60. Net fee and commission income 3,721,638,972 3,564,352,262 70. Dividends and similar income 445,281 597,839 80. Profits/(Losses) on trading 5,670,610 2,342,123 90. Fair value adjustments in hedge accounting (1,777,493) 1,897,984 100. Profits/(Losses) on disposal or repurchase of: 378,997,561 623,613,722 a) financial assets measured at amortised cost 1,377,576 b ) financial assets measured at fair value through other comprehensive income 377,619,985 623,613,722 110. Profits/(Losses) on other financial assets/liabilities measured at fair value through profit or loss 9,199,912 a ) financial assets and liabilities designated at fair value - b ) other financial assets mandatorily measured at fair value 9,199,912 120. Net interest and other banking income 5,641,192,628 5,640,599,434 130. Net losses/recoveries due to credit risk on: (21,388,521) (14,583,719)
b) financial assets measured at fair value through other comprehensive income 769,548 140. Profits/(Losses) from contract amendments without termination - 150. Net income from banking activities 5,619,804,107 5,626,015,715 b) other administrative expenses (4,603,752,497) (4,522,368,521)
a) commitment and guarantees given - b ) other net provisions (72,295,107) (182,598,597)
220. Profits/(Losses) on investments - 230. Profits/(Losses) on fair value measurement of property, plant and equipment and intangible assets - 250. Profits/(Losses) on disposal of investments - 260. Income/(Loss) before tax from continuing operations 829,913,039 770,019,838 270. Taxes on income from continuing operations (233,104,453) (185,040,191)
Other components of comprehensive income after taxes not reclassified to profit or loss 20. Equity instruments designated at fair value through other comprehensive income - 30. Financial liabilities designated at fair value through profit or loss (changes in own credit risk) - 40. Hedges of equity instruments designated at fair value through other comprehensive income - 50. Property, plant and equipment - 80. Non-current assets held for sale and discontinued operations - 90.
Other components of comprehensive income after taxes reclassified to profit or loss 100. Hedges of foreign investments - 130.
** The changes in the opening balances are due to the effects of the transition to IFRS 9.
A. Operating activities 1. Cash flow from operations 707,840,222 669,944,592 - profit/(loss) for the year (+/-) 596,808,586 584,979,647 - gains/(losses) on financial assets held for trading and on assets and liabilities measured at fair value through profit or loss (-/+) (9,638,688) 1,095,199 - gains/(losses) on hedging activities (-/+) 1,777,492 (1,897,984)
B. Investing activities - dividends received on investments - - - disposal of property, plant and equipment - - - disposal of intangible assets - - - disposal of business division - 2. Cash flow used for - - - acquisition of property, plant and equipment - - - acquisition of intangible assets - - - acquisition of business division - -
KEYS: (+) from (-) used for * Financing activities for 2018 include dividend payments of €585 million net of the €210 million capital injection from Poste Italiane SpA outside the ring-fence.
Section 2 – Basis of preparation The Separate Report has been prepared in application of the 5th update of Bank of Italy Circular 262 of 22 December 2005 – “Banks’ Financial Statements: Layouts and Preparation”, which came into force on 1 January 2018, and of art. 2447 septies, paragraph 2, of the Italian Civil Code. On 27 May 2014, the Bank of Italy issued specific Supervisory Standards for BancoPosta RFC (Circular 285/2013, Part Four, Section 1) which, in taking into account the entity’s specific organisational and operational aspects, has established prudential requirements that are substantially in line with those applicable to banks. The Standards also govern the requirements regarding capital adequacy and risk containment.
The Separate Report relates to the year ended 31 December 2018, has been prepared in euros and consists of the statement of financial position, the income statement, the statement of comprehensive income, the statement of changes in equity, the statement of cash flows and the explanatory notes. The statement of financial position, income statement and statement of comprehensive income consists of numbered line items and lettered line sub-items. Nil balances have also been presented in the statement of financial position, income statement and statement of comprehensive income for the sake of completeness. The statement of cash flows has been prepared using the indirect method138. All figures in the notes are stated in millions of euros. Notes and account analysis have not been included for nil balances.
The Separate Report forms an integral part of Poste Italiane SpA’s financial statements and has been prepared on a going concern basis in that BancoPosta’s operations are certain to continue in the foreseeable future.
4.1 Intersegment relations Balances relating to transactions between BancoPosta RFC and Poste Italiane SpA (“Intersegment transactions”) are recognised in the statement of financial position at 31 December 2018 as shown below: (€) At 31 December of which intersegment At 31 December of which intersegment
Financial liabilities designated at fair value - - - 50. Adjustments for changes in hedged financial liabilities portfolio (+/-) - - - 70. Liabilities associated with non-current assets held for sale and discontinued operations - - - 100. Provisions for risks and charges: 511 - 543 a ) commitment and guarantees given - - - - b) post-employment benefit - - - - c) other provisions 511 - 543 180. Profit/(Loss) for the year (+/-) 597 - 585 -
B Total liabilities and equity 72,489 489 67,235 510 A-B Net intersegment balances 357 246
The provision of services to BancoPosta RFC by Poste Italiane SpA functions is governed by specific General Guidelines governing the process of contracting out BancoPosta’s corporate functions to Poste Italiane (the “General Guidelines”), the latest version of which was approved by Poste Italiane SpA’s Board of Directors.
In line with 2017, the services are charged for in the form of transfer prices. The transfer prices paid, inclusive of commissions and any other form of remuneration due, are determined on the basis of market prices and tariffs for the same or similar services, identified, where possible, following a benchmarking process. When the specifics and/or the particular nature of a service provided by a Poste Italiane function do not allow the use of a comparable market price, a cost-based method is used, again with the support of benchmarking to ensure that the price charged is adequate for the service provided. In this case, an appropriate mark-up, determined with reference to those used by comparable peers, is applied. The prices set in each Operating Guidelines can be reduced in the presence of operating losses of the activities outsourced or in case of penalties due to the failure to achieve pre-established service levels, as measured by specific performance indicators. The Operating Guidelines for 2017-2018, which were due to expire originally on 31 December 2018, have been amended and updated following organisational changes and the corporate actions carried out in 2018 that entailed a significant impact on BancoPosta RFC in terms of reassessment of the scope of its activities. The new Operating Guidelines took effect on 1 October 2018 and will expire on 31 December 2020. The transfer prices so defined are revised every year in connection with the planning and budget process.
For the purposes of oversight of the unbundled accounts, in 2018 the Board of Statutory Auditors conducted the relevant audit activities during 2 meetings, reporting its conclusions in its annual report to shareholders for the year ended 31 December 2018.
On 9 March 2015, the Authority notified Poste Italiane, in relation to BancoPosta RFC’s operations, of an investigation for alleged violation of articles 20, 21 and 22 of the Consumer Code, regarding the “Libretto Smart” product. On 21 December 2015, the Authority notified Poste Italiane of its final ruling, in which it deemed the Company’s conduct unfair and imposed a 139. BancoPosta RFC’s Regulation, originally approved on 14 April 2011 by the Extraordinary General Meeting of Shareholders of Poste Italiane, was revised by Poste Italiane SpA’s Board of Directors on 28 February 2017 and 28 June 2018. In its meeting of 31 January 2019, the Board of Directors approved the new “General guidelines governing BancoPosta RFC’s outsourcing and contracting out process”, combining the guidelines outlined separately in the “General guidelines governing the process of contracting out BancoPosta’s corporate functions to Poste Italiane” and the “Guidelines governing BancoPosta RFC’s outsourcing process”.
The innovations made to procedural and IT structures, and the further initiatives planned in 2018 to consolidate the Company’s oversight of them, were the subject of specific reporting to the CONSOB, in March.
In July and August, two requests were received from the CONSOB: the first, dated 27 July, was also sent to other intermediaries and regarded an in-depth assessment of the key issues relating to implementation and application of MiFID II; the second, dated 13 August, contained a request for a meeting with the aim of obtaining greater details on the provision of investment services. During this meeting, held at the CONSOB in September 2018, additional information was provided with respect to the information previously made available, and the related implementation plan was presented, in line with the details submitted to the regulator in the Tableau de Bord on Compliance at 30 June 2018, supplemented with further guidance based on evidence emerging during the process. Finally, during the above meeting, the CONSOB requested further details on specific issues, later formalised in writing, to which Poste Italiane gave a full and timely response.
For the content of the new financial reporting standard and the analysis of the qualitative impacts and the choices adopted by the Poste Italiane Group, reference is made to note 3 – Changes in accounting policies - in the section – Poste Italiane’s financial statements – of this Annual Report.
