate the full adoption of the new IT system


49

20 Italian average

Market attractiveness 2001GDP

inhabitant(‘000€)

Competitive strengthbranch market share (%)

2002

We are leader or co-leader with a strong productivity: here we have to increase the customer profitability.

Significant potential in theBPN historical areas

Neighbouring areas: fair brand but we needto increase the share

Marginal areas: withcorporate focus

Peripheral areas in Sicily, Campania,

Lazio: we do not lose -opportunistic approach

# branches in the quadrant(% on total branches)BPVN and CrebergBPN

PS

CR

LE

FE

MC

PC

BA

FR

TN

RO

LT

FO

AV

SR

FGSA

ANAR

MS

CE

UD

RATS

PO

PD

FIRM

LC

BO

BL

LI

PI

NA

PN

MI

LU

CO

GE

TV

PT

VA

TO

SP

CT

GR

MN

TR

VI

AO

PR

BS

CN

AT

IM

AL

PV

SV

VE

BI

BG

RE MO

BN

VC

VR

VB

NO

10

15

20

25

30

35

0.1% 1.0% 5.0% 100.0%

312(28%)

215(19%)

492(43%)

77(7%)

38(3%)

10.0%

Differences in the Group’s regional market areasMerger restructuring & growth strategy

50

0,50%

0,60%

0,70%

0,80%

0,90%

1,00%

1,10%

1,20%

1,30%

1,40%

1,50%

0% 5% 10% 15% 20% 25% 30% 35%

1.5%

1.4%

1.3%

1.1%

1,0%

0.9%

0.5%

1.2%

Totalnetwork 1.05%

Contribution margin net of cost of risk/volume (2002)

Share of local employees

Marginal areas Neighbouring areas Historical areas

0.6%

0.7%

0.8%

Contribution post risk(% revenues)

~40% ~50% ~60% ~50%

Total

Strong difference in profitability among areasMerger restructuring & growth strategy

51

BPVN Group Q1 2004 resultsSection 4

52

Performance highlights - P&L€m

+2.2%

-1.6%

+8.8%

+5.5%

+16.6%

+10.2%

Total revenues

Operating costs

Operating income

Total net value adjustments (i)

Net income of the period

Income before taxes

% changey/y

Q1 2003

541.9

-341.0

200.9

-47.5

78.2

153.0

Q1 2004

554.1

-335.5

218.5

168.7

91.2

-50.2

(i) include those for loans, guarantees, financial fixed assets and other risks, net of write backs, plus amortisation of goodwill

BPVN Group Q1 2004 results

53

Performance highlights - volumes

+6.8%

+22.2%

+3.3%

-2.9%

36,137

66,388

1,545

Direct customer funds (i)

Indirect customer funds (ii)

Loans to customers (gross)

Non-performing loans (gross)

31/03/2004% change

y/y

(i) including subord. debt and repos(ii) excluding custodian activity for third party mutual fund management customer (about €7bn), indirect customer funds grew some 9.3% year-on-year, or 1.8% since year-end 2003(iii) excluding custodian activity for third party mutual fund management customer (about €7bn), assets under administration grew some 11.4% year-on-year, or 2.0% since year-end 2003

31/03/2003

54,349

1,590

€ m

of which: assets under management 29,683 +7.2%27,681


33,826

33,267 32,217

-3.9%

+13.8%

+1.2%

-2.7%

31/12/2003

+1.5%

58,352

1,587

29,232

37,588

32,876

% change (3mths)

of which: assets under administration (iii) 36,706 +37.6%26,668 +26.0%29,121

54

291.0304.0

13.53.8

228.6197.0

21.037.2

Q1 2003 Q1 2004

4. profits (losses) from financial transactions 3. net commissions & other net income2. dividends & similar1. net interest income

Analysis of total revenues

€m

-4.3%

+255.3%

+16.0%

Total554.1

Total541.9

Q1 2003 Q1 2004

Revenue Mix (in %)

3.8%6.9%

41.3%36.3%

2.4%0.7%

52.5%56.1%

1.

2.

3.

4. -43.4%

+2.2%

1.

2.

3.

4.


1.

2.

3.

4. FY 2003

5.8%

38.8%

1.9%

53.5%

55

291.0289.3297.4304.4303.9

228.6243.7210.1215.9197.0

21.025.527.138.937.213.59.97.8

21.33.8

Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004

1. net interest income 2. net commission income & other net income

3. profits from financial transactions 4. dividends & similar

Quarterly revenue analysis (i)

1.

2.

3.

€541.9 €580.5 €542.4

€m

€568.4


€554.1

1.

2.

3.

+0.6%

+2.2%

includes year-end

seasonality items

4. 4.

56

268 258

3336

Q1 2003 Q1 2004

Notes(i) includes net interest income on interbank activities, the securities portfolio and non-domestic customer business.

Net interest income

Money market rate (TIT) 2.79%

2.09%

1. Italian customer business 2. total other components (i)

-4.3%

Analysis of net interest income

the decrease is largely attributable to

the lower yield onfree capital/liquidity

€304m €291m€m

-3.7%

-8.3%2.

