Italian Banks Sector - Intesa Sanpaolo Group · 4 October 2016 Intesa Sanpaolo Research Department...

See page 55 for full disclosures and analyst certification

Italian Banks Sector Challenges Ahead for 2017, MPS at centre stage We confirm our NEUTRAL Credit View on the Italian banking sector, expecting

normalisation to continue in 2017, on the back of the recovery in place, albeit still very mild, and of a gradual positive impact from the several reforms that have been approved over the last two years (i.e. reform of cooperative banks and mutual banks, new legal framework to enhance the speed of collateral foreclosure procedures by banks, and new schemes – GACS and Atlante funds - to support the development of an NPLs’ secondary market). We also see that many banks are currently in the spotlight with reference to their restructuring plans, capital increases, disposal of assets and of non-performing exposures and merger deals. The success of these deals, besides their impact on each related entity, would also represent a sign of progress of the entire banking system, while their failure would potentially spread to the entire system, in particular to the most vulnerable cases. We also confirm our NEUTRAL Credit View on banks under our coverage.

MPS’s rescue plan at centre stage. Shown in the European stress test to be the weakest bank in the adverse scenario, MPS announced (on 29 July) a rescue plan aimed at selling its whole portfolio of bad loans, while increasing provisions on the remaining NPLs, and restoring capital with a capital increase of up to EUR 5Bn, to be executed by YE16. Following the recent management reshuffle, the roadmap of the recovery plan foresees the presentation of an updated business plan on 24 October, while MPS is studying the possibility of a debt conversion to equity in its capital plan, likely on subordinated debt (according to economic media), in order to reduce the amount of the capital increase, hence limiting its execution risk.

Asset quality still weak, but credit quality indicator improving and NPLs’ disposal on the uptrend. Italy’s severe recession in recent years has caused a sharp deterioration in the credit quality of the Italian banking system in the 2008-2015 period, but the recent ongoing improvement in the economy is reflected in risk indicators in the initial part of the current year improving or at being least stable. Moreover, NPLs’ disposal, though being limited compared to the size of the stock, increased in 2015, and we expect they will be supported further by the newly-introduced schemes such as the State guarantee GACS scheme, which saw its inaugural deal in August, and the Atlante funds’s activity.

Investment Recommendations. We confirm our investment recommendations on all the bonds of issuers under our coverage at HOLD, with the exception of BUY on MPS’s covered bond and senior unsecured bond, as they have significantly underperformed since the beginning of the year, while they would benefit from a successful outcome of a liability management exercise on subordinated debt that MPS is considering as part of the EUR 5Bn recapitalisation plan announced this past July. We also confirm our trading ideas as per the second table below.

Investment recommendations on Italian banks Investment Grade CB Sen Sub Jun Sun Hybrid BP HOLD c - - - - - - - - BPER HOLD c - - - - - - - - BPM HOLD c - - - - - - - - MPS BUY c - - - - - - - - UBI HOLD c HOLD c - - - - - - Unicredit HOLD c HOLD c - - - - - - High Yield BP - - HOLD c HOLD c - - HOLD c BPER - - - - HOLD c - - - - BPM - - HOLD c HOLD c - - HOLD c MPS - - BUY c HOLD c - - HOLD c UBI - - - - HOLD c - - - - Unicredit - - - - HOLD c HOLD c HOLD c

LT2 = Lower Tier 2; UT2 = Upper Tier 2; T1 = Tier 1; AT1 = Additional Tier 1.NA = Not Applicable. Source: Intesa Sanpaolo research

Trading ideas on Bank’s bonds Date Bond/CDS Type Spread Rate Buy/Sell Entry level Current level1 Pick-up Status 22.09.16 UBIIM 2 7/8 02/18/19 Sen ASW FX SELL 43.1 42.0 -1.0 OPEN 22.09.16 BPIM 3 1/2 03/14/19 Sen ASW FX BUY 225.4 216.8 8.6 OPEN PMIIM 4 1/4 01/30/19 Sen ASW FX SELL 130.7 129.1 -1.6 08.09.16 UCGIM 6.95 10/31/22 T2 Z-Spread FX BUY 411.6 447.5 -35.9 OPEN UCGIM 6 1/8 4/19/21 T2 Z-Spread FX SELL 233.3 265.5 32.2

