Address by Governor
Ordinary General Meeting of Shareholders
Rome, 31 March 2020
year
financial
126th
th
Year
126
2019
Financial

Address by Governor
Ordinary General Meeting of Shareholders
Rome, 31 March 2020

Ladies and Gentlemen,
Italy, Europe, and the entire world are experiencing the same anxiety
and difficulty that come with any unprecedented challenge. Aside from
posing a deadly threat to public health and putting a severe strain on national
health systems, the rapid spread of the Coronavirus disease (COVID-19)
has transformed our daily lives, our work processes, the functioning of our
schools and universities; the extent of the impact on the economic and
financial system will be as wide as it is deep.
In carrying out its institutional functions, and in tandem with the other
national institutions, the Bank of Italy has taken the necessary action to
limit the economic repercussions of the pandemic. While the health of all of
our staff is our absolute priority, we continue to guarantee the provision of
essential services to the wider public.
In my Concluding Remarks delivered on 31 May last, I recalled the changes
made to the composition of the Governing Board in 2019: Fabio Panetta was
appointed Senior Deputy Governor, Luigi Federico Signorini confirmed as
Deputy Governor, and Alessandra Perrazzelli and Daniele Franco also both
appointed as Deputy Governors. I wish once again to thank Salvatore Rossi
and Valeria Sannucci for their many years of service to the Bank, in the roles
of Senior Deputy Governor and Deputy Governor respectively. The Bank is
- we all are - hugely indebted to them.
On 1 January this year the composition of the Board of Directors changed
again. Daniele Franco succeeded Fabio Panetta as Senior Deputy Governor
following the latter's appointment to the ECB's Executive Board. Our thanks
also go to Fabio Panetta; we wish him every success in his new important
role. Finally, Piero Cipollone, formerly Managing Director responsible for
high-level consultancy to the Governing Board on matters pertaining to the
organization of the Bank's functions and institutional relations, was appointed
Deputy Governor.
Last year the process of reallocating the Bank's capital continued. Since
the launch of the reform of the Bank's ownership structure (Law 5/2014),
40.4 per cent of its capital has been reallocated, 7 per cent since March 2019.
Of the 143 current shareholders, 115 invested after the reform law was passed
(6 insurance companies, 8 pension funds, 10 social security institutions, 29
banking foundations and 62 banks). The nominal value of the shareholdings
exceeding the 3 per cent capital limit is just under €2 billion, compared with
total capital of €7.5 billion. Last year, the nominal value of the shareholdings
exceeding the threshold was €2.5 billion and two years ago it was €2.7 billion.
Given that the broadening of the shareholder base is among the goals of
the reform, the Bank is desirous that the redistribution of the shareholdings,
in accordance with the limits set by law, continue at a fast pace. On behalf
of the Board of Directors and the Governing Board, I would like to welcome
those who have acquired a shareholding in the Bank's capital, even if they are
not physically present at the meeting today.
The annual accounts submitted for your approval show a net profit of
€8.2 billion, €2 billion more than in the previous year. This is the highest ever
profit posted in the history of the Bank of Italy.
After four years of continuous expansion, the balance sheet total of the
Bank of Italy, in line with that of the Eurosystem, recorded a small decline
linked to fewer monetary policy operations. The size of the balance sheet
remains considerable, however: at €1,000 billion, it has expanded by more
than 80 per cent since the end of 2014. This has translated into a significant
increase in profitability, which has in part been used to strengthen financial
buffers against risks. In the last five years, gross profit - before taxes and
transfers to the general risk provision - totalled approximately €41 billion.
The total amount allocated to the State - also considering the proposed
distribution submitted for your approval - is €21 billion, in addition to taxes
amounting to €6 billion.
Future earnings will depend on developments in the financial markets,
on the riskiness of assets, as well as on the monetary policy measures that will
be adopted by the Governing Council of the ECB. What happens in the near
future will be heavily influenced by how Italy and Europe respond to the
emergency, first and foremost in terms of health care, then on an economic
and financial plane.
We are closely monitoring all developments and the implications of the
pandemic for the economy, price stability, the performance of banks, and the
financial markets. We have adopted a comprehensive package of measures
designed to guarantee ample liquidity to all sectors of the economy and to
address the risks of financial fragmentation along national lines, thereby
ensuring that monetary policy decisions are transmitted more effectively.
The expansionary monetary policy of the Eurosystem and the Bank
of Italy's balance sheet
In 2019 the monetary policy of the Eurosystem remained expansionary
in order to counter the downside risks to inflation stemming from the
weakening economic outlook.