1.

2.

1.


57


1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

jan 03 feb-03 mar-03 apr-03 may 03 june 03 july 03 aug 03 sept 03 oct 03 nov-03 dec 03 jan 04 feb-04 mar-04

Customer spread Money market rate (TIT)

3.45% 3.39%3.19% 3.13% 3.22%

2.79%

2.47%2.16% 2.14% 2.09%

Trend in customer spread

calculated as weighted monthly average

58

100.491.1

5.95.922.624.1

21.420.9

93.072.5

6.319.7

Q1 2003 Q1 2004

Analysis of net non-interest income

6. Corporate derivatives

5. Total asset management (i)

4. Total dealing (ii)

3. Collection and payment services2. Guarantees

1. Other banking services(iii)

(ii) collection of orders, dealing of securities and currencies and profits from trading on behalf of customers(iii) include recovery of expenses from deposit and overdraft accounts, custodian services, placement of securities and other

(i) management of mutual funds and discretionary accounts, including distribution of third party products and profits from retail structured products

249.6234.1

+6.6%€m

+10.2%

-0.5%

-6.0%+2.3%

+28.3%

-68.0%

1.

2.

3.

4.

5.

6.

1.

2.

3.

4.

5.

6.

incl. retail structured products

avg. Q9mths 2003

€14.5m

€78.4m

€21.3m€22.5m

€99.6m

€5.7m

Q4 ‘03

€9.0m

€104.0m

€20.6m

€22.3m

€107.7m

€5.6m


excl. dividends & similar

59

Management accounting

• Dealing (i)

• asset management fees

• corporate derivatives

Q4 2003 Q1 2004Q1 2003 Q1 2004

Profits from financial transactions

3. finance (i)2. retail structured products1. corporate derivatives

(i) including trading on behalf of customers


Fee

equ

ival

ent=

76%

Fee

equ

ival

ent=

76%

Fee

equ

ival

ent=

69%

Fee

equ

ival

ent=

69%

Total€37.2m

Total€21.0m

Total€25.5m Total

€21.0m

Performance year–on–year

Performance over Q4 2003

53%

23%

24%

29%

40%

31%

35%

41%

24%

29%

40%

31%

indicates as classified undernet non-interest income

shown on slide 11

1.

2.

3.

1.

2.

3.

1.

2.

3.

1.

2.

3.

-43.5%

-17.6%

60

16,962 18,048

6,761 6,464

3,9585,171

31/03/2003 31/03/2004

18,04817,844

6,4646,247

5,1715,141

31/12/2003 31/03/2004

1. mutual funds 2. discretionary accounts 3. life technical reserves

Assets under management: healthy growth performanceBPVN Group Q1 2004 results

+30.7%

-4.4%

+6.4%

+7.2%

€27,681m€29,682m

€m +1.5%

€29,232m €29,682m

1.

2.

3.

1.

2.

3.+0.6%

+3.5%

+1.1%1.

2.

3.

1.

2.

3.

Performance year–on–year

Performance since year–end2003€m

61

208.8205.7

98.8105.1

28.030.1

Q1 2003 Q1 2004

1. Personnel costs 2. Other admin. costs 3. Value adjustments on tangible and intangible fixed assets (i)

Total operating costs

(i) excludes amortisation of goodwill, positive differences arising on consolidation etc.

-1.3%excluding integration costs

(€4.3m in Q1 2003 vs€2.2m in Q1 2004) (ii)

(ii) indicated integration costs include those accounted for as operating costs.

€m €341.0m €335.5m

€135.2m €126.8m: -6.3%y/y

+1.5%

-6.0%

-7.1%

1.

2.

3.

1.

2.

3.

-1.6%


62

Personnel cost

Other administrative costs

Extraordinary costs

Total integration costs

Accounting treatment of integration costs

Full year

Amortisation and depreciation on tangible and intangible fixed assets

11.7

Total included in operating costs

0.2 4.6

11.1 0.8

Q1 Q2 Q3

3.1 5.4

5.2

1.0 2.3 2.4

4.3 12.3 8.3

1.3 3.0 64.3

5.6 15.3 72.7

7.5

72.7

103.0

30.3

€m

regards essentially the part of the earlyretirement incentive scheme/severance fund

Q4

1.8

1.7

1.8

5.3

4.1

9.4


FY 2003

0.0

FY 2004

0.0

2.2

2.2

0.0

2.2

Q1

63

98.8102.0

3.1 0

0

20

40

60

80

100

120

Q1 2003 Q1 20041. total excl. Integration costs 2. integration costs

208.8205.5

00.2

0,0

50,0

100,0

150,0

200,0

250,0

Q1 2003 Q1 2004

1.total excl. Integration costs 2. integration costs

Analysis of total operating costs

+1.6%

205.7 208.8

+1.5%

1.

2.

1.

2.