As already indicated, in accordance with paragraph 7.2.15 of IFRS 9 and paragraphs E1 and E2 of IFRS 1, the Group elected not to restate the accounts of prior periods on a basis consistent with the accounts of the annual reporting period that includes the date of initial application of the new standard, without prejudice to the retrospective application of the new measurement and reporting requirements set by IFRS 9. According to the guidelines contained in the 5th update of Circular 262, below a reconciliation is provided between the format of the financial statements used in the Separate annual report for 2017 and that introduced by the new Circular 262 of the Bank of Italy, reclassifying the balances to the new items (amounts calculated in accordance with IAS 39) in accordance with the classification criteria laid down by IFRS 9 and on the basis of the analyses performed, but without the application of the new measurement criteria, thus with the same amounts for total assets and total liabilities and equity.
. C as h an d ca sh e qu iv al en ts
in an ci al a ss et s de si gn at ed a t f ai r v al ue
dj us tm en ts fo r c ha ng es in h ed ge d fin an ci al as se ts p or tfo lio (+
N on -c ur re nt a ss et s he ld fo r s al e an d di sc on tin ue d op er at io ns 0.
in an ci al li ab ili tie s de si gn at ed a t f ai r v al ue
dj us tm en ts fo r c ha ng es in h ed ge d fin an ci al li ab ili tie s po rt fo lio
ia bi lit ie s as so ci at ed w ith n on -c ur re nt as se ts h el d fo r s al e an d di sc on tin ue d op er at io ns 0.
P ro vi si on s fo r r is ks a nd c ha rg es 0.
R ed ee m ab le s ha re s 0.
S ha re p re m iu m re se rv e 0.
70. Liabilities associated with non-current assets held for sale and discontinued operations 90. Employee termination benefits 100. Provisions for risks and charges - - - - - - - - - - - 543 - - - - - - - 543 180. Profit/(Loss) for the year (+/-) - - - - - - - - - - - - - - - - - - 585 585
Below, the reconciliation between the Statement of financial position at 31 December 2017 (IAS 39 amounts), with the reclassifications determined by the transition to IFRS 9, and the Statement of financial position at 1 January 2018 (IFRS 9 amounts) is shown. In these statements the carrying amounts at 31 December 2017 (IAS 39 measurement) are changed, due to the application of the new measurement and impairment methods, to arrive at opening carrying amounts that IFRS 9 compliant.
The reclassification of financial assets to the new items contemplated by IFRS 9, and the resulting different measurement criterion, had a positive effect on Equity at 1 January 2018 in the amount of €1,923 million before tax.
The statement below shows the reconciliation between Equity at 31 December 2017, as published in the Separate report 2017, and Equity at 1 January 2018, following the transition to IFRS 9, with the effects commented above.
Regarding the above effects, on 27 December 2017 the Official Journal of the European Union published Regulation (EU) 2017/2395, amending Regulation 2013/575, i.e. CRR, and introducing, among others, transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds which, in the case of BancoPosta, matters only for the effects deriving from the adjustments due to expected losses. BancoPosta RFC elected, under the applicable Regulation, to adopt a phasein approach for the recognition of such effects over a five-year period, mitigating the impact on CET 1 with the application of decreasing percentages over time.
IFRS 15, which was issued with Regulation (EU) 1905/2016, replaced as of 1 January 2018 IAS 18, IAS 11 and IFRIC 13, introducing a single and innovative frame of reference and changing substantively definitions, criteria and methods to determine and recognise revenue.
The Poste Italiane Group elected to apply IFRS 15 starting from its mandatory effective date of 1 January 2018, without early application.
The review performed revealed the existence of clauses that call for the return of the fees collected for the placement of mutual funds and loans in the presence of early redemptions and repayments (to date recognised as provisions for risks and charges). As of 1 January 2018, such fees are deducted directly from revenue.
The application of IFRS 15 at the transition date did not generate any effect on BancoPosta’s Retained earnings.
Following the receipt of clearance from the Bank of Italy, the Extraordinary General Meeting of Poste Italiane’s shareholders held on 29 May 2018 approved the proposed removal of the restriction on the rights and obligations of BancoPosta RFC relating to assets, contractual rights and authorisations that make up the card payments and payment services business unit from the ring-fence that applies to BancoPosta RFC. The transaction as a whole was effective from 1 October 2018. From the same date, Poste Mobile SpA changed its name to PostePay SpA.
A.2 – Part relating to principal financial statement items The following notes have been numbered in accordance with instructions contained in Bank of Italy Circular 262/2005. Omitted numbers denote information not relevant to the Separate Report.
d) Derecognition Financial assets are derecognised when the contractual rights to the cash flows of those financial assets cease or on the disposal of the financial asset and all risks and rewards relating to the financial asset are substantially transferred.
a) Recognition Financial assets measured at fair value through other comprehensive income are initially recognised on the settlement date at fair value which is generally the price paid. Any changes in fair value occurring between the trade and settlement dates are recognised in the Separate Report.
b) Classification This item includes financial assets held in connection with a business model where financial instruments are held to collect contractual cash flows and for sale (“Hold to Collect and Sell” business model), with the relevant contract calling for the payment, at specified dates, of principal and interest accrued on the principal outstanding (SPPI).
In addition to debt securities that meet the above mentioned characteristics, this item comprises also equity instruments that would otherwise be measured at fair value through profit or loss, for which the election was made to report any subsequent changes in fair value through other comprehensive income (FVTOCI option).
Expected credit losses are calculated in relation to these financial assets, as illustrated in the specific section. These expected losses are recognised in the income statement in “Item 130 – Net losses/recoveries due to credit risk” with a contra entry in “Item 110 – Valuation reserves”.
Equity instruments which the Company elected to classify in this item are measured at fair value and any changes in such fair value are recognised in line “Item 110 – Valuation reserves” without subsequent recycling to profit or loss, not even in case of sale. The only component that is reported in the income statement is the related dividends.
a) Recognition Financial assets measured at amortised cost are initially recognised on (i) the settlement date for debt securities and investments and (ii) the date on which the service is rendered for trade receivables. They are initially recognised at fair value which is generally the price paid for debt securities or at the contractual value of the service rendered for all the other receivables. Changes in fair value between the trade date and the settlement date are recognised in the Separate report.
c) Measurement and recognition of gains and losses These assets are measured at amortised cost, that is the value assigned to the financial asset or liability on initial recognition, net of any principal reimbursement, plus or minus the cumulative amortisation by using the effective interest rate method on the difference between the initial value and the value at maturity, after deducting any impairment. Any gains or losses are recognised in profit or loss in “Item 10 - Interest and similar income”. The carrying amount of financial assets measured at amortised cost is adjusted to take into account expected credit losses, as illustrated in the specific section. These expected credit losses are recognised in the income statement in “Item 130 – Net losses/recoveries due to credit risk”.
a) Recognition and classification Derivative hedges are initially recognised on conclusion of the relevant contract. There are two types of hedge: �� Fair value hedge: A hedge of the exposure to a change in fair value of a recognised asset or liability or of an unrecognised firm commitment attributable to a particular risk, and that could have an impact on profit or loss.
b) Measurement and recognition of gains and losses Derivatives are initially recognised at fair value on the date the derivative contract is executed. If derivative financial instruments qualify for hedge accounting, gains and losses arising from changes in fair value after initial recognition are accounted for in accordance with the specific policies described below. The relationship between each hedging instrument and the hedged item is documented, as well as the risk management objective, the strategy for undertaking the hedge transaction and the methods used to assess effectiveness. Assessment of whether the hedging derivative is effective takes place both at inception of the hedge and throughout the term of the hedge.
If the hedging transaction is not fully effective, the gain or loss arising from a change in fair value relating to the ineffective portion is recognised in “Item 90 - Fair value adjustments in hedge accounting”. If, during the life of the derivative, the forecast hedged transaction is no longer expected to occur, the related gains and losses accumulated in the cash flow hedge reserve are immediately reclassified in “Item 80 – Profits/(Losses) on trading” for the relevant year. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the related gains and losses accumulated in the cash flow hedge reserve at that time remain in equity and are recognised in profit or loss at the same time as the original underlying.
10 – Provisions for risks and charges Provisions for risks and charges are recorded to cover losses that are either probable or certain to be incurred, for which, however, there is an uncertainty as to the amount or as to the date on which they will occur. Provisions for risks and charges are made when the entity has a present (legal or constructive) obligation as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation. Provisions are measured on the basis of management’s best estimate of the use of resources required to settle the obligation. The value of the liability is discounted at a rate that reflects current market values and takes into account the risks specific to the liability. Under the option granted by the relevant accounting standards, limited disclosure is provided when, in rare cases, disclosure of some or all of the information regarding the risks in question could seriously prejudice BancoPosta RFC’s position in a dispute or in ongoing negotiations with third parties.
Due to banks and customers are measured at amortised cost, employing the effective interest rate method. If there is a change in expected cash flows and they can be reliably estimated, the value of borrowings is recalculated to reflect the change in estimated future cash flows and the internal rate of return initially applied.
Financial liabilities held for trading consist of derivatives which do not qualify for classification as hedging instruments in accordance with accounting standards, or originally obtained as a hedge which was subsequently discontinued, and financial instruments designated irrevocably at fair value, under the fair value option. Financial liabilities held for trading are recognised on the derivative contract date.