Note: 1) Current Level on 03.10.16 at 15:00PM; Source: Intesa Sanpaolo research

Credit Sector Report

4 October 2016: 18:50 CET Date and time of production

Sector View NEUTRAL

Banks

Intesa Sanpaolo Research Department

Maria Grazia Antola Credit Analyst +39 02 8794 1114

Bedri Nuredini Credit Analyst +39 02 8794 2838

Credit View Unicredit NEUTRAL MPS NEUTRAL BP NEUTRAL UBI NEUTRAL BPM NEUTRAL BPER NEUTRAL

Credit ratings Unicredit Rating Outlook Moody's Baa1 Stable S&P BBB- Stable Fitch BBB+ NG

MPS Rating Outlook Moody's B3 * S&P ---- --- Fitch B- *

BP Rating Outlook Moody's Ba3 *+ S&P - - Fitch BB NG

UBI Rating Outlook Moody's Baa2 Stable S&P BBB- Stable Fitch BBB NG

BPER Rating Outlook Moody's Ba2 NG S&P BB- Positive Fitch BB Stable BPM Rating Outlook Moody's Ba3 *+ S&P --- --- Fitch BB+ *- NG = Negative; POS = POSITIVE;*+/*- = under review for a possible upgrade/downgrade; * = under review uncertain. Source: rating agencies

Report priced at market close on day prior to issue (except where otherwise indicated).

In this report we confirm the company view and recommendation assigned in the latest company reports (unless otherwise indicated)

Date and time of first circulation: 21 June 2016: 17:58 CET

Italian Banks Sector 4 October 2016

2 Intesa Sanpaolo Research Department

Contents

Our Credit View 3

Rating agencies 4

Market Performance 6

Investment recommendations 6

MPS in the spotlight, but not alone 8

MPS rescue plan at centre stage 8

Other banks also in the spotlight 9

Italy: Macroeconomic and Bank Industry Scenarios 11

Recovery losing momentum. Mounting expectations ahead of the referendum 11

Italian Banking Industry: loans to non-financial corporations are lagging behind 14

2016 EU-wide stress test results 16

Results for Italian banks under our coverage 16

Italian Banks’ NPLs: Trend improving, Disposals uptrend 18

Asset quality of Top 7 Italian banks 19

Measures to cut NPLs: Atlante/Atlante II Funds & GACS at the forefront 20

Inaugural GACS scheme 23

ECB Financing and Institutional Primary Market 24

Italian banks’ ECB refinancing very attractive with new TLTRO II 24

Italian banks’ institutional primary market 24

Italian banks’ benchmark covered bonds 25

AT1 and T2 instruments: recent trends (2014-2016 YTD) 29

Company Section 33

BP: Credit View NEUTRAL 34

BPER: Credit View NEUTRAL 36

BPM: Credit View NEUTRAL 38

MPS: Credit View NEUTRAL 40

UBI: Credit View NEUTRAL 42

UniCredit: Credit View NEUTRAL 44

Appendix 1: EBA EU-wide stress test 2016 results 46

Appendix 2: Atlante Fund and GACS scheme 48

Appendix 3: Italian Banks Benchmark Euro-Denominated Bonds 51


Intesa Sanpaolo Research Department 3

Our Credit View

We confirm our NEUTRAL Credit View on the Italian banking sector, expecting normalisation to continue, on the back of the recovery in place – albeit still very mild – and a gradual positive impact from the several reforms that have been approved over the last two years (i.e. reform of cooperative bank and mutual banks, new legal framework to enhance the speed of collateral foreclosure procedures by banks, and new schemes – GACS and Atlante funds - to support the development of a NPLs secondary market). We also see that a lot of banks are currently in the spotlight regarding restructuring plans, capital increases, disposal of assets and of non-performing exposures and merger deals. The success of these deals, besides their impact on the each related entity, would also represent a sign of progress for the entire banking system, while their failure would potentially spread to the entire system, in particular to the most fragile vulnerable cases.