25.829.1

1.0 2.2

0

5

10

15

20

25

30

35

40

Q1 2003 Q1 20041. total excl. Integration costs 2. integration costs

-11.3%

30.1 28.0

-7.1%

1.

2.

1.

2.

Personnel costs Depreciat.& ammortis. (i)

-3.1%

105.1 98.8

-6.0%

1.

2.

1.

2

Other admin. expenses

€m€m

€m

• prudent increase of 4.7% in unitary labourcost

• decrease of 3.2% in headcount

• strict cost control

• internal best practice• merger synergies

• outsourcing

• merger synergies

(i) excluding ammortisation of goodwill


64

26,6

26,1

Q1 2003 Q1 2004

44,2

41,9

Q1 2003 Q1 2004

12,543

12,924

Q1 2003 Q1 2004

Total oper. costs (net of integr. costs)/employees (monthlyavg.)

Productivity & cost efficiencyEmployees (monthly average) Employees (period-end)

-381

€000

12,388

12,55512,564

12,90813,013

31/12/2002 31/03/2003 31/12/2003 31/03/2004 01/04/2004

Total revenues/employees (monthly avg.)

€000

-167

-105

+5.4%


-344

+2.0%

-9

65

60.2%

62.1%

Q1 2003 Q1 2004

Cost/Income ratio

Total operating C/Iwith integration costs

Total operating C/Iwithout integration costs (i)

(i) adjusted for that part of integration costs that were included in total operating costs

€4.3m €2.2m

integration cost adjustment

60.6%

62.9%

Q1 2003 Q1 2004

-2.3percentage

points -1.9percentage

points


66

33.2

1.1

2. Provisions for risks and charges

1. Net provisions for loans, guarantees & commiments and other credit provisions

Q1 2004 Q1 2003

€58.3m€61.4m

€28.0m€28.2m

Total provisions: prudent provisions – healthy write-backs

Provisions(gross)

Write-backsPro

visi

ons

for

cre d

it ris

ks

% changey/y

+5.3%

+0.6%

€m

+9.6% y/y

-22.7%

1.

2.

€34.3m+8.1%

y/y % change


avg. Q inFY 2003

€60.6m

€23.6m

Q1 2004

67

Q1 2003Q1 2004

Gross provisions as a % ofperiod-end gross customer loans

Net provisions as a % ofperiod-end gross customer loans

18.1bps

9.4bps

18.4bps

10.0bps

Total gross provisions € 61.4m €58.3m +5.3%

Total net provisions €33.2m €30.3 m +9.6%

Provisions for credit risks (i)

(i) provisions for loans, guarantees & commitments and other credit provisions, excluding adjustments on financial fixed assets and provisions for other risks and charges

% change y/y

+0.4bps

+0.6bps


(annualised in brackets)

(annualised in brackets)

(72.4bps)(73.8bps)

(37.6bps)(39.9bps)

avg. Q inFY 2003

73.7bps

45.0bps

€60.6m

€37.0m

(+1.4bps)

(+2.3bps)

of which 8bps Parmalat/Tanzi

68

1,544.81,590.2

862.8792.4

65.667.79.15.5

31/03/2003 31/03/2004

1. NPLs 2. watchlist3. restructured loans 4. country risk

Asset quality: overview of impaired loans

Total €2,455.8m

Total €2,482.3m€m

1.

2.

3.

+1.1%

-2.9%

+8.9%

-3.0%

4.

1.

2.

3.

4.


+64.2%

1,544.81,587.3

862.8795.7

65.663.68.9 9.1

31/12/2003 31/03/2004

1. NPLs 2. watchlist3. restructured loans 4. country risk

+1.1%

-2.7%

+8.4%

+3.2%+1.8%

Total €2,455.5m

Total €2,482.3m

1.

2.

3.

4.

1.

2.

3.

4.

Trend year-on-year Trend since year-end

69

Credit quality: ratio & trend analysis

gross NPL ratio net NPL ratio

3.00%

31/12/200331/12/2002

4.88%

3.07%

2.42%

2.16%

2.47%

2.25%

31/12/2001PF 31/12/2002 31/12/2003

gross watchlist loan ratio net watchlist loan ratio

31/12/2001PF

Trend in gross NPLs:• -2.9% y/y• -2.7% since year-end 2003

Trend in net NPLs:• +0.5% y/y• -1.0% since year-end 2003

Trend in gross watchlist loans:• +8.9% y/y • +8.4% since year-end2003

Trend in net watchlist loans:• +6.9% y/y• +8.6% since year-end 2003

5.33%

3.22%

2.20%

2.04%

4.83%

-4.8% excluding

Parmalat/Tanzi


31/03/2003

4.94%

3.02%

2.93%

4.64%

31/03/2004

2.46%

2.24%

31/03/2003 31/03/2004

2.59%

2.31%

70

Ratio analysis at a glance

12.4%

56.1%

43.2%

62.9%

26.4

3.02%

2.24%

Performing loan coverage 60.95bps

41.9

Q1 2003

Profitability

Cost efficiency & productivity

Asset quality

Adjusted ROE (i), annualised1

Net interest income/Total revenues

Net non - interest income/Total revenues4

3

Total operating costs /Total revenues5

6

7

Total revenues/avg. employees (€’000)8

Total operating costs (incl. integration costs)/avg. employees (€’000)

