1.2 Banking group – market risks

Generally, as the Banca IFIS Group does not usually trade in financial instruments, its financial risk profile refers mainly to the banking book. The activity of purchasing bonds, given that these are classified under Available for Sale and Loans and Receivables, falls within the scope of the banking book and does not, therefore, constitute new market risks.

At the end of 2016, the Group recognised currency swaps with a mark-to-market value positive to the tune of 397 thousand Euro and negative to the tune of 2.031 thousand Euro. The classification of these derivatives under financial assets held for trading does not reflect the aim of the transaction, which is to mitigate the impact of potential fluctuations in the reference exchange rates.

Concerning Interbanca alone, during 2016, in line with internal policies forbidding any kind of trading for speculative purposes, the trading book consisted entirely of residual transactions from Corporate Desk operations (discontinued in 2009), in which clients were offered derivative contracts hedging the financial risks they assumed. In order to remove market risk, all outstanding transactions are hedged with “back to back” trades, in which the Bank assumes a position opposite to the one sold to corporate clients with independent market counterparties.

 

1.2.1 Interest rate risk and price risk – supervisory trading book

Qualitative information

The Banca IFIS Group does not usually trade in financial instruments.

1.2.2 Interest rate risk and price risk – banking portfolio

Qualitative information

A. General aspects, management procedures and measurement methods concerning the interest rate risk and the price risk

Quantitative information

As a general principle, the Group does not assume significant interest rate risks. Following the acquisition of the former GE Capital Interbanca Group, the main funding source is still the online savings account rendimax, which is complemented by collateralised or non-collateralised interbank funding. Customer deposits on the rendimax and contomax products are at a fixed rate for the fixed-term part, while on demand and call deposits are at a non-indexed floating rate the Bank can unilaterally revise without prejudice to legal and contractual provisions. The Bank launched three securitisation programmes in the year just ended: one with underlying the factoring portfolio, one with underlying the leasing portfolio, and one with underlying the corporate portfolio. The first is a three-year revolving programme, the other two are amortizing programmes.

At the end of 2016, Banca IFIS acquired the former GE Capital Interbanca Group and expanded its core business to corporate lending, structured finance, and finance and operating leases. Loans to customers are still largely at floating rate.

As for the operations concerning distressed retail loans (carried out by the NPL Area), for which the business model focuses on acquiring receivables at prices lower than their book value, there is a potential interest rate risk associated with the uncertainty about when the receivables will be collected. The variability in the loan’s term, which to all intents and purposes can be considered at a fixed rate, is particularly

important with reference to tax receivables, the overall par value of which is highly likely to be collected, although in the medium/long term. In this context, and in order to effectively mitigate interest rate risk, it is particularly important to correctly assess the transaction during the initial acquisition stage. At 31 December 2016, approximately 14% of the bond portfolio consisted of inflation-indexed bonds. The remainder consisted of fixed-rate short-term bonds. The average duration of the overall portfolio is approximately eleven months.

The interest rate risk associated with funding operations carried out by the Parent Company’s Treasury Department is assumed according to the limits and policies set by the Board of Directors, with precise delegations of power limiting the autonomy of those authorised to operate within the Bank’s Treasury Department.

The business functions responsible for ensuring interest rate risk is managed correctly are: the Treasury Department, which directly manages funding operations and the bond portfolio; the Risk Management function, responsible for selecting the most appropriate risk indicators and monitoring assets and liabilities with reference to pre-set limits; and, lastly, the Top Management, which every year shall make proposals to the Board regarding policies on lending, funding and the management of interest rate risk, as well as suggest appropriate actions during the year in order to ensure that operations are conducted consistently with the risk policies approved by the Bank.

As part of current operations and based on funding indications from the Treasury Department, as well as interest rate forecasts and assessments of lending trends, the Top Management provides the Treasury Department—which monitors interest rate risk trends with reference to the natural mismatching between assets and liabilities—with guidelines on the use of available credit lines.

In order to monitor interest rate risk, the Top Management receives a daily summary on the overall cash position. Furthermore, the Risk Management function periodically reports to the Bank’s Board of Directors on the interest rate risk position by means of a quarterly Dashboard prepared for the Bank’s management. The Integrated Treasury System (SIT) provides further tools for assessing and monitoring the main interest rate-sensitive assets and liabilities. 

The interest rate risk falls under the category of second-pillar risks. In the final document sent to the Supervisory Body, as per the relevant regulations (Circular 285 of 17 December 2013 – Title III, Chapter 1, Annex C), the Interest Rate Risk has been specifically measured in terms of capital absorption. In the face of the warning threshold of 20% of Regulatory Capital, the resulting risk indicator for the Banca IFIS Group (pre-acquisition of the former GE Capital Interbanca Group) was close to zero as at 30 September 2016.