Italian banking system - Strengths and weaknesses Strengths Weaknesses

High level of bank intermediation

Deep and stable retail funding support

Adequate capitalisation / good capital quality

Limited exposure to illiquid bonds (Lever 3).

Weak lending volumes

Very poor asset quality, though easing deterioration in place

Weak profitability

High concentration of operations in Italy

Significant exposure to Italy sovereign risk.

Source: Intesa Sanpaolo Research elaboration

We also confirm our NEUTRAL Credit View on banks under our coverage.

Credit View on Italian banks under our coverage Investment Grade View Chg UBI NEUTRAL c Unicredit NEUTRAL c High Yield View Chg BP NEUTRAL c BPER NEUTRAL c BPM NEUTRAL c MPS NEUTRAL c

Note: c = confirmed. Source: Intesa Sanpaolo Research elaboration

Credit View confirmed at NEUTRAL



Rating agencies

To date (30 September 2016), Moody’s and Fitch have assigned a Stable outlook on the Italian banking system, after having raised it from Negative in November 2015, while S&P on 7 June 2016 confirmed a Positive view of the Economic and Industry risks within its BICRA (Banking Industry Country Assessment) for Italy in group 6 (out of 10, with group 1 as the lowest-risk group).

Rating agencies - View of Italian banking system and Italy’s debt ratings S&P Moody's Fitch Last action 07.06.2016 Last action2 10.11.2015 Last action2 24.11.2015 Sector outlook - Sector outlook: Stable Sector outlook: Stable BICRA1 Group 6 Macro Profile3

(17.03.2015) Moderate + BSI 4 bbb

Rating Italy: BBB-/S/A-3 Rating Italy: Baa2/S/P-2 Rating Italy: BBB+/S/F2 Action Confirmed Action Confirmed Action Confirmed Last action 13.05.2016 Last action 02.08.2016 Last action 22.07.2016

Notes: 1) BICRA = Bank Industry Country Risk Assessment, includes 10 groups, with Group 1 as the lowest-risk group; 2) Last action refers to Sector Outlook; 3) Banking System Macro Profile = five levels from Very Strong to Very Weak. It is the rating input to determine each bank's Baseline Credit Assessment, capturing the system-wide factors that are predictive of the propensity of banks to fail. 4) BSI = Bank System Indicator, includes levels "aa", "bbb", "bb", "b" and “ccc/cc/c”. It is determined based on the system’s average individual rating (Viability Rating - VR), calculated as the asset weighted average on VRs assigned by Fitch to the country’s main banks. It excludes the benefit of support from both parent/group entities and the government. 6) Last action refers to Sector Outlook confirmed as Negative. Source: Intesa Sanpaolo Research elaborations on rating agencies’ data

To date (30 September 2016), the long-term ratings assigned to Italian banks by S&P, Moody’s and Fitch, continued to be mainly concentrated in the BBB level on average (53%vs 51% at YE15), while the outlook is broadly Stable (64% vs 77%).

Italian banks’ ratings by category (30 Sept-2016) Italian banks’ rating by outlook (30 Sept-2016)

Source: Intesa Sanpaolo Research elaboration on S&P, Moody’s and Fitch data Source: Intesa Sanpaolo Research elaboration on S&P, Moody’s and Fitch data

For the six banks under our coverage (see rating details in the tables below), the outlook on their LT rating is mixed, as follows:

S&P (on LT Counterparty credit rating): Stable on Unicredit and UBI, while Positive on BPER.

Moody’s (on LT Senior Unsecured Debt): Stable on Unicredit and UBI, under review for possible Upgrade on Banco Popolare and BPM (in sight of their merger deal), under review with Uncertain direction on MPS (in sight of its rescue plan), and Negative on BPER.

Fitch (on LT IDR): Stable on BPER, credit watch Evolving on MPS (in sight of its rescue plan), Negative on Unicredit, Banco Popolare and UBI, while credit watch Negative on BPM (in sight of its merger deal with Banco Popolare).