Net NPL ratio9

Net watchlist loan ratio10

11

13.1%

52.5%

45.1%

60.6%

26.8

2.93%

2.31%

58.59bps

44.2

Q1 2004

Total operating costs (exluding integration costs)/avg. employees (€’000)

26.126.6

(i) ROE adjusted for goodwill, net of estimated tax charges


9.5%ROE, annualised2 10.5%

13.2%

53.5%

44.6%

59.9%

26.2

3.00%

2.16%

59.40bps

43.7

avg. Q in FY 2003

25.6

10.3%

31/03/200331/03/2004 31/12/2003

71

Approaches to Equity Valuation

Discounted Cash Flow Techniques

Relative Valuation Techniques

Option Pricing Approaches

PV of Dividends (DDM)

PV of Free cashflows to equity

PV of Operating free cash flow

Earnings Multiples •Price/Earnings Ratio (PE) and variants PEG etc •Value/EBIT ,Value/EBITDA,Value/Cash Flow

Book Value Multiples •Price/Book Value(of Equity) (PBV), Value/ BV of

Assets, Value/Replacement Cost (Tobinís Q)

Revenues

•Price/Sales per Share (PS) •Value/Sales

Industry Specific Variable

72

Stable growth firms generally

•Pay large dividends relative to earnings (high payout)

•Earn moderate returns on projects (ROA is closer to market or industry average)

•Have higher leverage

•Have average risk (betas are closer to one.)

•Growth rate in firm’s earnings is stable

•Large companies

73

Many large Banks = stable growth firms or moderate growth firms

Two-Stage ModelStable Growth Model

Dividend Discount Model

Aswath Damodaran: Damodaran on Valuation, Wiley : Use the Dividend Discount Model

• (a) For firms which pay dividends (and repurchase stock) which are close to the Free Cash Flow to Equity(over a extended period)

• (b)For firms where FCFE are difficult to estimate (Example: Banks andFin ancial Service companies)

74

Aswath Damodaran: Damodaran on Valuation, Wiley

r = Ke = Cost of Equity (if discounting Dividends)

V0= P0 Value of Equity (ifcash flows to equity are discounted) ; price of one share

DPS1 = Dividend (pershare) in period t+1;

gn = Expected growthrate in stable period of Cash Flow being discounted (in that case, dividend)

EPS0 = Earnig per sharein period t0

DPS1 = EPS0 * Payout R.

75

Aswath Damodaran: Damodaran on Valuation, Wiley

Retention Rate = b

b = (1 – Payout Ratio)

gt = bt * Roe t-1

gn = b * Roe (if Roe and payout and retention rates are stables – that’s the case for a stable growth firm

76

• P/ BV0 is > 1 if ROE > Cost of Equity

P0--------------------

BV0

ROE - gn------------------------------------------------------

Ke – gn

Therefore recalling that MVA (Market Value Added) can be expressed as

P0 –BV0

and that MVA = sum of futures EVA’s (*) at time t, t+1…t+n,

MVA > 0 if ROE > Ke

EVA(*) could be approximated by ROEt- Ket

=

(*) Eva is a registred trademark by Stern Stuart & Co.

77

Introduction into internal methodology for the evalua tion of value creation

Accountancy model “Internal” model

� Approach based on accountacy figures, clear and straight

� Compares an accountancy ratio of capital profitability with the Bank’s cost of capital

� Emphasis on the evaluation of profitability allowing a benchmarking analysis

� It shows some limits in terms of significativity:

• suffers from accountancy policies

• it does not include market evaluations of many asset and liability items

• it does not show the risk of the operations

• it refers only to company level

- What is the capacity of the Bank and BUs to create value i. e. generate profitability above the cost of capital?-

� Approach based on “internal” data gathered from sophisticated risk assessment andmanagement systems

� Compares RAPM ratios (Risk adjustedperformance measures) with the Bank’s cost of capital

� It represents a methodology that complemetsthe accountancy one because it allows toovercome the latter’s significativity problems :

• it singles out the operational performance

• it shows the risks embedded into the operations

• it can be referrend both to the company and BU levels and it is better suited to the recent organisational changes (divisionalisation)

78

Today, the management focus of the planning and control process has shifted towards the value creation

for the shareholders, focusing on both profitability and on the risks faced by the company to reach the

planned profitabilty levels:

Risk adjusted profitability ratios

Risk ratios

Value ratiosRatios showing the

economic value generatedby the BUs (e.g. EVA)

Ratios showing the potential or actual risk to

which the Bus are exposed (e.g. Allocated capital,

Absorbed capital

Ratios showing the profitabilityof the Bus adjusted for risk (e.g.

RAROC)

Profitability and capital adequacy

ratios

Ratios of operational and commercial efficiency

Ratios showing profitability in terms of economic and financial results (Interest

and non-interest income etc.)