In order to ensure Group-level monitoring and reporting, Banca IFIS has implemented an integration process to include Interbanca, IFIS Factoring Srl, IFIS Leasing Spa, and IFIS Rental Services Srl in the scope of analysis.

Considering the extent of the risk assumed, the Banca IFIS Group does not usually hedge interest rate risk.

As for the price risk, the Group does not generally assume risks associated with price fluctuations on financial instruments, as its business focuses on financing SMEs’ working capital.

Classifying the bonds held under Available for sale financial assets gives rise to the risk that the Group’s capital reserves could fluctuate as a consequence of the change in the bonds’ fair value. Nonetheless, this risk is relatively low, since the securities portfolio is now limited in size and given the high credit standing of the issuers and the short average duration of the portfolio.

The Risk Management function is responsible for monitoring the price risk that the Group assumes while conducting its business. Thanks to the Integrated Treasury System (SIT) and the contribution of the Risk Management Function, the Group can assess and monitor the operations of the treasury, providing appropriate tools for assessing price risks. Specifically, the SIT also allows to

  • manage the Treasury’s traditional operations (securities, exchange rates, money market and derivatives);
  • measure and control the exposure to specific types of market risk;
  • establish and constantly monitor limits set for the various operational functions.

 

B. Fair value hedging

There are no fair value hedges.

 

C. Cash flow hedging

There are no cash flow hedges.

     

1. Banking book: distribution by residual duration (re-pricing date) of financial assets and liabilities - Currency: Euro

Type/Residual life on demand up to 3 months over 3 to 6 months over 6 months to 1 year over 1 to 5 years over 5 years to 10 years over 10 years Indefinite duration
1, On-balance-sheet assets 1,549,960 708,118 360,449 565,387 526,723 195,187 11,938 -
1,1 Debt securities - - 52,741 270,292 - - - -
- with early redemption option - - - - - - - -
- other - - 52,741 270,292 - - - -
1,2 Loans to banks 95,327 301,644 - - - - - -
1,3 Loans to customers 1,454,633 406,474 307,708 295,095 526,723 195,187 11,938 -
- current accounts 49,868 6 624 238 14,331 3,928 128 -
- other loans 1,404,765 406,468 307,084 294,857 512,392 191,259 11,810 -
- with early redemption option 100,839 63 204 863 13 - - -
- other 1,303,926 406,405 306,880 293,994 512,379 191,259 11,810 -
2, On-balance-sheet liabilities 1,011,538 1,507,281 220,938 399,284 1,538,602 1,053 1,909 -
2,1 Due to customers 891,081 1,104,976 184,938 390,284 1,538,602 1,053 1,909 -
- current accounts 891,081 1,609,680 182,639 388,299 1,536,475 - - -
- other payables - 504,704 2,299 1,985 2,127 1,053 1,909 -
- with early redemption option - - - - - - - -
- other - 504,704 2,299 1,985 2,127 1,053 1,909 -
2,2 Due to banks 120,457 402,305 36,000 9,000 - - - -
- current accounts 120,457 - - - - - - -
- other payables - 402,305 36,000 9,000 - - - -
2,3 Debt securities - - - - - - - -
- with early redemption option - - - - - - - -
- other - - - - - - - -
2,4 Other liabilities - - - - - - - -
- with early redemption option - - - - - - - -
- other - - - - - - - -
3, Financial derivatives - - - - - - - -
3,1 With underlying security - - - - - - - -
- Options - - - - - - - -
+ long positions - - - - - - - -
+ short positions - - - - - - - -
- Other - - - - - - - -
+ long positions - - - - - - - -
+ short positions - - - - - - - -
3,2 Without underlying security - - - - - - - -
- Options - - - - - - - -
+ long positions - - - - - - - -
+ short positions - - - - - - - -
- Other - - - - - - - -
+ long positions - - - - - - - -
+ short positions - - - - - - - -
4, Other off-balance-sheet transactions -   - - - - - -
+ long positions -   - - - - - -
+ short positions - - - - - - - -
 

1.2.3 Currency risk

Qualitative information

A. General aspects, management procedures and measurement methods concerning the currency risk

The assumption of currency risk, intended as an operating element that could potentially improve treasury performance, represents a speculative instrument: in principle, therefore, it is not part of the Group’s policies. Banca IFIS’s foreign currency operations largely involve collections and payments associated with factoring operations. In this sense, the advances in foreign currency granted to customers are generally hedged with deposits and/or loans from other banks in the same currency, thus eliminating for the most part the risk of losses associated with exchange rate fluctuations. In some cases, synthetic instruments are used as hedging instruments.