Financial liabilities held for trading are derecognised on the cessation of rights to the cash flows associated with the liability or when BancoPosta RFC has substantially transferred all the related risks and charges.
Gains and losses arising from movements in the fair value of financial liabilities held for trading are recognised through profit or loss in “Item 80– Profits/(Losses) on trading” while movements in fair value due to changes in credit risk are recognised through other comprehensive income in “Item 30 – Financial liabilities designated at fair value through profit or loss (changes in own credit risk)”.
Foreign currency transactions are initially recognised in the functional currency by translating the foreign currency amount at the transaction date spot rate.
In accordance with IFRS 15, revenue is recognised on the basis of a 5-step framework, which consists of the following: 1. Identification of the contract with the customer (sale contracts except leases, insurance contracts, financial instruments and non-monetary exchanges); 2. Identification of the performance obligations in the contract, such as the express or implied obligation to transfer a specific good or service to the customer; 3. Determination of the transaction price; 4. In case of multiple offers (“bundles”) that give rise to different performance obligations, allocation of the transaction price to the performance obligations; in this case it is necessary to estimate the standalone selling price related to each performance obligation; 5. Recognition of revenue as and when the performance obligations are satisfied, i.e. when title to the good or service passes to the customer. Performance obligations may be satisfied either: – “at point in time”: In this case revenue is recognised only when total “control” over the good or the service exchanged passes to the customer. In this respect, account is taken not only of the significant exposure to the risks and rewards associated with the god or service but also physical possession, customer acceptance, existence of legal rights, etc.; – “over time”: In this case revenue measurement and recognition reflect, virtually, progress of the customer’s level of satisfaction. An appropriate approach is defined to measure progress of the performance obligation (the output method).
Loans and debt securities classified under “Financial assets measured at amortised cost” and “Financial assets measured at fair value through other comprehensive income” are tested for impairment in accordance with the logics of IFRS 9. The Poste Italiane Group applies the General Deterioration Approach on the basis of varying risk estimate parameters, depending on the counterparty. Specifically: �� if at the reporting date the credit risk related to a financial instrument has not increased significantly since initial recognition, the expected credit loss is recognised over a 12-month time horizon (stage 1); �� if at the reporting date the credit risk related to a financial instrument has increased significantly since initial recognition, the expected credit loss is recognised over the lifetime of the instrument (stage 2); �� if the financial instrument is impaired since initial recognition, or shows objective evidence of impairment at the reporting date, impairment will continue to be recognised over the lifetime of the financial instrument (stage 3).
In determining whether there has been a significant increase in credit risk, it is necessary to compare the default risk of the issuer of the financial instrument at the reporting date with the default risk of the financial instrument at initial recognition.
However, there is the rebuttable presumption that default takes place if the financial asset is at least 90 days past due, unless there is reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate.
Defined benefit plans include employee termination benefits payable to employees in accordance with article 2120 of the Italian Civil Code. Benefits vesting up to 31 December 2006141, which are covered by the reform of supplementary pension provision, must, from 1 January 2007, be paid into a supplementary pension fund or into a Treasury Fund set up by INPS. Accordingly, BancoPosta RFC’s defined benefit liability is applicable only to the provisions made up to 31 December 2006.
141. Where, following entry into effect of the new legislation, the employee has not exercised any option regarding the investment of vested employee termination benefits, BancoPosta RFC has remained liable to pay the benefits until 30 June 2007, or until the date, between 1 January 2007 and 30 June 2007, on which the employee exercised a specific option. Where no option was exercised, from 1 July 2007 vested employee termination benefits have been paid into a supplementary pension fund.
Other long-term employment benefits consist of benefits not payable within twelve months of the end of the reporting period during which the employees provided their services. Typically, the calculation of other long-term employment benefits does not have the same degree of uncertainty as that of post-employment benefits and, as such, IAS 19 outlines certain simplifications in the accounting methods: the net change in the value of the liability during the reporting period is recognised in full in profit or loss. Measurement of the other long-term employee benefits liability is recognised in the financial statements on the basis of calculations performed by independent actuaries.
Use of estimates Preparation of the Separate Report requires the application of accounting standards and methods that are at times based on complex subjective judgments and estimates based on historical experience, and assumptions that are considered reasonable and realistic under the circumstances. Use of such estimates and assumptions affects the amounts reported in the financial statements, with reference to the statement of financial position, the income statement, the statement of comprehensive income, the statement of cash flows and the notes. The actual amounts of items for which the above estimates and assumptions have been applied may differ from those reported in previous financial statements, due to uncertainties regarding the assumptions themselves and the conditions on which estimates are based. Estimates and assumptions are periodically reviewed and the impact of any changes is reflected in the financial statements for the period in which the estimate is revised if the revision only influences the current period, or also in future periods if the revision influences both current and future periods.
To calculate impairment, the main factors to be estimated are as follows: �� the parameters of significant increases in credit risk (SICR); �� Probability of Default (“PD”) and rating by Sovereign and Banking counterparty through an internal model (internal evaluations are made for certain marginal Corporate counterparties).
One of the main factors in revenue recognition are the components of variable consideration, including in particular penalties (other than damages). The components of variable consideration are identified at contract inception and are estimated at the end of every reporting period throughout the term of the contract, to take into account new circumstances and changes in the circumstances considered for the preceding measurements. Components of variable consideration include, among others, refund liabilities.
A.4.1 Fair value levels 2 and 3: valuation techniques and inputs BancoPosta RFC had adopted the Poste Italiane Group’s fair value policy. This policy sets out the general principles and rules to be applied in determining fair value for the purposes of preparing the financial statements, conducting risk management assessments and supporting the market transactions carried out by the Finance departments of the various Group entities. The general principles to be applied in measuring the fair value of financial instruments have not changed with respect to 31 December 2017 and have been defined in compliance with indications from the various (banking and insurance) regulators and the relevant accounting standards, ensuring consistent application of the valuation techniques adopted at Group level. The methods used have been revised, where necessary, to take into account developments in operational procedures and in market practices during the year.
Level 2: this level is comprised of fair values based on inputs other than Level 1 quoted market prices that are either directly or indirectly observable for the asset or liability. Given the nature of BancoPosta RFC’s operations, the observable data used as input to determine the fair value of the various instruments include yield curves and projected inflation rates, exchange rates provided by the European Central Bank, ranges of rate volatility, inflation option premia, asset swap spreads or credit default spreads which represent the creditworthiness of specific counterparties and any liquidity adjustments quoted by primary market counterparties.
�� Fixed income bonds which are measured with the discounted cash flow method, that is by calculating the present value of all future contractual cash flows. The credit spread for the counterparty is incorporated by using yield curves constructed on the basis of the bond prices specific to the issuer.
�� Derivative financial instruments: – Plain vanilla interest rate swaps: valuation is based on discounted cash flow techniques, involving the computation of the present value of future differentials between the receiver and payer legs of the swap. The construction of yield curves to estimate future cash flows indexed to market parameters (money market rates and/or inflation) and computation of the present value of future differentials are carried out using techniques commonly used in capital markets.
A.4.3 Fair value hierarchy There were no occurrences during the year resulting in a requirement to transfer financial assets and liabilities measured at fair value on a recurring basis between the various levels of the fair value hierarchy.
Level 1 Level 2 Level 3* Level 1 Level 2 Level 3*
1. Financial assets measured at fair value through profit or loss - 13 45 - - a ) financial assets held for trading - - - - - b ) financial assets designated at fair value - - - - - c ) other financial assets mandatorily measured at fair value - 13 45 - - 2. Financial assets measured at fair value through other comprehensive income 31,780 260 - 36,244 2,859 37 1. Financial liabilities held for trading - - - - - 2.
Financial liabilities measured at fair value - - - - - - * Notes on this position are provided in Part B, Assets, Table 2.5.
The derivatives held in BancoPosta RFC’s portfolio may be pledged as collateral and the fair value, consequently, need not be adjusted for the counterparty’s credit risk (Part A, Section A.4.1).
Total of which: a) financial assets held for trading of which: b) financial assets designated at fair value of which: c) other financial assets mandatorily measured at fair value
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1. Financial assets measured at amortised cost 33,743 16,780 4,660 10,620 22,014 14,384 - 9,102 2. Property, plant and equipment held for investment purposes 3. Non-current assets held for sale and discontinued operations 1. Financial liabilities measured at amortised cost 64,203 - 8,488 55,729 59,636 - 4,853 54,794 2. Liabilities associated with non-current assets held for sale and discontinued operations
Section 2 – Financial assets measured at fair value through profit or loss – Item 20 2.1 Financial assets held for trading: analysis BancoPosta RFC had no financial instruments in the trading book either at 31 December 2018 or 31 December 2017.
BancoPosta RFC entered into transactions to acquire and immediately dispose of debt securities and equities on behalf of certain customers.