Ratios showing profitability in terms of economic and financial results (Interest

and non-interest income etc.)

Ratios showing the productivityand efficiency of market, corporate center and service Bus (personnel costs/ Interest and non-interest

income

Ratios showing the productivityand efficiency of market, corporate center and service Bus (personnel costs/ Interest and non-interest

income

Transitional ratios

VBM ratios

79

The performance analysis is based on a set of ratios that adds to the traditional perfomance ratios the risk measurement the Bank runs to reach the planned perfomance levels:

Volumes / profitability ratios

Efficiency, efficacy and concentration ratios

Profitability/risk ratios

Risk ratios Value ratios

LIST OF KEY RATIOS

� Cust. funds/cust. loans

� AUM/Indiretct cust. funds

� Service margin/Int + nonint. margin

� Net commission/Service margin

� ROE

� …………...

� Operating costs/Int. + nonint. margin

� Customer funds/Employees

� Absorbed capital/allocatedcapital

� Int. + non int. margin per customer segment/Int. + non .int. margin

� …………….

� RORAC:

NOPAT

Allocated capital/ Absorbed capital

� EAR

� VAR

� Allocated capital

� Absorbed capital

� Regulatory capital absorption

� NPLs/customer loans

� Warchlistloans/customer loans

� Loan cocnentration

� Loan distribution

� ………...

� EVA:

NOPAT

less

cost of capital

� MVA

Exemplification

RETAIL CORPORATE PRIVATE INVESTMENT BANKING

ASSET MANAGEMENT

These 5 ratios macroclasses apply to each BU according to BU specificity

………..

80

The VBM Planning and control model singles out and con trols each BU’s objectives in terms of their own value

Pluriannual strategic plans

Budget

Mismatch monitoring (Risk /performance analysis and value creation)

CAPITAL ALLOCATION

Objectives

�Profitability

�Capitalisation

�Operative efficiency

Traditional ratios

Risk/CapitalRisk/Capital

ValueValue

NOPATNOPAT

Definition B.U.

RETAIL CORPORATE PRIVATE

ASSETMGMT

INVESTMENT BANKING

LEASING

MERCHANTBANKING

BANCAASSURANCE

……...

81

Business Unit’s activity are coordinated by a Corporate Center that manages the investment choices to the Bus adopting a portfolio management methodology aimed at the maximisation of Group value

Business development along customer segments/markets lines aimed at maximisising the return on capital

CORPORATECENTER

Business activity

RETAIL CORPORATE PRIVATEASSET

MANAGEMENTINVESTMENT

BANKINGLEASING …...

Strategic planningDefinition of risk-profitability profile/profitability BU

Capital allocation processOptimisation of business portfolio

Coordination and development of new businessesService activity

82

BU performance determination

The BU profit & loss account represents the

baseline for all risk/profitability indicators

La Business Unit è assimilabile ad una piccola azienda autonoma che tendenzialmente deve garantire un ritorno sul capitale superiore al costo opportunità del capitale da essa utilizzato

P&O

BUSINESS UNIT

Interest margin

+ Service margin

Interest & non-interest margin

- Direct costs

Gross contribution margin

- Indirect cost

Operating result

83

Example for the BU retail

- Direct costs


- Indirect costs

Operating result

Descrizione Dati al Var %

C/correnti passivi:

Depositi a risparmio:

Certificati di deposito:

Prestiti Obbligazionari:

Assegni Circolare/Traenza

Raccolta estero lire/euro

(a) Raccolta lorda Lire

Raccolta in divisa

(b) Raccolta Tradizionale

Pronti contro Termine

(c) Raccolta Diretta

Riserva Obbligatoria

(d) Raccolta Diretta Netta

(e) Raccolta Figurativa

TOTALE RACCOLTA (d+e)

C/correnti attivi:

C/anticipi:

Finanziamenti:

Impieghi estero-Lire/Euro:

(f) Impieghi lire breve termine

C/correnti ipotecari

Prestiti Cambiari

Prestiti Personali

Mutui:

Impieghi estero-Lire/Euro:

(g) Impieghi lire a medio/lungo termine

(h) Impieghi in valuta

TOTALI IMPIEGHI (f+g+h)

MARGINE FINANZIARIO

Garanzie rilasciate

Servizio di incassi e pagamento

Servizio di gestione, intermediazione e

consulenza

Altri servizi di finanziamento

Gestione Conti Correnti

Commissioni Attive

Garanzie rilasciate

Servizio di incassi e pagamento

Servizio di gestione, intermediazione e

consulenza

Altri servizi di finanziamento

Gestione Conti Correnti

Commissioni Passive

MARGINE DA SERVIZI

MARGINE DI INTERMEDIAZIONE

Interest margin

+ Service margin


84

L’analisi dei costi per singola BU permette di individuare il margine di contribuzione lorda e il risultato di gestione:

- Direct costs


- Indirect costs

Operating result

Direct costs

Gross contribution

margin

Esprime la performance economica della BU

direttamente riconducibile alle scelte operative e

gestionali del management

Indirect costs

Operating margin

Esprime la performance economica complessiva

della BU

Costi di natura operativa direttamente

imputabili alla Business Unit (es. costi del

personale, costi transazionali, investimenti,

campagne commerciali e pubblicitarie, ecc.)