Concerning the foreign currency transactions carried out by the subsidiary Interbanca, they consist in medium/long-term loans (mostly in USD) for which the currency risk is neutralised right from their inception by securing funding denominated in the same currency. This funding is currently provided by the Parent Company Banca IFIS, which manages the consolidated net mismatching of the exposure related to said risk.

A residual currency risk arises as a natural consequence of the mismatch between the borrowers’ drawdowns and the Treasury Department’s funding operations in foreign currency. Such mismatches are mainly a result of the difficulty in correctly anticipating financial trends connected with factoring operations, with particular reference to cash flows from account debtors vis-à-vis the maturities of loans granted to customers, as well as the effect of interest on them.

However, the Treasury Department strives to minimise such mismatches every day, constantly realigning the size and timing of foreign currency positions.

Currency risk related to the Bank’s business is assumed and managed according to the risk policies and limits set by the Parent Company’s Board of Directors, with precise delegations of power limiting the autonomy of those authorised to operate, as well as especially strict limits on the daily net currency position.

The business functions responsible for ensuring the currency risk is managed correctly are: the Treasury Department, which directly manages the bank’s funding operations and currency position; the Risk Management function, responsible for selecting the most appropriate risk indicators and monitoring them with reference to pre-set limits; and the Top Management, which every year shall make proposals to the Bank's Board of Directors regarding policies on funding and the management of currency risk, as well as suggest appropriate actions during the year in order to ensure that operations are conducted consistently with the risk policies approved by the Group.

Furthermore, the Risk Management function periodically reports to the Bank’s Board of Directors on the currency risk position by means of a quarterly Dashboard prepared for the Bank’s management.

The Group's expanding operations in Poland, through the subsidiary IFIS Finance, are no exception to the above approach: assets denominated in Zloty are financed through funding in the same currency.

With the acquisition of the Polish subsidiary, Banca IFIS has assumed the currency risk represented by the initial investment in IFIS Finance’s share capital for an amount of 21,2 million Zloty and the subsequent share capital increase for an amount of 66 million Zloty.

Furthermore, Banca IFIS owns a 5,57% interest in India Factoring and Finance Solutions Private Limited, worth 20 million Indian rupees and with a market value of 3.044 thousand Euro at the historical exchange rate. As already mentioned, in 2015 the Bank tested said interest for impairment, recognising a 2,4 million

Euro charge in profit or loss. In 2016, the fair value was revalued by 193,4 million Euro through equity, bringing the value of the equity interest to 864,6 million Euro.

Considering the size of this investment, the Bank did not deem it necessary to hedge the ensuing currency risk.

   

Quantitative information

1. Distribution of assets, liabilities and derivatives by currency

Items Currencies
  US DOLLAR POUND STERLING JAPANESE YEN CANADIAN DOLLAR SWISS FRANC OTHER CURRENCIES
A, Financial assets 212,521 1,313 4 39 4 62,521
A,1 Debt securities            
A,2 Equity securities            
A,3 Loans to banks 169,802 87 4 38 0 9,546
A,4 Loans to customers 42,719 1,226 0 1 4 52,975
A,5 Other financial assets            
B, Other assets           95
C, Financial liabilities 65,333 514 20 0 164 6,944
C,1 Due to banks 63,693 504 20 0 164 6,105
C,2 Due to customers 1,638 10 0 0 0 839
C,3 Debt securities 0          
C,4 Other financial liabilities 2 0 0 0 0 0
D, Other liabilities           565
E, Financial derivatives 132,114 0 0 0 0 27,178
- Options 0 0 0 0 0 0
+ long positions            
+ short positions            
- Other 132,224 0 0 0 0 27,201
+ long positions 10         399
+ short positions 132,234 0 0 0 0 27,600
Total assets 212,529 1,314 4 38 4 63,014
Total liabilities 197,564 514 20 0 164 35,108
Unbalance (+/-) 14,965 800 16 38 159 27,906
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1.2.4 Derivative instruments

A. Financial derivatives

The Banca IFIS Group does not trade in financial derivatives on behalf of third parties and limits proprietary trading to instruments hedging against market risk.

Banca IFIS often uses financial derivatives to hedge currency exposures. At 31 December 2016, the Bank recognised foreign exchange derivatives with a positive fair value of 397 thousand euro and a negative fair value of 2031 thousand euro. As for the transactions entered into, it should be noted that the Group never undertakes speculative transactions.

Concerning Interbanca alone, during 2016, in line with internal policies forbidding any kind of trading for speculative purposes, the trading book—totalling 47,0 million Euro—consisted entirely of residual transactions from Corporate Desk operations (discontinued in 2009), in which clients were offered derivative contracts hedging the financial risks they assumed. In order to remove market risk, all outstanding transactions are hedged with “back to back” trades, in which the Bank assumes a position opposite to the one sold to corporate clients with independent market counterparties, resulting in 46,4 million Euro in liabilities held for trading.