Stable outlook on the Italian Banking System by Moody’s and Fitch. Positive view on Italy’s economic and industry risks by S&P

53% of Italian banks’ ratings is BBB level while outlook is 64% Stable

Mixed Outlook on LT ratings of banks under our coverage



Ratings of Italian banks under our coverage

Italian banks covered by Intesa Sanpaolo Research - S&P ratings S&P UCG UBI BPER Latest action 02.12.2015 06.07.2016 02.12.2015 Outlook S S P Counterparty credit rating - LT BBB- BBB- BB- SACP bbb- bbb- bb- Government support notching (Counterparty credit rating) - - - Senior Unsecured BBB- BBB- BB- Short-term debt A-3 A-3 B Subordinated BB BB B- Junior Subordinated BB- - - Preferred B+ - - Additional Tier 1 - - - Covered bond House Mortgage - SB A - -

SACP = standalone credit profile.SB = Soft bullet. Source: S&P Italian banks covered by Intesa Sanpaolo Research - Moody’s ratings

Moody's UCG MPS BP UBI BPER BPM Latest action 18.05.2016 08.08.2016 13.04.2016 25.01.2016 27.09.2016 13.04.2016 Outlook on Issuer rating S * *+ S NG *+ Adj BCA ba1 ca b2 ba1 ba3 b2 Issuer rating Baa1 B3 Ba3 Baa2 Ba2 Ba3 Government support notching (Sen Uns) - 2 - - - - Bank Deposit Baa1/P-2 B2/NP Ba2/NP Baa1/P-2 Baa3/S/P-3 Ba2/ NP Senior Unsecured Baa1 B3 Ba3 Baa2 Ba2 Ba3 Short-term debt P-2 NP - - - Subordinated Ba1 Ca B3 Ba2 B1 B3 Junior subordinated Ba3 (hyb) Ca (hyb) - - - Preferred B1 (hyb) C (hyb) *+ Caa2 (hyb) - - Caa2 (hyb) Additional Tier 1 - - - - - - Covered bond House Mortgage - SB Aa2 - A2 Aa2 Aa2 A2 Covered bond House Mortgage - CPT - A2 - - Aa2 -

* = Under Review with uncertain direction, *+ = Under Review for Possible Upgrade. SB = Soft bullet; and CPT = Conditional Pass Through. Source: Moody's Italian banks covered by Intesa Sanpaolo Research - Fitch ratings

Fitch UCG MPS BP UBI BPER BPM Latest action 24.03.2016 04.08.2016 21.04.2016 24.03.2016 16.05.2016 21.04.2016

Outlook NG * NG NG S *- Issuer Default Rating (IDR) - LT BBB+ B- BB BBB BB BB+ Issuer Default Rating (IDR) - ST F2 B B F3 B B Viability Rating bbb+ ccc bb bbb bb bb+ Support Rating 5 5 5 5 5 5 Support Rating Floor No Floor No Floor No Floor No Floor No Floor No Floor Senior Unsecured BBB+ B- / RR4 BB BBB BB BB+ Subordinated BBB CC BB- BBB- BB- BB Jun Subordinated BB+ CC / RR5 B- - - - Preferred Stock BB C / RR6 B- - - B+ Additional Tier 1 BB- - - - - - Covered Bond - SB AA - - - - - Covered Bond - CPT AA+ BBB - - - -

*= Credit Watch Evolving; *- = Credit Watch Negative. Support Rating = Scale 1-5 (where 1 is the highest); Support Rating Floor = only in the event of public support, indicates the minimum LT IDR rating level assignable to the bank in relation to the support rating; SB = Soft bullet; and CPT = Conditional Pass Through. Source: Fitch



Market Performance

In 2016 YTD, the bonds of the banks under our coverage have shown a mixed performance, with covered bonds generally outperforming, while hybrid bonds and lower-rated subordinated bonds have strongly underperformed. In particular:

In the senior unsecured space, IG bonds have posted a generally positive performance, overall outperforming respective maturity buckets of JPM Financial BBB-rated indices. In detail, Ubi, whose bonds are trading close to their lowest levels over the last 12 months, have outperformed Unicredit, whose bonds posted a mixed performance, while all maturity buckets (1-3Y, 3-5Y and 5-7Y) of JPM Financial BBB-rated indices have posted a widening in YTD 2016. Also, the HY segment has shown a generally positive trend, with BPM’s bond outperforming, followed by the BP’s bonds, while MPS’s bond has strongly underperformed across the board. As a result, all bonds have outperformed against the respective ML BB index in 2016 YTD, while MPS’s bond underperformed against the respective ML B index. All HY bond spreads are trading strongly above their respective government bonds.