Costi di natura operativa relativi alla fornitura

di servizi da parte del Corporate Center (es.

gestione del presonale, amministrazione,

organizzazione, ecc.)

Interest margin

+ Service margin


85

NOPATNOPAT

Interest & non-interest

marginOperating

costs

Operating result

- Specific provisons for expected losses (credit risks, market risks…)

- Taxes

Rules for NOPAT determination (Net Operating Profit After Taxes):

86

Risk analysis: BPV’s risk management systems using VA R methodologies

Categoria (*)

MARKET

CREDIT

TRANSFORMATION

StrumentoDefinizione

OPERATIVE

� Rischio di perdite derivante dall’incapacità della controparte affidata di far fronte agli impegni contrattualmente assunti nel momento di erogazione del credito

� Rischio di perdite in conto capitale, attese con una certa probabilità, sul portafoglio di negoziazione causate da un andamento sfavorevole inatteso dei fattori di rischio sottostanti (tassi, prezzi, cambi, …)

� Rischio di perdite derivanti dagli sbilanci temporali che emergono in conseguenza delle diverse date di scadenza e/o di riprezzamento delle poste dell’attivo e del passivo

� Rischio di perdite dovute a processi operativi, sistemi informatici o risorse dedicate carenti o completamente mancanti, oppure ad eventi esterni

� Modello di Portafoglio per il rischio di credito (“Credit Risk Pro” Prometeia) Metodologia di tipo VAR

� Rischio generico: modulo “VarFinanza” del sistema “Alm Pro –Prometeia Metodologia di tipo VAR

� Modulo “Analisi Statica” del sistema “Alm Pro” Prometeia- Metodologia di tipo VAR

� Calcolato secondo il criterio “base” definito da Basilea II

(*) Allo stato attuale dell’analisi non è stimato il capitale assorbito a fronte del rischio di business ( inteso come il non riuscire a generare un volume di commissioni adeguato relativamente ai principali servizi prestati) e il rischio controparte delle posizioni Finanza

� Rischio specifico: criteri di vigilanza

87

Capital soundness could be evalueted not just on a regu latory base but also on an economical base.

Capital at risk from the internal model

Capital available Regulatory riskcapital

Tier 1 capital Tier 1 + tier 2. In application of the regulatory provisions regardingcredit and market risks

Calculated on the basis of the risk management systemsand methodology already depicted

Regulatory point of viewManagement point of view

88

• Extension of the Control model

unified management model to record the profitability and making economic reporting comparable troughout the

Group

COSTSCOSTS

SLASLA

� Full costing: all direct costs are attrributed to the BUs

� Costs for services received

� Costs relating to infra BU services

� Service Level Agreement regulate infra BUs services

� Distribution of service margin among BUs

� I corrispettivi degli SLA (quota parte del margine) entrano a far parte del conto economico di Business Unit

89

Profit and loss account Absorbed capital

Capital at risk

• transformation

• market

• credit

• operational

+ Functioning capital

PERFORMANCE RATIOS

Profitability

Risk

Risk/Profitability

Value

ROE

VAR ( Value at Risk)

RORAC (Return on Risk Adjusted Capital)

EVA (Economic Value Added), MVA (Market Value Added)

Total Absorbed capital

Interest margin

+ Service margin


- Direct costs


- Indirect costs

Operating costs

The values in the P&L accounts and in the capital absorption tableaux of each BU represent the starting point for the determination of the performance ratios

90

La determinazione della redditività di BU e del rel ativo assorbimento di capitale permette di valutare l’effettiva creazione del valore attravers o l’analisi del Rorac e della Value Performance:

EVA

NOPAT – Costo del Capitale

RORACNOPAT / Capitale Assorbito

RORAC > K EVA > 0

Il Rorac (Return on Risk Adjusted Capital) esprime la redditività corretta per il rischio. Permette di valutare le BU che contribuiscono maggiormente alla redditività aziendale e rappresenta la base di riferimento nel processo di allocazione del capitale.La BU crea valore solo se:

Il fattore K rappresenta il costo % del capitale, è determinato secondo il modello CAPM:

K= tasso free risk + β * (Rm-Rf)

L’ EVA (Economic Value Added) è un indicatore di performance assoluto che tiene conto esplicitamente del costo del capitale (pari a K* Capitale Assorbito).

La BU crea valore solo se:

La misurazione del valore creato

Percentuale

RARORAC

EVA / Capitale assorbito

Il RARORAC è un indicatore % di efficienza della redditività del capitale e rappresenta la capacità di creazione di valore per unità di capitale a rischio.

