The outlook for Europe and Italy is clouded by significant political and social uncertainty. A series of crucial elections hang in the balance—and combine with socio-economic tensions that the Italian and European governments are struggling to address. After years in which GDP has contracted or, more recently, grown at a modest pace, it is not possible to push back against the calls for changing Europe's institutional architecture without a credible and shared alternative to the status quo. Therefore, in Europe, and especially in Italy, it is hard to imagine how to raise economic growth, which would lead to new investments, boost confidence, and ultimately make public debts more sustainable.

The growth forecasts for the next few years cannot thus be expected to be completely accurate, and there is considerable uncertainty about the impact that the upcoming elections as well as the new international scenario and Britain's exit from the EU could have on economic indicators.

The robust GDP growth rates registered in other historical periods now appear to be a thing of the past, in Europe as well as maybe all industrialised countries. This is due to several factors, of which only some concern the economy. This situation has led some experts to argue that advanced economies may be facing a “secular stagnation”, with extremely long periods of weak growth, low or no returns on risk-free investments, and low or zero inflation.

In the reference European markets, the cost of money remains at record lows—although it is expected to rise moderately in the not-so-distant future—because of two factors: the ECB's monetary policy, and still limited price increases (except for the rebound in oil prices). Core inflation remains largely unchanged because of the relatively modest use of the factors of production as well as other shifts—chief among them, the growing digitisation of the economy, which is driving down the cost of goods while disrupting traditional economic sectors. Monetary policy measures—not welcomed by everyone in Europe—should bring inflation near the central bank's target rates, even though a core inflation of just below 2% (excluding oil prices) remains a distant prospect in Europe.

It does not appear possible to steadily and sustainably grow our way out of the last few years of economic crisis without restarting the flow of credit to the real economy—especially in Italy.

Against this backdrop, the Banca IFIS Group's ability to provide support to small- and medium-sized businesses, also thanks to strengthening capital adequacy ratios and increasing liquidity, continues representing a competitive advantage, enabling it to acquire new customers—also with the new scope following the acquisition of the former Interbanca Group. The market is still characterised by the limited and selective supply of credit, and the demand for appropriate solutions—especially for companies that are small in size and have less measurable or low credit standing.

In 2017, the Banca IFIS Group will complete its restructuring following the acquisition of the former Interbanca Group, which was finalised on 30 November 2016. IFIS Factoring S.r.l. will be merged into Banca IFIS (after transferring the relevant shares from Interbanca S.p.A. and IFIS Leasing S.r.l. To the Parent Company) by the third quarter of 2017, and the merger of Interbanca S.p.A. will be completed before the end of the year. Then, consistently with the intention to streamline the Group's organisational structure, IFIS Leasing S.r.l. is expected to be merged into the Parent Company during 2018.

In commercial terms, the former Interbanca Group's operations have been organised by product line and will be developed as follows. Concerning finance and operating leases, which have strong synergies with Banca IFIS's traditional operations, special emphasis will be placed on returning to volumes consistent with the potential of IFIS Leasing. We expect to expand our presence across all business areas—especially in the automotive and equipment segments, and with the exception of real estate and shipping. In this sense, the cross-selling of the leasing and trade finance distribution networks will be key: combined, these ensure the Group maintains a widespread presence throughout Italy. As for corporate finance, this is the segment of Interbanca S.p.A., which operates in the following sectors: medium-term financing to businesses; structured finance; management of the non-performing and run-off portfolio. It consists of three different business units, and, as far as trade receivables are concerned, special emphasis will be placed on developing smaller-sized customers, boosting profitability, and making credit risk determinable. There will be a renewed push in the structured finance business, returning Interbanca to its leadership position. The Group will be as pro-active as possible in collecting non-performing loans, aware of contingent market needs and focusing on selling assets based on a rigorous

assessment of economic viability. We will be able to do so also because we are not subject to the prudential capital requirements that force most Italian banks to make otherwise unnecessary sacrifices.

Concerning the scope of the former Interbanca Group—which will be mostly merged into Banca IFIS by the end of this year, and will therefore not report its results separately—we expect a steady increase in profitability, which could allow to reach the break-even point right away after several years of structural losses.

