Section 1 - Transactions carried out during the year
In November 2016, the Bank finalised the acquisition of the group headed by the former GE Capital Interbanca, which at 31 December 2016 was 99,993%-owned by the Banca IFIS Group. The company concerned and its subsidiaries operate in the following sectors: medium/long-term financing, structured financed, and operating and finance leases.
The acquisition was conducted by entering into a Share Purchase Agreement (SPA) on 28 July 2016 with GE Capital International Holdings Limited, and then a final sale agreement on 30 November 2016 after obtaining the authorisation of the competent Supervisory Authorities on 29 November 2016.
Under IFRS 3, at the date of the business combination, the entity must identify the cost of the business combination and allocate it to the acquiree's identifiable assets, liabilities, and contingent liabilities at the acquisition date and measured at their fair values.
The cost of the acquisition of the GE Capital Interbanca Group was provisionally estimated at 119,2 million Euro (still gross of any additional adjustments to the price initially paid of 160 million Euro), as agreed: the price is still subject to adjustments under the agreement with the seller.
Following the acquisition, in accordance with IASs/IFRSs, Banca IFIS conducted a Purchase Price Allocation (PPA), which consists in allocating the cost of the business combination, recognising the assets acquired, liabilities assumed, and contingent liabilities at their fair values at the acquisition date.
This phase of the allocation was based on a previous mapping of the assets and liabilities for which, considering all available information, significant differences between their fair value and carrying amount were deemed likely.
The consolidated assets and liabilities of the former GE Capital Interbanca Group at 30 November 2016 for which a difference between the carrying amount and fair value was found mainly referred to:
- loans to customers;
- tax assets and liabilities
- provisions for risks and charges.
The fair value of in-scope individual loans to customers was estimated using the discounted cash flow method, i.e. by discounting the future cash flows from the position. The cash flows used are those in the Target's systems, without making any changes to their amount or payment schedule. To calculate the amount, Banca IFIS identified the interest rate of the individual exposure that represents the market expected return for exposures with similar duration and risk characteristics.
In order to apply the above method, loans to customers were segmented into portfolios by type.
Here below are the details about the portfolios to which fair value adjustments were made following the fair valuation.
|Lending portfolio at 30 November 2016 FV measurement summary||Performing||Non-performing past due||Unlikely to pay||Bad loans|
|Book value [A]||960,461||1,635||301,734||104,246|
|Full fair value [B]||785,159||1,635||149,950||25,844|
|Overall fair value adjustment [C=B-A]||(175,302)||-||(151,784)||(78,402)|
|CQS &, Mortgage at 30 November 2016 FV measurement summary||Performing||Non-performing past due||Unlikely to pay||Bad loans|
|Book value [A]||159,605||6,943||18,800||11,667|
|Full fair value [B]||115,260||6,943||12,025||2,735|
|Overall fair value adjustment [C=B-A]||(44,345)||-||(6,774)||(8,931)|
The tax assets and liabilities concerned consist of:
- deferred tax assets (DTAs) relating to previous tax losses for the years from 2009 to 2016 as well as other minor deductible temporary differences not recognised by the Target because of the uncertainty as to how and when sufficient future taxable profit will be available to recover them;
- gains and losses arising from the adjustment to fair value of the assets acquired and liabilities and contingent liabilities assumed as resulting from the PPA process.
The remaining allocations of fair value concerning Provisions for Risks and Charges referred to unfunded commitments (undrawn loan commitments) related to non-performing exposures as well as higher provisions for disputes for which it is possible that a net outflow of resources will be required to settle the obligation. The fair value of lawsuits against the Group backed by specific guarantees covering all costs associated with a potential defeat in court was estimated to be zero, since, in accordance with IAS 37, the best estimate of the expenditure required to settle the present obligation (i.e. the expenditure the entity would incur) is zero based on the Bank's internal assessment. Consistently with IFRS3, the value of the related indemnification assets was estimated to be zero for the same reasons.
Finally, Banca IFIS did not identify any intangible assets (such as client relationships, brand names) from which it could expect future economic benefits and whose fair value could be estimated reliably. As for property, plant and equipment, and specifically buildings, the fair value is equal to the Target's carrying amount according to the appraisals carried out at the acquisition date.
Under IFRS3, the allocation of the cost of the business combination must be definitively quantified within 12 months of the acquisition date. At the reporting date, the allocation process is to be considered provisional, as the price is subject to adjustments under the agreement with the seller.
Here below is the carrying amount and fair value of the assets and liabilities acquired:
|SOFP Item||Description||Consolidated Interbanca Pre Acquisition||Acquired assets and liabilities at fair value||Fair value adjustments|
|10.AP||Cash and cash equivalents||0||0||-|
|20.AP||Derivatives to customers||50||50||-|
|60.AP||Due from banks||241||241||-|
|70.AP||Loans to customers||2.854||2.389||(466)|
|120.AP||Property, plant and equipment||46||46||-|
|130.AP||Int. assets with indefinite useful life||-||-||-|
|130.AP||Int. assets with finite useful life||1||1||-|
|140.AP; 80.PP||Tax assets and liabilities||248||499||251|
|160 AP||Other assets||73||73||-|
|10.PP||Due to banks||(1,838)||(1,838)||-|
|20.PP||Due to customers||(534)||(534)||-|
|40.PP||Financial liabilities held for trading||(51)||(51)||-|
|120.PP||Provisions for risks and charges||(23)||(28)||(6)|
The above-mentioned purchase price allocation process revealed a negative difference between the purchase price and the fair value of the identifiable assets acquired, liabilities assumed and contingent liabilities net of taxes. This difference represents the gain on bargain purchase.
The gain on bargain purchase identified as part of the above allocation process amounted to 623,6 million Euro and was immediately recognised in profit or loss under “other operating income”. In the table showing the breakdown of other operating income, included in part C of these notes, this amount is reported separately under the subline item “Bargain on interest acquisition”.
Finally, the Group calculated the value to allocate to non-controlling interests, corresponding to a 0,01% interest in Interbanca, by estimating the fair value based on the purchase price.
Section 2 - Transactions carried out after the end of the year
The Banca IFIS Group did not carry out any business combinations between the end of the year and the date of preparation of these financial statements.
Section 3 – Retrospective adjustments
Despite the business combination falling within the scope of IFRS 3 above, during the year were not made retrospective adjustments.