In its September meeting, the ECB's Governing Council lowered the
deposit facility rate by ten basis points, bringing it to -0.50 per cent; at the
same time it introduced a two-tier system for reserve remuneration, in which
part of banks' reserve holdings in excess of the minimum requirements are
exempt from the negative deposit facility rate and remunerated at a rate of
0.0 per cent.
Also in September, a new series of targeted longer-term refinancing
operations (TLTRO III) was introduced, each with a maturity of three years,
to be conducted on a quarterly basis. Initially equal to the average rate on the
main refinancing operations over the life of each targeted operation (currently
set at zero per cent), the interest rate can be as low as the average rate on the
deposit facility, depending on the volume of net lending by banks.
Since November, net purchases of public- and private-sector securities
have resumed at a monthly pace of €20 billion; this will continue for as long
as necessary to strengthen the accommodative impact of the policy rates in
tandem with the ECB's explicit objective of ending the purchases shortly
before it starts raising its key policy rates. These purchases are in addition
to the full reinvestment of the principal payments from maturing securities
purchased under the programme; this too will continue for as long as necessary
to maintain favourable liquidity conditions and an ample degree of monetary
accommodation.
To mitigate the impact of the ongoing pandemic, in its meeting of
12 March, the Governing Council adopted a broad package of measures.
To support bank lending to those most financially affected by the spread of
COVID-19 - particularly small and medium-sized enterprises - from June
2020 to June 2021 the conditions applied to TLTRO III will be considerably
more favourable. Both the initial rate and the (lower) rate actually applied
to counterparties based on the achievement of lending targets have been
lowered by 25 basis points and the targets' attainment has also been facilitated.
The maximum amount that the counterparties can borrow through these
operations will be raised to €3,000 billion. As a bridging measure, until
June 2020 additional LTROs will be conducted at favourable conditions and
with full allotment of the amounts requested. Alongside the asset purchase
programme already under way, equal to €20 billion in monthly purchases,
a further €120 billion has been allocated for additional net purchases until
the end of the year, with a significant contribution from the private sector
purchase programmes.
These measures were further reinforced at the meeting of 18 March
last, when the Governing Council announced a new programme for the
purchase of public- and private-sector securities amounting to €750 billion
this year. This new pandemic emergency purchase programme (pepp)
will continue until the end of 2020 but may be extended if the public
health emergency continues. Ample flexibility is envisaged for purchases
of public-sector securities to enable, should market conditions require
it, divergences with respect to the current allocations, both in respect of
jurisdictions and asset classes. The range of eligible securities issued by
private firms has been extended to include commercial paper of sufficient
credit quality; the eligibility criteria for collateral have been relaxed
further, to facilitate recourse to refinancing by banks.
Within our mandate, we stand ready to increase the volume of purchases,
adjust their composition and explore all possible options for supporting the
economy in this acutely difficult phase. It was also decided to consider
revising past self-imposed limits in carrying out these operations, to the
extent necessary to make the interventions proportionate to the current
risks; any impediment that might hamper the effective transmission of
monetary policy will not be tolerated.
The balance sheet
At the end of 2019, the Bank of Italy's total assets amounted to
€960 billion, a decrease of €8 billion compared with the year before.
Assets continued to consist mostly of securities purchased for monetary
policy purposes, equal to €384 billion, of which around €320 billion made
up of Italian government securities. Refinancing operations, totalling
€220 billion, decreased by €24 billion owing to early repayments on
TLTRO II operations, only partly offset by amounts allotted under the
new TLTRO III operations. Overall, monetary policy assets make up
more than 60 per cent of the total balance sheet.
The value of gold rose by almost €20 billion compared with 2018, reaching
€107 billion. In line with Eurosystem accounting rules, this appreciation is
not recorded in the profit and loss account and therefore did not affect the
Bank's operating result, as it was reflected in a corresponding increase in the
revaluation account on the liabilities side.
Investment assets, amounting to €140 billion, consist mainly of bonds
and, to a lesser extent, equity shares. Since last year, the Bank has modified
its investment strategy, integrating Environmental, Social and Governance
(ESG) factors into the management of its equity portfolio. Shares of companies
that operate mainly in sectors not compliant with the principles of the
UN Global Compact have been excluded, those of companies with the
highest ESG scores favoured. The Bank is already looking into extending this
new investment strategy to corporate bonds as early as this year.