     

A.1 Supervisory trading book: year-end notional amounts

Underlying assets/type of derivatives 31.12.2016 31.12.2015
  Over the counter Central counterparts Over the counter Central counterparts
1, Debt securities and interest rates 419,297 - - -
a) Options 21,168 - - -
b) Swaps 398,129 - - -
c) Forwards - - - -
d) Futures - - - -
e) Other - - - -
2, Equity instruments and share indexes 30,091 - - -
a) Options 30,091 - - -
b) Swaps - - - -
c) Forwards - - - -
d) Futures - - - -
e) Other - - - -
3, Currencies and gold 157,946 - 36,500 -
a) Options - - - -
b) Swaps 157,946 - 36,500 -
c) Forwards - - - -
d) Futures - - - -
e) Other - - - -
4, Goods - - - -
5, Other underlying assets - - - -
Total 607,334 - 36,500 -
     

A.3 Financial derivatives: gross positive fair value - breakdown by product

Underlying assets/type of derivativesPositive fair value
 31.12.201631.12.2015
 Over the counterCentral counterpartsOver the counterCentral counterparts
A. Supervisory trading book40,282--259-
a) Options----
b) Interest rate swaps39,885---
c) Cross currency swaps397-259-
d) Equity swaps----
e) Forwards----
f) Futures----
g) Other----
B. Hedging banking book----
a) Options----
b) Interest rate swaps----
c) Cross currency swaps----
d) Equity swaps----
e) Forwards----
f) Futures----
g) Other----
C. Banking book - other derivatives----
a) Options----
b) Interest rate swaps----
c) Cross currency swaps----
d) Equity swaps----
e) Forwards----
f) Futures----
g) Other----
Total40,282-259-
       

A.4 Financial derivatives: gross negative fair value - breakdown by product

Underlying assets/type of derivativesNegative fair value
 31.12.201631.12.2015
 Over the counterCentral counterpartsOver the counterCentral counterparts
A. Supervisory trading book48,478-21-
a) Options----
b) Interest rate swaps46,447---
c) Cross currency swaps2,031-21-
d) Equity swaps----
e) Forwards----
f) Futures----
g) Other----
B. Hedging banking book----
a) Options----
b) Interest rate swaps----
c) Cross currency swaps----
d) Equity swaps----
e) Forwards----
f) Futures----
g) Other----
C. Banking book - other derivatives----
a) Options----
b) Interest rate swaps----
c) Cross currency swaps----
d) Equity swaps----
e) Forwards----
f) Futures----
g) Other----
Total48,478-21-
     

A.5 Financial derivatives: supervisory trading book: notional values, gross positive and negative fair value by counterparty - contracts not included in netting agreements

Contracts not included in netting agreements Governments and Central banks Other public entities Banks Financial institutions Insurance companies Non-financial companies Other entities
1) Debt securities and interest rates              
- notional amount - - 233.792 22.357 - 163.148 -
- positive fair value - - 3.936 11.110 - 24.839 -
- negative fair value - - 46.447 - - - -
- future exposure - - 1.682 112 - 1.357 -
2) Equity instruments and share indexes              
- notional amount - - - - - 30.091 -
- positive fair value - - - - - - -
- negative fair value - - - - - - -
- future exposure - - - - - 75 -
3) Currencies and gold              
- notional amount - - 157.946 - - - -
- positive fair value - - 397 - - - -
- negative fair value - - 2.031 - - - -
- future exposure - - 275 - - - -
4) Other amounts              
- notional amount - - - - - - -
- positive fair value - - - - - - -
- negative fair value - - - - - - -
- future exposure - - - - - - -
 

A.9 Residual life of OTC financial derivatives: notional amounts

Underlying assets/Residual lifeUp to 1 yearOver 1 to 5 yearsOver 5 yearsTotal
A, Supervisory trading book207,898269,107130,329607,334
A,1 Financial derivatives on debt securities and interest rates49,952239,016130,329419,297
A,2 Financial derivatives on equity instruments and share indexes-30,091-30,091
A,3 Financial derivatives on exchange rates and gold157,946--157,946
A,4 Financial derivatives on other values----
B, Banking book----
B,1 Financial derivatives on debt securities and interest rates----
B,2 Financial derivatives on equity instruments and share indexes----
B,3 Financial derivatives on exchange rates and gold----
B,4 Financial derivatives on other values----
Total 31.12.2016207,898269,107130,329607,334
Total 31.12.201536,500--36,500
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