La BU crea valore solo se:

Assoluta Percentuale

RARORAC > 0

91

EVA = NOPAT - Costo del CapitaleEVA = NOPAT - Costo del Capitale

Capitale di

Debito

Capitale a

Rischio o

Equity Capital

Interessi passivi a remunerazione dei prestiti subordinati (costomedioponderato dei debiti ponderati in essere detratti i vantaggi fiscali)

I ricavi devono remunerare i rischi legati al business della Banca ed essere comparabili ad altre opportunità di investimento

Composizione del Costo del Capitale

Il costo del capitale impiegato è una media ponderata dei costi delle poste di debito subordinato e delle poste “Equity”:

= Tasso Free Risk + (Premio al Rischio)

(Rm-Rf) dove Rm = ritorni medi di mercato. Premio al Rischio pari all’eccedenza della remunerazione del mercato (o relativa ad uno specifico titolo) rispetto al tasso Free Risk

Per definire il Costo opportunità del Capitale a Rischio è possibile utilizzare il Capital Asset Pricing Model (CAPM) che mette in relazione la remunerazione attesa per un particolare investimento (capitale) e la remunerazione media garantita dal mercato:

Il CAPM definisce il premio al rischio basandosi su serie storiche di dati

Costo Opp. del Capitale ββββ

Beta rappresenta la correlazione tra l’investimento ed il mercato ed indica quanto strettamente il titolo azionario segue le fluttuazioni del mercato

92

EVA is based on the idea of an “economic profit”, that’s to say, what is left after subtracting from profit the cost of capital

NOPAT(Net Operating Profit After

Taxes)

NOPAT(Net Operating Profit After

Taxes)

Cost of Capital

Average weighted cost of capital

X

EVA

Absorbed capital

=

The cost of capital is the result of the

weighted average of the subordinated

debt costs and of the “Equity” and

“Equity Equivalent” items

93

Bank market value

Bank market value

Market Value Added

Market Value Added

Book valueBook value

EVA

year 1

EVA

year 1EVA

year 2

EVA

year 2EVA

year 3

EVA

year 3EVA

…

EVA

…EVA

year n

EVA

year n

Theoretically, MVA equals the net present value of all future EVAs of the bank. Actually,

the MVA is an empirically dimension observable from market and balance sheet

figures

The Market Value Added (MVA) results from the difference betweenthe market value and the book value of the equity:

94

Value creation

BU’s relative positioning

Posizionamento BU anno in corso

3,440,61

1,48

-0,40

4,22

-0,05

-10,00%

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00 80,00Capitale Assorbito

Ris

chio

/Re

nd

ime

nto

BU RETAIL

BU CORPORATE

BU PRIVATE

BU INVESTMENT BANKING

BU ASSET MANAGEMENT

CORPORATE CENTER

Business Unit NOPAT RORACCapitale

Assorbito

Efficienza

finanziaria

Costo del

CapitaleEVA

BU RETAIL 10,94 17,49% 62,54 90,91% 7,50 3,44

BU CORPORATE 3,45 12,15% 28,43 94,75% 2,84 0,61

BU PRIVATE 2,74 17,49% 15,63 100,00% 1,25 1,48

BU INVESTMENT BANKING 1,73 8,10% 21,32 83,33% 2,13 -0,40

BU ASSET MANAGEMENT 4,79 67,41% 7,11 85,47% 0,57 4,22

…

CORPORATE CENTER 0,37 5,23% 7,11 90,91% 0,43 -0,05

TOTALE 24,02 16,90% 142,13 91,03% 14,72 9,30

EXEMPLIFICATION

95

Efficiency, efficacy and concentration indicators

Other risk indicators

Performance objectives (intermediate)

Performance objectives

SP, C/E di BU

RORAC

EVA

Rettificheper Nopat

MARGINE INTERESSE

MARGINE SERVIZI

COSTI INDIRETTI

COSTI DIRETTI

PATRIMONIO NETTO

CAPITALE A RISCHIO

CAP. FUNZIONAMENTO

COSTO DEL CAPITALE

NOPATRISULTATO DI

GESTIONE

UTILE NETTO

ROE

CAPITALE ASSORBITO/ALLOCATO

Rettificheper Utile Netto

MVA

The different typologies of indicators can be shown as a tree that underlines the

relationships among the variables for each BU from the standpoint of Planning and control

96

The determination of EVA and RORAC at BU level allows to syntetisize the risk/profitability profile and the actual value creation

BusinessUnit

NOPAT Absorbedcapital

RORAC %Cost of

capital (%)

Banktotal

EVA(mld)

Cost of capital (mld)

11 5 = 2 * 45 = 2 * 422 3 = 1 / 23 = 1 / 2 6 = 1 - 56 = 1 - 5

+20,0%

44

+20,0%

+5,0%

+30,0%

+17,9%

BU 2

BU 11999

1999

1999

1999

+20

+40

+5

+30

+125

+30

+100

+200

+100

+100

+700 (*)

+200 +15,0%1999

BU 3

BU 4

…...