Equity instruments comprise: �� €45 million, reflecting the fair value of 32,059 Visa Incorporated preference shares (Series C Convertible Participating Preferred Stock) received for the sale of the Visa Europe Ltd. share to Visa Incorporated on 21 June 2016 convertible at the rate of 13,886142 ordinary shares for each C share, minus a suitable illiquidity discount, considering the staggered conversion between the fourth and the twelfth year after the closing; �� €5 million, reflecting the fair value of 11,144 class C shares of Visa Incorporated. These shares are not traded on an organised exchange, but are immediately convertible into Class A shares (at the rate of four ordinary shares for each C share), which are listed on the New York Stock Exchange, if disposal is desired.
The item “Loans/Other” reflects the receivable arisen from the sale of the Visa Europe Ltd share to Visa Incorporated (payable after three years from the transaction date, 21 June 2016). As it did not meet the SPPI test, this receivable has been measured at fair value through profit or loss.
2.6 Other financial assets mandatorily measured at fair value: composition by borrower/issuer
3.2 Financial assets measured at fair value through other comprehensive income: composition by borrower/issuer
4.1 Financial assets measured at amortised cost: breakdown of due from banks
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1.1 Current accounts and demand deposits
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1.2 Reverse repurchase agreements 1.4 Credit cards, personal and salary loans
“Other transactions” primarily consist of: �� €5,971 million, €41 being accrued interest, in public customers’ current account deposits deposited with the MEF, which earn a variable rate of return, calculated on a basket of government securities and money market indexes146. Following the introduction of IFRS 9, the deposits have been adjusted to reflect accumulated impairments of approximately €3 million, to reflect the risk of counterparty default (unchanged compared to 1 January 2018).
�� €1,306 million, €1 million of which being accrued net interest, in deposits at the MEF (the “Buffer account”), remunerated at the EONIA rate147; �� €440 million in fees receivable from Cassa depositi e prestiti during the year in connection with postal savings; �� €303 million in guarantee deposits provided to counterparties for interest rate swaps in the amount of €58 million (with collateral provided by specific Credit Support Annexes) entered into for cash flow and fair value hedging purposes by BancoPosta RFC, repurchase agreement with a Central Counterparty for €111 million and for collateral deposited with the Central Counterparty, in relation to the clearing system, in the amount of €134 million (i.e. the Default Fund)148; �� €68 million in amounts due for the payment of pensions and vouchers on behalf of INPS (the National Institute of Social Security). In February 2019, following a joint review, Poste Italiane and INPS entered into an agreement whereby the respective credit positions were settled (Part B Section 10); �� €844 million in amounts receivable from Poste Italiane SpA’s functions outside the ring-fence, €842 million of which relates to Poste Italiane SpA’s Finance function’s intersegment financial account, used for the processing of payments to and from third parties.
146. The rate in question is calculated as follows: 50% is based on the return on 6-month BOTs, with the remaining 50% based on the monthly average Rendistato index. The latter represents the average yield on government securities with maturities greater than one year, which approximates the return on 7-year BTPs.
147. The rate applied in overnight lending and calculated as the weighted average of overnight rates for transactions on the interbank market reported to the ECB by a panel of banks operating in the euro zone (the biggest banks in all the euro zone countries).
“Other debt securities” include Italian fixed income government bonds and securities guaranteed by the Italian State for €20,935 million. Their carrying amount of €22,872 million reflects the amortised cost of unhedged fixed income bonds, totalling €10,309 million, the amortised cost of fair value hedged fixed income bonds, totalling €11,570 million, increased by €993 million to take into account the effects of the hedge. Following the introduction of IFRS 9, fixed income instruments recognised at amortised cost are adjusted to take into account the related impairments. Accumulated impairments at 31 December 2018 amount to approximately €9 million (€7 million at 31 December 2017).
Section 5 – Hedging derivatives – Item 50 5.1 Hedging derivatives by type of hedge and fair value level
Fair value at 31 December 2018 Notional* amount at 31 December
Deferred tax assets and liabilities are analysed below: 10.1 Deferred tax assets: analysis
Deferred tax liabilities through equity 246 48 12 2 258 50 10.3 Movements in deferred tax assets through profit or loss (€m) Balance at 31 December 2018 Balance at 31 December 2017 2.1 Deferred tax assets recognised in the year 12 26 a) relating to previous years - b ) due to changes in accounting policies 1 2. 2 New taxes or tax rate increases - 3. Decreases (15) - 3.1 Deferred tax assets derecognised in the year (15) b ) write-downs of non-recoverable items - c ) due to changes in accounting policies - 3. 2 Reduction of tax rate - a ) transformation into tax credit pursuant to Law 214/2011 - -
Transaction type/Amounts (€m) Balance at 31 December 2018 Balance at 31 December 2017
Current account cheques being settled, drawn on other banks 22 130
“Items in process, other” includes: �� amounts to be charged to PostePay SpA for €174 million (mainly in the first few days of 2019); �� uses of debit cards issued by BancoPosta to be debited to customer accounts, totalling €131 million; �� amounts due from the commercial partners for providing PostePay top-ups for €110 million; �� €86 million in withdrawals from BancoPosta ATMs yet to be debited to customer accounts or awaiting settlement; �� customer postal cheques of €13 million in collection from banks; �� account maintenance and custody fees of €7 million to be debited to customers.
SpA outside the ring-fence payments on account for the current year 156 39 195 158 39 197
Amount recognised in profit or loss (197) (37) (234) (170) (40) (210)
changes in current taxation for previous years - - - 13 - 13 of which: Current tax assets due from Poste Italiane outside the ring-fence (Item 120 Assets)
* Primarily due to amounts receivable following the payment of withholding tax on fees received.
149. Introduced by article 19 of Law Decree 201/2011 converted with amendments by Law 214/2011 in the manner provided for by the MEF Decree of 24 May 2012: Manner of implementing paragraphs 1 to 3 of article 19 of Decree Law 201 of 6 December 2011 having regard to stamp duty on current accounts and financial products (Official Gazette 127 of 1 June 2012).
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1. Due to Central Banks - x x x - x x x 2.1 Current accounts and demand deposits 589 x x x 1,023 x x x 2.4 Obligations to repurchase equity instruments - x x x - x x x
“Current accounts and demand deposits” include €4,271 million in postal current accounts held by PostePay SpA, €526 million in postal current accounts held by PosteVita SpA and €65 million in current accounts held by Poste Italiane outside the ring-fence.
At 31 December 2018 “Loans, repurchase agreements” amount to €3,150 million, reflecting transactions entered into with Central Counterparty in relation to securities with a nominal amount of €3,089 million. These regard €2,036 million in Long Term Repos and €1,114 million in borrowings, with the resulting proceeds invested in Italian fixed income government securities and utilised as funding for incremental deposits used as collateral.
“Other payables” primarily consist of domestic postal orders, amounting to €615 million, postal money orders for €161 million. Compared to 31 December 2017, the change in this sub-item was due mainly to the transfer to PostePay of all the payment cards outstanding as of 1 October 2018.
1.3 Financial liabilities measured at amortised cost: composition of securities in issue
Section 2 – Financial liabilities held for trading – Item 20 BancoPosta RFC held no financial instruments in the trading book at either 31 December 2018 or 31 December 2017.
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 * The settlement price for derivatives involving the exchange of principal (securities or other assets) has been indicated, as required by Bank of Italy Circular 262/2005.
Credit Commodities Other 1. Financial assets measured at fair value through other comprehensive income 2. Financial assets measured at amortised cost 2. Portfolio of financial assets and financial liabilities
Section 7 – Liabilities associated with non-current assets held for sale and discontinued operations – Item 70 There are no such liabilities at the reporting date.
Items in process: 728 637 - amounts to be credited to Postal Savings Books 204 243 - items in transit between local branches 5 5
In addition to services rendered, the amounts payable to Poste Italiane SpA outside the ring-fence relate to: (i) taxes payable (for which reference is made to Part B, Section 12); (ii) the sum due to PostePay SpA representing the difference between the carrying amounts of the assets and liabilities of the card payments and payment services unit transferred to this company on 1 October 2018, which will be paid in the early months of 2019.