On the liability side, the Bank of Italy's negative balance on the TARGET2
payment system declined for the first time in five years, from €482 billion to
€439 billion over the course of 2019. The decrease occurred primarily in
the second half of the year, initially as a result of the inflow of capital from
abroad, mainly owing to higher demand for Italian government securities,
and thereafter due to the net foreign funding by Italian banks, driven by the
Eurosystem's new system for banks' reserves remuneration, which was also
reflected in the increase in deposits of credit institutions (from €89 billion to
€102 billion).
Finally, the value of banknotes in circulation continued to increase:
reported in the Bank's balance sheet in proportion to its share in the ECB's
capital key, their value increased by €4 billion, reaching €202 billion at the
end of 2019.
Profitability, risks and organizational measures
The gross profit for 2019, before taxes and transfers to the general risk
provision, was equal to €10.8 billion. The €2 billion increase over 2018 is
mainly attributable to income components that may not recur to the same
degree in the future.
In particular, the positive performance of the stock markets in 2019
- accompanied by the Bank's extensive rebalancing of its portfolio to
integrate ESG factors - led to a reduction in write-downs and to a marked
improvement in realized gains from trading operations. Net interest income,
which is central banks' traditional source of income, also contributed
positively to the increase in gross profit, rising by €0.2 billion on 2018 to
€9.6 billion.
Operating expenses declined by about 1 per cent, reflecting in part lower
depreciation. Although there were minor internal changes in composition,
staff costs and administrative expenses remained essentially unchanged.
In order to cope with the risks to which the Bank is exposed, financial
buffers were increased by transferring to the general risk provision the same
amount as the year before (€1.5 billion), without affecting the statutory
reserves. Taxes for the year amounted to about €1 billion, similar to the figure
recorded in 2018 (€1.2 billion).
The Bank's human resource policies are contributing to a generational
turnover that is reflected in a gradual decline in the staff's average age, which
was 48.3 years at the end of the year. Women now represent a larger proportion
of total staff, rising from 36 to 38 per cent over the last five years.
These staff-related initiatives flank those to reorganize the Bank's structure
in order to make the performance of its institutional activities at the service of
the public more effective, and to adapt its working practices to developments
at national and European level. In relation to this, in July 2019, the statistics
function was reorganized to improve the quality of the data produced by the
Bank, to make production processes more efficient, and to further develop
the methodologies used.
In early 2020, the powers of the Financial Intelligence Unit for Italy
(UIF) were enhanced by strengthening its inspection and sanctioning
functions. Two more organizational changes were also made; the first was to
strengthen the Bank's consumer protection and financial education functions
by transferring their activities to a new directorate general; the second was
to integrate traditional retail payment services and highly technological and
innovative payment services within a single directorate general.
As usual, further information on the activities of the Bank and on the
organizational and management measures implemented in 2019 is available
in the Report on Operations and Activities of the Bank of Italy, which will be
published in May, on the occasion of the presentation of the Annual Report.
Proposal for the allocation of the net profit
Shareholders,
Pursuant to Article 38 of the Statute, acting on a proposal of the
Governing Board and after hearing the opinion of the Board of Auditors,
I present for your approval the Board of Directors' proposal for the allocation
of the net profit. On behalf of the Board of Directors and the Governing
Board, I would like to take this opportunity to thank the new Board of
Auditors for their valuable contribution.
As you may recall, under the dividend policy in force, the amount paid
to the shareholders is kept within a range of €340 million to €380 million,
provided that the net profit is sufficient and without prejudice to the Bank's
capital adequacy. The difference between the upper limit of the range and
the dividend paid to the shareholders may be allocated to the special item
for stabilizing dividends, until this item reaches a maximum amount of
€450 million.
Accordingly, from the net profit of €8,247 million, we propose allocating
€340 million as a dividend to the shareholders, equal to 4.5 per cent of the
capital. Also this year, we propose allocating €40 million to the special item
for stabilizing dividends, which would then amount to €160 million.
Pursuant to the Statute, shares exceeding the 3 per cent threshold are
not entitled to a dividend. Therefore, the dividend actually due to the
shareholders would amount to €251 million. The dividend corresponding
to the shares exceeding the threshold, equal to €89 million, would be
allocated to the ordinary reserve.
As a result, the remaining profit for the State would be equal to
€7,867 million which, in addition to taxes for the year amounting
to €1,009 million, would bring the total amount allocated to the State, to
around €8.9 billion, over €2 billion more than last year.
Designed by
the Printing and Publishing Division
of the Bank of Italy