The Bank has been overhauling, and is continuing to overhaul, its distribution network, increasing its headcount and reimagining it to better meet the needs of tomorrow. The merger with the former Interbanca Group strengthens our ability to engage with the market as well as leads to an immediate and significant increase in the number of corporate customers, which will be gradually targeted by cross-selling initiatives. We expect to increase the number of corporate customers and loans during the year, and throughout 2017 we will see whether these measures can boost overall profitability based on market trends. At the macroeconomic level, the scenario for business lending sees on the one hand a large amount of liquidity available, which puts downward pressure on lending interest rates; on the other hand, several institutions are reluctant to increase their exposure to avoid repercussions in terms of regulatory capital absorption. However, margins are limited across the board, and especially on loans to customers with a higher credit standing. If the recovery drives up demand for credit, and the challenges facing some institutions constrain the supply, we can reasonably expect this situation to gradually reverse, at least in the medium term.

The Group will continue focusing on smaller entities: given the need to pay close attention during the lending process to mitigate risks by using factoring and leasing, the profitability of this segment currently appears less compromised. The Bank will continue expanding its presence in the international markets where it operates; in the pharmaceutical industry and pharmacy segments; and in the sector of receivables due from Italy's Public Administration.

Overall, margins on business lending are likely to remain stable and gradually improve in the near future; in any case, the Bank will continue focusing on companies with less resources. This approach, which we introduced in 2016, will increase the number of smaller-sized customers—and could compensate for the pressure on margins.

Banca IFIS will play an increasingly important role in the non-performing loan sector (NPL Area), providing solutions in demand at lenders and financial institutions across Italy and abroad to manage non-performing loans in the face of the mentioned mounting regulatory pressure—which aims to remove excess non-performing loans from the balance sheets of the institutions with limited regulatory capital. We will continue monitoring and bidding for the portfolios of receivables due from households that originators are expected to place on the market. Banca IFIS is making progress in managing NPLs in terms of organisational and operating solutions, which allows to continue increasing collection rates. As in recent times, considering the abundant liquidity of the market; the Bank's ability to turn the quality of the portfolios into a strength in dealings with debtors; and the opportunity to scale up operating volumes, benefiting the bank and the debtors involved in its initiatives, Banca IFIS will consider trading in the secondary market. Specifically, it may also continue selling already processed portfolios with the goal of freeing up resources, using them to further expand the business, or buy portfolios that other players already started processing. The Bank will manage and collect debts using new techniques, including legal actions involving properties and against debtors with lower amounts outstanding; in addition, it will specifically strengthen phone relationships with customers, as these involve lower operating costs and are considerably more effective. The Bank will continue looking at the secured micro real estate sector, which shares some similarities with what the Bank is already doing, as well as the retail

business segment. We expect this segment, which is proving capable of generating steady returns, to make an additional significant contribution to overall profitability.

As for tax receivables, the Bank maintains its leadership in this segment, given the good medium-term profitability of these investments. Also in this segment, margins are under pressure because of competition, but the Bank enjoys significant competitive advantages because of the recognised quality of its work and its operational skills. Returns will remain decent in an environment of risk-free rates of return stuck at zero.

As for the profitability of the Governance and Services sector, funding retails costs remain stable in the face of the current and projected steady increase in assets under management. The Bank aims to further develop retail funding, as it considers it to be an excellent source of funding. The interest rates at or below zero in the funding market remain available to non-first-tier banks only if they have prime collateral. Alternatively, wholesale funding has and will have costs broadly similar to retail funding, but the latter's stability is more consistent with the profile of the Bank's loans. Nonetheless, the Group is finalising or conducting a number of transactions to monetise assets through securitisations that, based on the quality of the underlying assets, will be financed on the Eurosystem (leasing assets) or the wholesale market (factoring assets)—as well as implementing procedures such as ABACO (the Bank of Italy's collateral management system). As for the government bond portfolio, the bank is not planning any significant changes: as it continues to gradually shrink in size, the relevant trading has become immaterial. However, to seize the last opportunity to participate in the TLTRO programme (amount: 700 million Euro), the Group must ensure it has enough adequate collateral, which will consist mostly of eligible instruments generated by the Group and backed by its own assets.

As the Board of Directors approves the 2016 Financial Statements, the Group is also adopting the new 2017-2019 Strategic Plan. Over a three-year period, it seeks to grow the Bank's presence in the reference sectors by adopting a stand-alone approach, leaving ample room for additional actions concerning regulatory capital, liquidity, and human and technological resources. The Bank will therefore consider opportunities for inorganic growth in similar or adjacent sectors—as well as specific measures concerning portfolios or classes of either non-performing or performing assets. These will be based on the relevant characteristics as well as the opportunities that will come up from time to time in a market in which players will likely seek to dispose of assets in order to boost regulatory capital.

In light of the above, the Group can reasonably expect to remain profitable also 2017, considering the circumstances that gave rise to—often non-recurring—profits during 2016.