“Liabilities arising from contracts”, pursuant to IFRS 15, are mainly due to the placement of loan products, as shown in the following table: Item (€m)
Section 9 – Employee termination benefits – Item 90 Movements in employee termination benefits during the year under review are shown below: 9.1 Employee termination benefits: movements during the year
At 31 December 2018 At 30 June 2018 At 31 December 2017
Advance rate 1.25% for lengths of service of at least 8 years
Employee termination benefits at 31 December 2018 Employee termination benefits at 31 December 2017
Transaction type/Amounts (€m) Balance at 31 December 2018 Balance at 31 December 2017 1. Provisions for credit risk relating to financial commitments and guarantees given - 2. Provisions for other commitments and guarantees given - 3. Provisions for retirement benefits - -
(€m) Provisions for other commitments and guarantees given Provisions for retirement benefits Other provisions Total
B.2 Increases due to passage of time - - - -
10.3 Provisions for credit risk related to commitments and financial guarantees provided
In the year under review, provisions in the amount of €96 million were made, due mainly to risks linked to errors deriving from the distribution of postal saving products, compensation and adjustments to income for previous years and the adjustment of liabilities for risks linked to claims by customers in relation to investment products whose performance is not in line with expectations. Regarding this last aspect, in 2018 the liquidation of the property funds placed in past years continued and was constantly monitored. Regarding the Europa Immobiliare I fund (which expired on 31 December 2017), on 24 September 2018, following the resolutions adopted by the Board of Directors of Poste Italiane on 19 February and 28 June 2018, the voluntary customer protection initiative was started for the benefit of customers that had invested in the fun. The initiative ended on 7 December 2018.
Provisions for expired and statute barred Postal Certificates, amounting to €14 million at 31 December 2017, have been made to cover the cost of redeeming certificates relating to specific issues, even after the certificates have become invalid150, were released to the income statement in 2018, as the terms of the Company’s obligations expired.
12.4 Revenue reserves: other information At 31 December 2018, undistributed earnings total €1,057 million. Other revenue reserves amount to €1,210 million, including the initial reserve of €1000 million provided to BancoPosta RFC on its creation and €210 million in additional capital contributions by Poste Italiane SpA.
Service (€m) Amount 1. Execution of orders on behalf of customers 2. Individual portfolio management 3. Custody and administration of securities 54,257 a) third party securities in custody: related to depository bank operations (excluding portfolio management) 1. securities issued by the reporting bank b ) third party securities in custody (excluding portfolio management): other 3,093 1. securities issued by the reporting bank c ) third-party securities deposited with third parties 3,093 d) own securities deposited with third parties 51,164 a) Postal Savings Books 105,755 b) Interest-bearing Postal Certificates 133,353
6. Financial assets offset in the financial statements or subject to framework master netting agreements or similar arrangements
7. Financial liabilities offset in the financial statements or subject to master netting agreements or similar arrangements
The above tables have been compiled in accordance with IFRS 7 – Financial Instruments: Disclosure, which requires a specific disclosure regardless of whether or not the financial instruments have been offset in the financial statements.
The sub-item “Financial liabilities” reflects mainly interest income accruing during the year on reverse repos.
For the year ended 31 December 2017 c) Management, brokerage and advisory services: 2,617 2,309 4. Securities custody and administration 4 5 7. Order receipt and transmission 3 3 8.2 Relating to financial structuring - 9. Arrangement of third-party services: 2,557 2,258 d) Collection and payment services 994 1,069 h) Multilateral trading services - i ) Current account maintenance and management 239 240
“Management, brokerage and advisory services” include, within the context of the distribution of other products, fees receivable in return for the collection of postal savings deposits, totalling €1,827 million. This service relates to the provision and redemption of Interest-bearing Postal Certificates and payments into and withdrawals from Postal Savings Books, carried out on behalf of Cassa depositi e prestiti under the Agreement of 14 December 2017, for the three-year period 2018-2020. In addition, the increase in fees for the services in question, €47 million is attributable to the placement of PostePay SpA products begun as of 1 October 2018. Reference is made to Part H for a description of dealings between BancoPosta RFC and PostePay SpA.
Revenue from contracts with customers relate mainly to: (i) revenue from management, brokerage and advisory services these are recognised over time and measured on the basis of the volumes placed, quantified on the basis of commercial agreements with financial institutions. In terms of payment for the collection of postal savings, the agreement entered into with Cassa depositi e prestiti envisages payment of a variable consideration on achieving certain levels of inflows, determined annually on the basis of the volume of inflows and expected redemptions; certain commercial agreements, entered into with leading financial partners for the placement of financial products, envisage the return of placement fees in the event of early termination or surrender by the customer; (ii) revenue from current account maintenance and management: these are recognised over time, measured on the basis of the service rendered and quantified on the basis of the contract terms and conditions offered to the customer; (iii) revenue from fees on collection and payment services: these are recognised at a point in time given the number of transactions handled by post offices (e.g. fees on postal current account payments slips) and quantified on the basis of the terms and conditions in the contract of sale. These services include, for the first nine months, revenue from card payments and payment services, relating mainly to the issue of Postepay cards (recognised at a point in time, upon issue) and the related services (recognised over time on the basis of use by the customer). Other revenue recognised over time refers mainly to delegated services and debit cards.
For the year ended 31 December 2017 3. Third-party products and services 2,557 2,258
For the year ended 31 December 2017 c) Management and brokerage services: (2) (2)
1. Financial assets held for trading - 4 - - 4 2. Financial liabilities held for trading - - - - 3. Financial assets and liabilities: foreign exchange differences x x x x - - on debt securities and interest rates - 3 - (1) 2 - on equity instruments and share indices - - - - - - on foreign exchange and gold x x x x of which: natural hedges linked to the fair value option x x x x -
C. Net hedging income (A – B) (2) 2 of which: result of hedging net positions - -
8.1 Net losses/recoveries due to credit risk related to financial assets measured at amortised cost: analysis
Write-off Other of which: acquired or originated impaired financial assets - - - - - - of which: acquired or originated impaired financial assets - - - - - - 8. 2 Net losses/recoveries due to credit risk related to financial assets measured at fair value through other comprehensive income: analysis
Section 10 – Administrative expenses – Item 160 10.1 Personnel expenses: analysis
The main provisions and releases are discussed in Part B – Liabilities and Equity, Section 10.
For the year ended 31 December 2017 1. Burglaries and theft (5) (5)
Section 15 – Profits/(Losses) on investments – Item 220 Not applicable.
Section 16 – Profits/(Losses) on fair value measurement of property, plant and equipment and intangible assets – Item 230 Not applicable.
For the year ended 31 December 2017 2. Increase/(decrease) in current taxes of prior period taxation (+/-) - 13 3. Reduction in current taxes (+) - 3.
Hedges of equity instruments designated at fair value through other comprehensive income: - a ) movements in fair value (hedged instrument) - b ) movements in fair value (hedging instrument) - 50.
Property, plant and equipment - 80. Non-current assets held for sale and discontinued operations - 90. Share of valuation reserve attributable to equity-accounted investments - 100. Tax expense on other comprehensive income not reclassified to profit or loss - -
of which: result from net positions - 140. Hedges (elements not designated): - a ) movements in fair value - b ) reclassified to profit or loss - 150.
Tax expense on other comprehensive income reclassified to profit or loss 589 282 190. Total other comprehensive income (1,473) (755)
BancoPosta RFC Separate Report for the year ended 31 December 2018 Notes – Part D – Comprehensive income
151. Amendment of art. 1, paragraph 1097 of Law 296 of 27 December 2006, introduced by art. 1, paragraph 285 of the 2015 Stability Law (Law 190 of 23 December 2014).
Following the positive performance of current account deposits in 2018, from March onwards, the process of monitoring the risk profile indicated that there had been a decline in the leverage ratio to below the threshold set in the Risk Appetite Framework (RAF). The €210 million capital injection by Poste Italiane on 27 September 2018, in accordance with the Board of Directors’ resolution of 25 January 2018 approving the recapitalisation of BancoPosta, contributed to the improvement of the leverage ratio which, at 31 December 2018, stands at approximately 3.2% (3% regulatory minimum). The relevant functions will continue to keep a close eye on the leverage ratio throughout 2019 to ensure, over time, that it continues to meet the related targets, thresholds and limits established in the RAF.
Financial Risk Management Balanced financial management and monitoring of the main risk/return profiles are carried out and ensured by dedicated organisational structures, both within and without the BancoPosta ring-fence, that operate separately and independently. In addition, specific processes are in place governing the assumption and management of and control over financial risks, including through the progressive implementation of adequate IT tools. In this regard, on 19 February 2018, Poste Italiane SpA’s Board of Directors adopted a revised version of the Guidelines for Internal Control and Risk Management System (SCIGR), which contains integrated guidelines for Poste Italiane SpA’s Internal Control and Risk Management System. From an organisational viewpoint, the model consists of: �� the Audit, Risk and Sustainability Committee established in 2015 to support – thanks an adequate research, recommendation and advisory activity - the assessments and decisions of the Board of Directors on the internal control system, risk management and, starting from February 2018, issues pertaining to Poste Italiane’s sustainability; Annual Report Poste Italiane Group 2018
The RAF consists of a framework that defines, in keeping with the maximum acceptable risk, the business model and strategic plan, the risk appetite, risk tolerance thresholds, risk limits and risk management policies, together with the processes needed to define and implement them.
Concentration risk is related to the overexposure to counterparties, groups of related counterparties and counterparties in the same business segment or that engage in the same business or operate in the same geographic region.