In the covered bond space, performance has been overall positive, with BP’s CBs tightening the most (up to 61bps YTD), while Unicredit’s and UBI’s 2026 CBs have tightened the least (-4.4bps and -3.9bps, YTD from issue date, respectively), though both were issued in 2016 at relatively tight spreads. MPS’s CBs underperformed in their respective maturity buckets. Currently, Unicredit’s and UBI’s <2024 CBs are trading in the negative territory, while MPS’s CBs are trading at the widest levels. Conversely, most of MPS’s CBs spreads are trading above their respective Italian government bonds, while the rest are generally trading below their respective government bonds.

In senior and junior subordinated space, performance has been mixed, with MPS’s bonds strongly underperforming, while BPER’s floater coupon bond outperformed (-96.9bps YTD) followed by positive performance from BP’s and Unicredit’s (<2022) fixed coupon bonds.

In the hybrid space, a negative performance was recorded across the board, with MPS’s T1 bonds strongly underperforming. Unicredit’s T1 bonds have proved to be most resilient, trading down 1.5pp and 3.5 price points, YTD, respectively. Regarding Unicredit’s EUR 1Bn AT1 bond, issued on 3 September 2014, it has performed negatively in 2016 to-date, trading down 8.5 price points YTD. The rest of European AT1 market has posted a mixed performance, with DB’s AT1 bond (-26 price points) strongly underperforming, while the two BBVA’s AT1 bonds issued in 2015 and 2016 outperformed (+12 price points and +10 price points, respectively).

(for details on bank bonds see page 51)

Investment recommendations

We confirm our investment recommendations on all the bonds of issuers under our coverage at HOLD, with the exception of BUY on MPS’s covered bond and senior unsecured bond, as they have significantly underperformed since the beginning of the year, while they would benefit from a successful outcome of a liability management exercise on subordinated debt that MPS is considering as part of the EUR 5Bn recapitalisation plan announced this past July. We also confirm our trading ideas as per the second table below.



Investment recommendation on Bonds of Italian Banks under our coverage CB Senior Sub Jun Sub Hybrid Investment Grade BP HOLD - - - - BPER HOLD - - - - BPM HOLD - - - - MPS BUY - - - - UBI HOLD HOLD - - - Unicredit HOLD HOLD - - - High Yield BP - HOLD HOLD - HOLD BPER - - HOLD - - BPM - HOLD HOLD - HOLD MPS - BUY HOLD - HOLD UBI - - HOLD - - Unicredit - - HOLD HOLD HOLD

Source: Intesa Sanpaolo research Trading ideas on Bank’s bonds

Date Bond/CDS Type Spread Rate Buy/Sell Entry level Current level1 Pick-up Status 22.09.16 UBIIM 2 7/8 02/18/19 Sen ASW FX SELL 43.1 42.0 -1.0 OPEN 22.09.16 BPIM 3 1/2 03/14/19 Sen ASW FX BUY 225.4 216.8 8.6 OPEN PMIIM 4 1/4 01/30/19 Sen ASW FX SELL 130.7 129.1 -1.6 08.09.16 UCGIM 6.95 10/31/22 T2 Z-Spread FX BUY 411.6 447.5 -35.9 OPEN UCGIM 6 1/8 4/19/21 T2 Z-Spread FX SELL 233.3 265.5 32.2

Note: 1) Current Level on 03.10.16 at 15:00PM; Source: Intesa Sanpaolo research



MPS in the spotlight, but not alone

MPS rescue plan at centre stage

MPS was shown to be the weakest bank under the EBA 2016 EU-wide stress test, the results of which were announced on 29 July. It was the only one of the banks tested to show a negative fully loaded CET1 ratio in the adverse scenario in 2018, at -2.2%, starting from 12.1% at YE15 and 12.2% in the baseline scenario in 2018.