19971998

19971998

19971998

19971998

19971998

1999

19971998

EXEMPLIFICATION

10%

10%

10%

10%

10%

10 +10

20

10

10

+20

-5

+20

70 +55

10% 20 +10

97

Per effettuare l’allocazione del capitale a livello di singola BU, occorre comprendere il legame esistente tra obiettivo reddituale e capitale allocato/assorbito rappresentato dall’indicatore di

rischio /rendimento (RORAC - Return On Risk Adjusted Capital):

PREVISIONALE CONSUNTIVO

Il RORAC in fase di pianificazione esprime la relazione tra l’obiettivo reddituale e la propensione al rischio quantificata nel capitale allocato

Il RORAC in fase di analisi consuntiva esprime il “livello” di performance come relazione tra l’utile conseguito ed il rischio effettivamente assunto quantificato nel capitale assorbito

Nopat

Capitale assorbitoCapitale allocato

Definizione Obiettivi Monitoraggio ObiettiviMisurazione efficienza

Profilo rischio/ rendimento atteso

(Rorac ex ante)

Nopat

Capitale allocato

Efficienza finanziaria

Capitale assorbito

Capitale allocato

Performance conseguita(Rorac ex post)

Nopat

Capitale assorbito

Input per ripianificazione

Nopat

RORAC =Nopat

Capitale allocato/assorbito

98

Il costo del capitale esprime il rendimento minimo richiesto dagli azionisti, anche tenendo conto della rischiosità dell’investimento in azioni della banca:

Il fattore K (costo % del capitale proprio) è’ determinato in base il modello CAPM secondo il quale il rendimento atteso dall’investimento in azioni è legato al rendimento degli assets privi di rischio aumentato di un premio al rischio che dipende dalla rischiosità dell’investimento in azioni della società:

K= Rf + β*(Rm-Rf) dove

� Rf= tasso free risk esprime il rendimento associato ad un investimento privo di rischio

� Beta misura la correlazione esistente fra l’andamento dell’investimento e quello del mercato di riferimento e esprime il rischio sistematico dell’azione;

� Rm-Rf , differenza tra ritorni medi di mercato e tasso free risk, rappresenta il rendimento richiesto per unità di rischio.

Il valore K determinato a livello di Capogruppo rappresenta un parametro unico e comune per l’analisi della creazione di valore di tutte le SBUin esame

— Calcolo del Costo del Capitale -

99

Per la valutazione del rischio di credito è stato applicato il modello Credit Risk Pro di Prometeia:

Sistema di ratingSistema di rating

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%7.0%

1 4 7 10

13

16

19

22

25

28

31 34

37

40

Modelloprobabilità di perdita

Modelloprobabilità di perdita

Esposizioni netteEsposizioni nette

Distribuzione delle perditeDistribuzione delle perdite

Modello delle correlazioni


EsposizioniEsposizioni

Modello del tasso di severity

Modello del tasso di severity

Prob. di insolvenzaProb. di insolvenza

PrenditoriPrenditori

- Pricing- Assorbimenti- Politiche creditizie- Rorac- Concentrazioni

Obiettivo del modello è classificare le clientela affidata in classi omogenee di rischio, pervenendo alla stima della probabilità di default attesa.

Obiettivo del modello è di stimare la verosimiglianza di fallimenti congiunti di prenditori appartenenti a segmenti produttivi differenti.

Obiettivo del modello è definire una stima (percentuale sull’esposizione) dell’ammontare della perdita in caso di default della controparte in relazione allaentità e tipo delle garanzie, algrado di esigibilità del credito e alla solvibilità del garante.

Obiettivo del modello è di aggregare le informazioni prodotte dai modelli con le esposizioni del portafoglio crediti per stimare la perdita attesa ed il capitale a rischio del portafoglio

Ai fini dell’analisi, sono state adottate specifiche metodologie per stimare i tassi di default e i tassi di severity, in assenza di modelli operativi a livello di Banca

100

The hypothesis underlying the determination of the capital absorption:

Probabilità attesa di default


Tassi attesi di default stimati calcolando

la capacità distintiva di istituto

utilizzando i dati relativi alle nuove

sofferenze del 1999

Il grado di dettaglio del portafoglio ha reso

possibile segmentare il campione nei

cluster geo-economici funzionali al

modello delle correlazioni di Prometeia

Segmentazione per:

Imprese: aree geografiche e branche

Famiglie Produttrici: aree geografiche e macrosettori.

Società finanziarie: aree geografiche

Modello delle severity

Il tasso di severity applicato a ciascuna

controparte è frutto di rielaborazioni di

Prometeia su dati di sistema forniti da

Banca d’Italia

La severity è stata attribuita alle controparti sulla base di: aree geografiche e tipi di operazioni

Tassi attesi di default per branca di attività economica Banca d’Italia

Criterion Results

Rischio di trasformazione

Rischio relativo agli impieghi a vista Stima del rischio di interesse in capo alla BU Corporate complessiva

-R

isch

io d

i cr

edit

o -

Rischio Operativo Stima in % del totale degli altri rischi Stima del rischio operativo

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