Monitoring credit risk is particularly focused on the following exposures: �� euro area government securities (or those guaranteed by the government) in which private customer account deposits are invested; �� deposits at the MEF in which Public Administration account deposits are invested; �� any eventual amounts due from the Italian Treasury as a result of depositing funds gathered less payables for advances disbursed; �� items in process: cheque clearing, use of electronic cards, collections; �� temporarily overdrawn post office current accounts caused by debiting fees: limited to those which were not classified as impaired since the accounts were in funds in the early days of 2019; �� cash collateral for outstanding transactions with banks and customers, in accordance with agreements intended to mitigate counterparty risk (CSA - Credit Support Annexes and GMRA – Global Master Repurchase Agreements); �� cash collateral provided to the guarantee fund of the Central Counterparty “Cassa di Compensazione e Garanzia” for repurchase agreement transactions; �� securities provided as collateral in accordance with agreements intended to mitigate counterparty risk (CSAs and GMRAs); �� trade receivables payable for financial/insurance product arrangement.
Credit risk is controlled through the following: �� minimum rating requirements for issuers/counterparties, based on the type of instrument; �� concentration limits per issuer/counterparty; �� monitoring of changes in the ratings of counterparties.
152. On 18 October 2018, Poste Italiane SpA’s Board of Directors approved new “Guidelines for financial transactions” for Poste Italiane SpA, upon proposal of the CEO and with the prior consent of the Audit, Risk and Sustainability Committee.
154. The standardized approach entails risk weightings in accordance with the nature of the exposure and the identity of the counterparty and the counterparty’s external credit rating.
The new Expected Credit Loss (ECL) method introduced by IFRS 9 applies to financial assets measured at amortised cost and to financial assets measured at fair value through other comprehensive income.
For financial assets other than trade receivables, BancoPosta RFC applies the General deterioration approach, with models to estimate risk parameters depending on the type of counterparty: �� Internal risk parameter estimation models for debt securities and deposits with sovereign and banking counterparties (and certain marginal corporates); �� Risk parameters furnished by an external provider and average sector default rates for the other financial instruments with corporate and government counterparties.
158. The judgmental factor can summarise significant aspects in determining the significant increase of credit risk, considering such elements as: • an actual or expected significant change of the internal/external credit rating of the financial instrument; • actual or expected negative changes in economic, financial or business conditions that might cause a significant change in the borrower’s ability to honour its obligations, such as an actual or expected increase in interest rates or an actual or expected significant increase in the unemployment rate. 159. In particular, the use of such approach is limited to situations where, actually, the available data are deemed to be no longer representative of the counterparty’s risk.
For trade receivables BancoPosta RFC applies the simplified approach, where no significant increase in credit risk is expected. However, the loss provisions are calculated for an amount equal to lifetime expected credit loss.
Such approach is implemented through the following process: �� based on total revenue or the historical credit exposure, a credit threshold is identified beyond which the single receivables or the single exposure is evaluated. The analytical evaluation of the exposures entails an analysis of the borrower’s credit quality and solvency, as determined on the basis of internal and external supporting evidence; �� for receivables falling below the threshold set, through the preparation of a matrix with the different impairment percentages determined on the basis of historical losses, or on the historical pattern of collections. In constructing the impairment matrix, receivables are grouped by homogeneous categories, based on their characteristics, to take into account the historical loss experience.
Debt instruments secured by guarantees or other credit risk mitigation instruments are bonds issued by CDP SpA guaranteed by the Italian State and subscribed by BancoPosta RFC, amounting to a nominal value of €4,500 million. These are recognised as financial assets measured at amortised cost and, in determining the associated expected credit losses, account was taken of the PD of the Italian Republic.
The calculation of positions in derivatives and repurchase agreements and the related risk mitigation instruments are illustrated in Part B – Other Information, tables 6 and 7, to which reference is made.
To mitigate the risks arising from the extension of payment terms to its customers, BancoPosta RFC has implemented a policy and suitable guidelines that govern the management of trade receivables, the terms and conditions of payment applicable to customers and defines the corporate process aimed at checking the customer’s creditworthiness, as well as the sustainability of the business risk inherent in the contract involving extended payment terms.
3. Non-performing exposure BancoPosta RFC holds a single non-performing financial asset relating to misappropriated items which are currently being recovered. The relevant amount of €13 million has been written off.
A.1.4 Financial assets, commitments to disburse funds and provide guarantees: changes in total value adjustments and total loss provisions
A.1.5 Financial assets, commitments to disburse funds and provide guarantees: transfers between the different credit risk stages (gross and nominal amounts)
“Off-balance sheet exposures, Performing” relates to the counterparty risk associated with derivatives registering fair value gains, securities provided as collateral under counterparty risk mitigation agreements and for Repo financing with Securities Financing Transactions (SFT)160 margins.
Non-performing past-due - of which: exposures sold but not derecognised - - -
A.1.9bis On-balance sheet credit exposures to customers: changes in gross forborne exposures by credit quality
A.1.10 On-balance sheet non-performing credit exposures to banks: changes in total value adjustments
A.1.8bis On-balance sheet credit exposures to banks: changes in gross forborne exposures by credit quality
A.1.11 On-balance sheet non-performing credit exposures to customers: changes in total value adjustments
B.5 Contract amendments without termination - X - X - X
C.5 Transfers to other categories of non-performing exposure - - - - - -
C.6 Contract amendments without termination - X - X - X
- of which: exposures sold but not derecognised - - - - - -
Class 1 Class 2 Class 3 Class 4 Class 5 Class 6
A. Financial assets measured at amortised cost 172 736 32,130 - 15 - 881 33,934
B. Financial assets measured at fair value through other comprehensive income - - 32,053 - - - - 32,053 of which: acquired or originated impaired financial assets - - - - - - - -
C. Commitments to disburse funds and financial guarantees given - - - - - - - -
Financial assets allocated to stage 1 in the “Without rating” category refer mainly to the exposure to the Central Counterparty, “Cassa di Compensazione e Garanzia”.
Off-balance-sheet credit exposures refer to derivatives are shown after the effects of netting agreements, regardless of whether they have been offset in the financial statements pursuant to IAS 32, paragraph 42.
B.1 Distribution of on and off-balance sheet credit exposures to customers by economic sector
B.3 Distribution of on and off-balance sheet credit exposures to banks by geographic area
In compliance with the supervisory standards in force, the table for “Large exposures” shows information on exposures to customers or groups of connected customers that exceed 10% of total own funds. The exposures are determined with reference to total on-balance sheet risk assets and off-balance sheet transactions, without applying any risk weightings. Based on these criteria, the table includes entities that, despite having a risk weighting of 0%, represent an unweighted exposure in excess of 10% of own funds. Exposures to the Italian state shown in the table represent approximately 84% of the total carrying amount. The remaining exposures regard primary counterparties represented by European banks and other central counterparties in Italy. However, in view of the fact that it cannot lend to the public, the Bank of Italy has exempted BancoPosta RFC from application of the requirements regarding limits on large exposures. No further exemptions from the remaining obligations have been granted.
Qualitative information In the case of BancoPosta RFC, this category only regards Italian government securities provided as collateral for repurchase agreements. BancoPosta uses these transactions to access the interbank market to raise funds, with the aim of funding the purchase of government securities and the deposits necessary for margin lending.
E.1 Financial assets sold recognised for their full amount and associated financial liabilities: carrying amounts
D. Financial assets measured at fair value through other comprehensive income 5,179 - 5,179 - 5,195 - 5,195
E. Financial assets measured at amortised cost 3,527 - 3,527 - 3,278 - 3,278
2.1 Interest rate and price risks - supervisory trading book There were no supervisory trading book assets or liabilities at 31 December 2018. Poste Italiane SpA’s “Guidelines for financial transactions” for BancoPosta RFC prohibit the acquisition of assets and liabilities with the intention to trade, as defined by article 104 of EU Regulation 575/2013 in relation to classification of the “supervisory trading book”.
Interest rate risk is measured internally using the economic value method. This results in a need to develop an amortisation schedule for the funding consistent with its nature and to select a time horizon and confidence levels for the estimates. A maximum time horizon (cut-off point) of 20 years is used for retail customer deposits, 10 years for business customer deposits and
Postepay cards161, and 5 years for Public Administration deposits, based on a 99% confidence level. This approach entails the computation of an ALM rate risk through the determination of asset/liability maturity gaps.
Over the period under review, the above situation resulted in a net reduction in the fair value of BancoPosta RFC’s financial assets measured at fair value through other comprehensive income by approximately €1.6 billion (a nominal value of approximately €30 billion). The increase in the fair value of instruments hedged against interest rate risk, amounting to approximately €0.3 billion, was offset by a decrease in the fair value of the related derivatives, whilst the reduction in the fair value of unhedged instruments and of the component subject to spread risk (unhedged) was reflected in consolidated equity by approximately €1.9 billion; Price risk
161. As of 1 October 2018, prepaid cards fall within the purview of PostePay SpA, the electronic money institution that has brought together Poste Italiane’s operations and competences in payments and telecommunications. The liquidity raised through these cards is transferred to BancoPosta, which invests it in euro area government bonds or bonds guaranteed by the Italian State. As such, for the purposes of specific risk analyses, the rationales related to each model underlying the different types of deposit inflow continue to apply.