MPS announced its 2Q16 results on the same day as the stress test results. The 2Q numbers beat market consensus expectations, and MPS subsequently published the details of a recovery plan. The plan aimed at de-risking its loan book both via the deconsolidation of the whole bad loan portfolio and the increasing of NPLs coverage ratios, and restoring capital impacted by related losses with a capital increase of up to EUR 5Bn. The rescue plan included the following key elements:

Increase in provision coverage of bad loans to 67% (from 63% in 1Q16) and of other NPLs to 40% (from 29%), with expected related losses of EUR 1Bn and EUR 2.2Bn, respectively.

De-recognition of the whole amount of gross bad loans at EUR 27.7Bn (EUR 9.2Bn net) outstanding at 1Q16 via transfer into a special purpose vehicle (SPV) at a price of 33% of the gross book value (GBV). The SPV is expected to be funded as follow:

o Junior notes of EUR 1.6Bn (or 17% of the sale price, 6% of GBV), which would then be transferred to MPS’s shareholders, prior to the launch of a capital increase. The deconsolidation of these assets from the bank’s balance sheet would result in a corresponding reduction in shareholders’ equity of EUR 1.6Bn, and the banks’ shareholders would directly bear the remaining first losses up to this amount;

o Mezzanine notes of EUR 1.6Bn (or 17% of the sale price, 6% of GBV) underwritten by the Atlante II fund established to provide support to the banking system; and

o Senior notes up to EUR 6Bn (or 65% of the sale price, 22% of GBV), to be placed with investors after a period of bridge financing and which would benefit from the state guarantee on non-performing loans securitisation (GACS scheme), for the portion that is investment grade.

A recapitalisation of approximately EUR 5Bn to cover the above losses through a share capital increase with pre-emption rights of up to EUR 5Bn and other undisclosed actions. The capital increase is supported by a pre-underwriting agreement subject to conditions including the successful premarketing activity. Moreover, warrants will be assigned to the Atlante II fund.

The rescue plan envisages positive achievements, mainly in terms of the de-risking of MPS’s loan portfolio, within the guidelines the ECB set for 2018 and at a level more in line with average for peers. In particular, MPS’s gross NPL ratio is set to fall significantly, to 18% from 34% in 1Q16, while residual impaired loans are expected to drop to EUR 19.5 gross and EUR 11.7Bn net, well below the thresholds set by the ECB of EUR 32.6Bn and 14.6Bn, respectively. NPL composition should also improve, including fewer riskier categories of Unlikely to Pay and Past Due. Moreover, the Texas ratios would drop considerably, to c.120% from 260%. Regarding capital, the plan aims to restore the CET1 ratio to a level reached before the de-risking action, at 11.4% fully loaded, which would exceed the SREP target of 10.75% set by the ECB on 31.12.2016. Finally, profitability should benefit going forward as a result of a lower cost of funding and cost of risk.

The original roadmap for the rescue plan required the presentation of a detailed business plan by the end of September and the call of the EGM to approve the transaction in October or November, to finalise the securitisation thereafter, and the launch of the rights issue set to be executed by the end of the current year.



However, the recovery plan entails a high level of execution risk, mainly related to the huge size of the capital increase of EUR 5Bn, over 9.3x the current market cap, while the success of the pre-marketing is far from assured. This could prevent the consortium from entering into a full underwriting agreement which would guarantee the capital increase. In case the recapitalisation failed, some kind of state support could be necessary, in our view, which could increase the pressure of a write-down of subordinated debt.

Also, the timing of the transaction has been postponed, in light of the reshuffling of MPS’s management after the CEO and the chairman resigned last month, while a new CEO was appointed in mid-September. Thereafter, on 26 September, while confirming the main objectives of the recovery plan, MPS announced it is considering a voluntary exchange of debt for equity in the business plan update set to be presented on 24 October, and we understand, from domestic economic media, that MPS is more likely to make its offer on subordinated debt.

MPS has some EUR 4.9Bn in subordinated debt outstanding, of which EUR 0.4Bn is legacy Tier 1 placed to the public, EUR 2.2Bn is Upper Tier 2 for retail investors, while EUR 1.9Bn is legacy Lower Tier 2 institutional bonds. Though the success of the exchange offer is difficult to estimate until technicalities are disclosed in October, we regard as positive the participation of subordinated bond-holders in order to reduce the residual amount of the capital increase, thus limiting the execution risk.

Other banks also in the spotlight

Disposal of four small rescued banks, with potential involvement by UBI and BPER

One of the hottest items of newsflow in the current year has been the disposal of the four small-sized regional banks (Carife, Banca Marche, Banca Etruria and Carichieti), representing c.1% of Italian banks deposits system-wise, which were rescued in November 2015, upon the enactment in Italy of the EU Bank Recovery and Resolution Directive (BRRD).

The resolution plan envisaged the setting up of four good banks to carry ordinary commercial activity and to be sold in the market within a maximum of two years. While a bad bank was also set up, incorporating all the original banks’ bad debt of EUR 1.5Bn (written down by 80%).

The resolution plan was financed by shareholders and subordinated bondholders and by the entire banking system, the latter for a total of EUR 4Bn. In particular, EUR 2.35Bn was paid by in 2015 by Italian banks through ordinary and extraordinary contributions to the Resolution Fund; while the remaining EUR 1.65Bn was in the form a loan granting expiry in 18 months, extended by the major three Italian banks (including Unicredit and UBI among our coverage), the latter to be repaid by the Resolution Fund, following the sale process of the four good banks.

According to the media (including Il Sole 24 Ore), the sale process is still ongoing, with the main issue related to the limited price offered by interested parties, while the deadline of 30 September has been postponed. Among interested parties, the media have always mentioned UBI (for three of the four banks, namely Banca Etruria, Banca Marche and Carichieti) and BPER (for one bank, namely Banca Etruria).

In our view, the announcement of the sale of the four good banks would contribute positively in terms of reducing pressure on Italian banks overall, as it will at least limit the additional extraordinary systemic charge by the Italian banking system related to the reimbursement of the EUR 1.6Bn debt provided last year, while it would also represent the end of a longstanding problematic story with the rescued banks. Moreover, we also see that the potential acquisition by UBI and BPER, could be in the direction of supporting their consolidation efforts, also in sight of the ample buffer of regulatory capital over SREP requirements.



Banco Popolare and BPM merger deal expected by YE16

Banca Popolare di Milano and Banco Popolare agreed last March to a merger upon their transformation into a joint-stock company, in accordance with the requirement of the reform of Italian cooperative banks approved in 2015.

The merger will entail the creation of the third-largest Italian bank by total assets, deeply rooted in the richest region in Northern Italy (i.e. Lombardy). The merger deal also included, at the request by the ECB, a capital increase by BP of EUR 1Bn, to cover credit-related extra-provisions in 2016 with the aim of increasing non-performing exposures coverage. The capital increase was successfully completed in June, while the EGM of both banks will convene on 15 October, to approve their corporate transformation and the merger deal, with the merger to be finalised by the end of the current year i.e. FY 2016.

The merger process is progressing in line with the companies’ timetable, and our expectation is that the merger is set to be approved in mid-October, although some risks still exist on the side of BPM retired-employee shareholders, who are largely opposed to the deal. We regard the merger of BP and BPM as positive, as we see it as a lever for both cost synergies and economies of scale in the future, but with no significant impact on the credit profile of the two banks in the near term.

Unicredit update business plan on 13 December 2016 expected to include a capital increase

Unicredit reported 2Q16 net profit above market consensus expectations, while its CET1 capital ratio remains its main negative spot showing almost no buffer over regulatory prudential requirements. Moreover, asset quality in Italy, albeit improving, is still weak.

Mr Mustier, the new CEO appointed last June, will present a strategic review on 13 December, which we expect to include a capital increase, while assets disposals and NPLs sale are also in the pipeline (according to the economic media, including Il Sole 24 Ore).

We see that a capital increase will take place in 2017, while we also expect Unicredit to tap the market of AT1 instruments to cover shortfall to the 1.5% Pillar 1 requirement. Moreover, we see that any asset disposal could balance the negative impact arising from a massive sale of NPLs.