Unspecified maturity 1. On-balance sheet assets 8,965 6,900 713 1,244 9,610 11,895 26,461 - 1.1 Debt securities - 4,997 705 1,244 9,610 11,895 26,461 1. 2 Due from banks 48 1,349 - - - - - - 1.3 Due from customers 8,917 554 8 - - - - 2. On-balance sheet liabilities 54,882 2,749 - 191 5,603 - - - 2.1 Due to customers 54,292 1,307 - 191 1,652 - - 2. 2 Due to banks 590 1,442 - - 3,951 - - - - current accounts 590 - - - - - - - - other deposits - 1,442 - - 3,951 - - 2. 3 Debt securities - - - - - - - - - with prepayment option - - - - - - - - - other - - - - - - - 2. 4 Other liabilities - - - - - - - - - with prepayment option - - - - - - - - - other - - - - - - - 3. Financial derivatives 3.1 With underlying securities - Options - Other derivatives 3.2 Without underlying securities - Options - Other derivatives 4. Other off-balance sheet transactions
1. Banking book: distribution of residual terms to maturity of financial assets and liabilities by repricing date
The sensitivity of exposures to fair value interest rate risk was tested by assuming a parallel shift of the market yield curve of +/- 100 bps. The sensitivities data shown by the analysis provide a base scenario that can be used to measure potential changes in fair value, in the presence of changes in interest rates.
BancoPosta’s financial assets measured at fair value through other comprehensive income at 31 December 2018 had a duration of 4.80 (31 December 2017: 5.34). The sensitivity analysis is shown in the table.
Financial assets measured at fair value through other comprehensive income * For derivatives involving the exchange of principal (securities or other assets), the settlement price was reported as indicated in the relevant contracts, in accordance with Circular 262/2005 of the Bank of Italy.
All of BancoPosta RFC’s investments are classified as either “Financial assets measured at amortised cost” or “Financial assets measured at fair value through other comprehensive income”. The sensitivity analysis shown above is for the last of these categories.
In particular, the risk in question concerns: �� In relation to financial assets measured at fair value through other comprehensive income, fixed income Government bonds for €32,040 million, consisting of fixed income bonds for €15,006 million, floating-rate bonds swapped into fixed income bonds through interest rate swaps of cash flow hedges for €1,823 million, inflation-indexed bonds for €2,047 million and fixed income bonds swapped into floating rate instruments through fair value hedge derivatives for €13,164 million (of which €11,163 million with forward starts); �� In relation to hedge derivatives, forward sales of government bond for a notional amount of €1,644 million and forward purchases of government bonds for a notional amount of €1,491 million, classified as cash flow hedges.
It is worthy of note that any change in the spread would not entail any accounting effect on financial assets measured at amortised cost but would affect solely unrealised gains/losses. In other words, fixed income bonds measured at amortised cost that at 31 December 2018 amount to €22,872 million (nominal €20,935 million), and have a fair value of €21,189 million, would experience a negative change in fair value of approximately €2 billion following a 100 bps increase of the spread.
Changes in the spread do not impact the capital requirements of BancoPosta RFC, as the fair value reserve is not part of Own Funds considered for supervisory purposes.
In addition to sensitivity analyses, BancoPosta RFC monitors fair value interest rate risk by computing maximum potential loss or VaR - Value at Risk. The results of the VaR analysis regarding the variability of spread risk are shown below.
Financial assets measured at fair value through other comprehensive income 2017 effect
Maximum potential loss (VaR - Value at Risk), a statistical estimation with a time horizon of 1 day and a confidence level of 99%, is also computed by BancoPosta RFC to monitor market risk. Risk analysis performed through VaR takes into account the historical variability of the risk (spread) in question, in addition to modelling parallel shifts of the yield curve.
Taking into account both financial assets measured at fair value through other comprehensive income (including the related hedges outstanding) and forward purchases and sales, the combined analysis of spread risk and fair value interest rate risk at 31 December 2018 results in a potential loss of €402 million (VaR at the end of the period).
The sensitivity to cash flow interest rate risk at 31 December 2017 and 31 December 2018 is summarised in the table below and was computed assuming a +/- 100 bps parallel shift in the market forward interest rate curve.
Due from customers - Deposits at MEF (PA deposits) 5,930 59 (59) 6,011 60 (60)
- Due from Poste Italiane SpA outside the ring-fence 843 8 (8) 732 7 (7)
Cash flow interest rate risk at 31 December 2018 was primarily due to: �� the placement of Public Administration deposits with the MEF; �� fixed income bonds issued by the Italian State swapped in floating-rate bonds through fair value hedge derivatives for a total nominal amount of €2,165 million including: (i) Italian government bonds for €1,900 million, whose fair value hedge will start to take effect in the 12 months following the period under review; (ii) inflation-linked bonds issued by the Italian Republic with a nominal amount of €100 million; �� receivables for a total amount of €1,652 million for security deposits provided as collateral for derivative liabilities.
The sensitivity of financial instruments to price risk is analysed using a variability stress calculated with reference to one-year historical volatility, considered to be representative of potential market movements.
Exposure Changes in value Net interest and other banking income Equity reserves before taxes
The Class C Visa Incorporated shares and the Series C Convertible Participating Preferred Stock issued by Visa Incorporated held in portfolio were sensitivity tested using similar Class A shares, after adjusting for the volatility of the shares traded on the NYSE. The shares’ price risk is also monitored through the computation of VaR.
The VaR sensitivity analyses are shown below: Average VaR (2) (2)
BancoPosta RFC does not have a policy for hedges of foreign operations.
The retrospective effectiveness test is run by utilising the “dollar offset approach through the hypothetical derivative163”. With this approach, consideration is given to the hedge ratio of the change in fair value of the actual derivative to the change in fair value of the hypothetical derivative occurred between inception and the valuation date. The hedge is considered effective if the hedge ratio ranges from 80% to 125%.
For the purposes of the prospective effectiveness test, different approaches have been adopted, depending on the characteristics of the hedging swap. In particular: �� the “Critical terms164” approach for swap spot start, for which it has been determined at inception that the characteristics of the fixed leg make it possible to replicate exactly the fixed cash flows generated by the hedged item; �� the “Dollar offset through the hypothetical derivative” approach for forward start swaps, for which the prospective effectiveness test is performed by calculating the hedge ratio between the change in fair value of the hypothetical derivative and the change in fair value of the actual derivative165. The hedge is considered effective if the hedge ratio falls in the interval between 80%and 125%.
For the purposes of the prospective effectiveness test, the critical terms approach is applied, considering at inception the consistency between the hedging instrument and the hedged item on the basis of the qualitative characteristics of the contracts166.
With respect to the inflation-indexed bonds, the retrospective effectiveness test considers the hedge ratio between the change in fair value of the actual derivative to the change in fair value of the hypothetical derivative occurred between the date of inception and the valuation date. The hedge is considered effective if the hedge ratio ranges from 80% to 125%.
The hypothetical derivative and the actual derivative have the settlement date that matches the inception of the hedge and differ in terms of their fixed income component. Moreover, for the derivatives used to hedge inflation-linked BTP, the fair value at the settlement date reflects also the interest accrued of the instrument accrued from the latest interest payment date to the date of settlement of the derivative. As such, both are considered the main sources of ineffectiveness.
162. IAS 39 requires two effectiveness tests: • prospective effectiveness test: attests that the hedging relationship is expected to be highly effective in future periods; • retrospective effectiveness test: attests that the hedging relationship has been effective from inception to the reporting date.
165. Calculated by assuming a parallel shift of + / - 100 bps of the yield curves. 166. The notional amount of the forward contract must be set, at the settlement date, as equal to the nominal amount of the instrument in case of purchase, and equal or lower than the nominal amount of the instrument in case of sale. The underlying of the forward contract must coincide with the instrument that must be purchased or sold (in this case it must be an instrument in the portfolio) at the settlement date. The settlement date must be the same as the date on which the cash flow to be hedged is expected, in case of forward purchase, or must be related to the year in which the total return must be stabilised, in case of forward sale.
For the purposes of the prospective effectiveness test, different approaches have been applied, depending on the characteristics of the hedging swap. In particular: �� the “Critical terms” approach for derivatives for which it has been determined at inception that the characteristics of the indexed leg of the swap make it possible to replicate exactly the variable cash flows generated by the hedged item; �� the “Dollar offset through the hypothetical derivative” approach for derivative contracts with a fixed rate applicable to a nominal amount growing constantly at six-month intervals until the derivative expires. For these contracts the prospective effectiveness test is performed by calculating the hedge ratio between the change in fair value of the hypothetical derivative and the change in fair value of the actual derivative167. The hedge is considered effective if the hedge ratio falls in the interval between 80% and 125%.
A.2 Hedging derivative financial instruments: gross positive and negative fair value - breakdown by product
Balance at 31 December 2018 Balance at 31 December 2017 Balance at 31 December 2018
Contracts not falling within the scope of netting agreements 1) Debt securities and interest rates 2) Equity instruments and equity indexes 3) Currencies and gold 4) Commodities 5) Other
Specific hedges - net positions: carrying amount of assets or liabilities (before netting)
A. Cash flow hedges 1. Assets 1.1 Debt securities and interest rates (155) 123 1. 2 Equity instruments and equity indexes - - 2. Liabilities 1.1 Debt securities and interest rates - - -
Cash flow hedge reserve Reserve for hedges of net investments in foreign operations
Reclassifications to profit or loss 18 - - - - - - - - of which: future transactions no longer expected of which: transfers to initial carrying amount of hedged instruments 3.3 Other information on trading and hedging derivatives
169. The threshold amount is the amount of collateral that is not required to be provided under the contract; it therefore represents the residual counterparty risk to be borne by a counterparty.
Management data, such as the modelling of demand deposits and the reporting of cash and cash equivalents taking account of their degree of liquidity, has, consequently, not been used.
Quantitative information At 31 December 2018, the risk map prepared in accordance with the aforementioned framework shows the type of operational risks BancoPosta RFC’s products are exposed to. These are as follows: OPERATIONAL RISK
Balance at 31 December 2017 b) required by articles - - - Equity instruments designated at fair value through other comprehensive income - - - Hedges of equity instruments designated at fair value through other comprehensive income - - - Financial assets (other than equity instruments) measured at fair value through other comprehensive income - Property, plant and equipment - - - Hedges of net investments in foreign operations - - - Hedging instruments (undesignated elements) - - - Non-current assets and disposal groups held for sale - - - Financial liabilities designated at fair value through profit or loss (changes in own credit rating) - - - Actuarial profits/(losses) on defined benefit plans (2) (2)
B.2 Valuation reserve for financial assets measured at fair value through other comprehensive income: analysis
B.3 Valuation reserve for financial assets measured at fair value through other comprehensive income: movements during the year
The opening balance reflects the effects of the transition to IFRS 9. In particular, the new financial reporting standard resulted in an increase of the Reserve in question as of 31 December 2017 in the amount of €1,372 million (net of the tax effect) due to: (i) reclassifications of financial instruments for €1,358 million and (ii) adjustments due to expected losses for €14 million.
At 31 December 2018 CET1 amounts to €2,286 million. Profit for the year has not been computed in accordance with article 26 of EU Regulation 575/2013.
Based on prudential standards, BancoPosta is required to comply with the following minimum capital ratios: �� Total capital ratio (the ratio of total own funds to total risk weighted assets - RWA172), equal to 10.5% (8% being the minimum requirement and 2.5% being the capital conservation buffer173); �� Common Equity Tier 1 ratio (the ratio of CET1 to total RWA): equal to 7.0% (4.5% being the minimum requirement and 2.5% being the capital conservation buffer); �� Tier 1 ratio (the ratio of T1 to total RWA): equal to 8.5% (6.0% being the minimum requirement and 2.5% being the capital conservation buffer).
At 31 December 2018, BancoPosta RFC complies with the prudential requirements, with a CET 1 ratio of 18.4%.
171. Contributions from non-controlling shareholders to BancoPosta RFC are excluded, as they are not provided for in the special regulations governing the ring-fence.
Consorzio Servizi Telef. Mobile ScpA - - - - - 1 -
Consorzio Servizi Telef. Mobile ScpA - - - - - 6 -
BancoPosta RFC Separate Report for the year ended 31 December 2018 Notes – Part H – Related party transactions
Other related parties external to the Group * On 26 September 2018, PosteMobile was entered in the Register of electronic money institutions (article 114 – quater of the Consolidated Banking Act) and, as of 1 October 2018, changed its name to PostePay SpA.
Within the scope of the transactions with Monte dei Paschi di Siena Capital Services Banca per le Imprese SpA authorised by the Board of Directors on 20 September 2017, having obtained the consent of the Related and Connected Parties Committee, twelve repurchase agreements and fifteen buy & sell back transactions and seven Interest Rate Swaps for hedging purposes, and twenty-four trades in government securities were carried out in 2018.
Moreover, in connection with the process that resulted in the establishment of the Electronic Money Institution, the Related and Connected Parties Committee issued a favourable opinion to the Board of Directors on two contracts with PostePay SpA that
qualify as material under the Bank of Italy’s regulations. These regard the contract governing the outsourcing of BancoPosta’s activities to the electronic money institution and the agreement on the promotion and placement of the EMI’s products by BancoPosta. Both were approved by the Board of Directors and took effect on 1 October 2018.
As a result of this transfer, PostePay SpA sells its own products/services174 as well as, in the capacity of service provider, the products and services of BancoPosta175.
In addition, BancoPosta RFC outsourced to the electronic money institution the management of payment products and services not included in the business unit transferred, which are sold through the Group’s distribution network. As such, BancoPosta RFC’s commission expenses include the costs for the services rendered to the electronic money institution, while its commission income reflects also revenue from sales of these products.
Regarding activities relating to its own products and products handled under service agreements, the EMI uses services provided by Poste Italiane functions outside the ring-fence (primarily by the Chief Operating Office function) relating to the development and management of payment services in such areas as information systems, IT security, operations (back-office, customer service and complaints management), monitoring and fraud management.
174. Own products: prepaid cards (card payments), payment services, acquiring services, tax payments using forms F23/F24 and international money transfers (Moneygram) forming part of the operations carried out independently by the EMI.
The Performance Targets, to which receipt of the cash bonus is subject, are as follows: �� an indicator of earnings over e three-year period, based on the RORAC (Return On Risk Adjusted Capital), used for the LTIP with the aim of taking into account the continuity and sustainability of the long-term performance after appropriately adjusting for risk; �� an indicator of shareholder value creation, based on the Total Shareholder Return, used to measure performance based on the value created for Poste Italiane’s shareholders compared with other FTSE MIB-listed companies.
Vesting of the phantom stocks is subject to achievement of the Performance Hurdle, designed to ensure sustainability of the Plan. The Performance Hurdle corresponds with achievement of a certain target for the Group’s cumulative EBIT over a threeyear period at the end of each Performance Period. In addition, vesting of the phantom stocks is also subject to achievement of Qualifying Conditions, designed to ensure the stability of BancoPosta RFC’s capital and liquidity position, as follows: �� Indicator of capital adequacy, based on CET 1 at the end of the period; �� Indicator of short-term liquidity, based on LCR at the end of the period.
The phantom stocks will be awarded by the end of the year following the end of the Performance Period, and are subject to a one-year retention period before they can be converted into cash, following confirmation that the Qualifying Conditions have been met.
The total number of phantom stocks awarded to the 4 Beneficiaries of the First Cycle of the Plan amounted to 33,298 units.
On 27 May 2014, the Bank of Italy issued specific Supervisory Standards for BancoPosta (Part IV, Chapter I, “BancoPosta” including in Circular 285 of 17 December 2013 “Prudential supervisory standards for banks”) which, in taking into account BancoPosta’s specific organisational and operational aspects, has extended application of the prudential standards for banks to include BancoPosta. This includes the standards relating to remuneration and incentive policies (Part I, Title IV, Chapter 2 “Remuneration and incentive policies and practices” in the above Circular 285/2013). These standards provide that a part of the bonuses paid to BancoPosta RFC’s Material Risk Takers may be awarded in the form of financial instruments over a multi-year timeframe. As a result, with regard to the management incentive schemes adopted for BancoPosta RFC, where the incentive is above a certain materiality threshold, the MBO management incentive scheme envisages the award of 50% of the incentive in the form of phantom stocks, representing the value of Poste Italiane’s shares, and application of the following deferral mechanisms: �� 60% of the award to be deferred for a 5-year period on a pro-rata basis, in the case of Material Risk Takers who are beneficiaries of both the short-term incentive scheme and the third cycle 2018-2020 of the “LTI Phantom Stock Plan”; �� 40% of the award to be deferred for a 3-year period on a pro-rata basis for the remaining Material Risk Takers.
Payment of the deferred portion will take place each year, provided that BancoPosta RFC’s minimum regulatory capital and liquidity requirements have been met. The effects on profit or loss and on equity are recognised in the period in which the instruments vest176.
2. In this regard, it should be noted that: - the adequacy of the administrative and accounting procedures adopted in preparation of Poste Italiane SpA’s separate financial statements was verified by assessment of the internal control system over financial reporting. This assessment was conducted on the basis of the criteria contained in the Internal Control–Integrated Framework model issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO); - the assessment of the internal control system over financial reporting did not identify any material issues.
Tax Code and Rome Companies’ Register no. 97103880585/1996 Business Registration Number in Rome: REA 842633