Italy: Macroeconomic and Bank Industry Scenarios

Recovery losing momentum. Mounting expectations ahead of the referendum

Last month we revised down our forecasts for Italian GDP growth, after signalling downside risks to them for some time. Our new estimates are 0.8% for 2016 and 1% for 2017. After stagnating GDP growth in 2Q, the likeliest scenario for the second half of the year is a return to a very modest pace of expansion, of around 0.1-0.2% q/q.

To date, as mentioned above, the recovery has been driven mostly by domestic demand, and in particular by consumer spending. The key was the improvement in the real disposable income of households, back into positive territory in 2015 for the first time in eight years. In the 2015-16 biennium, the recovery in households’ purchasing power was explained by: 1) savings on energy spending; 2) the recovery of employment.

The point is that in 2017 energy savings will disappear (in fact, energy prices could even rebound), and the real income of households can only grow on the back of a stronger employment trend. We estimate savings for households stemming from lower prices in the transport and shelter segments at around 5.1 billion euros in 2015 and 6.2 billion in 2016, i.e. 0.5% of disposable income last year and 0.6% this year. In 2017, no further support will come from this front. On the other hand, employment growth should keep contributing to disposable income, albeit at a slower pace than recorded this year. After accelerating to 1.2% in 2016, we expect the employment trend to slow to at least 0.7% next year. As a result, in 2017 both disposable income and consumer spending should continue to improve, but at slower rates than seen this year: we estimate 0.9% growth in private consumption, from 1.2% in 2016.

With respect to investments, some signs of an improvement were detected between the end of 2015 and the beginning of 2016, which, however, were not subsequently confirmed. Specifically: 1) the only component which achieved a significant recovery was spending on means of transport. The recovery trend could continue in the second half of the year and in 2017, albeit in all likeliness at a slower pace (+3.1% estimated in 2017); 2) the other component which had shown signs of a recovery in 2H 2015 was construction spending, which nonetheless in the course of this year failed to confirm the indications of an uptrend. In any case, sector fundamentals seem compatible with a recovery; 3) the biggest question mark is on investments in machinery and equipment: after a promising start to the year, in which a role was played by the possibility of taking advantage of the maxi-amortisation offered on new capital goods, mounting uncertainty on the evolution of the economic picture led companies to exercise great caution, also considering that profits only rebounded marginally from their cycle troughs.

In essence, in 2017 domestic demand could slow, and the simple fact of foreign trade no longer making a negative contribution, as has been the case this year and the last (-0.3% both in 2016 and in 2015), could prevent a slowdown in GDP. While the outlook for exports does not seem particularly bright, if nothing else the negative contribution of foreign trade to GDP seen over the past two years should reverse. In a nutshell, we expect national accounts exports to grow by 2.6% in 2017, from 0.9% in 2016 (with imports on the rise to 2.4% from 2.2% in 2016).

Even after the recent revision, the balance of risks to the growth scenario is still skewed to the downside. Political risk is one of the most serious. At present, there are no certainties on the outcome of the constitutional referendum scheduled on 4 December, as based on voting intention polls the margin between support for the “Yes” and “No” campaigns is too slim, and most importantly, the percentage of undecided voters, and of those who intend to abstain, is not only very high, but has grown over time. For the time being, therefore, survey data do not allow a reliable prediction of the outcome of the referendum. In our opinion, if “Yes” votes prevail, prospects in terms of the governability of the country would improve, and therefore the

Paolo Mameli Economist

+39 02 8796 2128

We have revised down our forecasts for GDP growth in 2016-17

Consumption still on the rise, but slowing

Uncertainty surrounding the outlook on investments

Foreign trade should at least stop dragging growth

The referendum holds risks, but also opportunities. Early elections are unlikely to be called without a new electoral law



reform agenda would have a better chance of being carried forward. We see three possible scenarios in the event of the “No” vote prevailing at the referendum (in order of probability): 1) the government in office survives the outcome of the referendum (even in the event of the President of the Council resigning, the President of the Republic could ask the government to face a confidence vote in Parliament and to stay in office if the majority proves resilient), albeit weakened; 2) the government in office falls, but the crisis is solved swiftly enough with the formation of an institutional or goal-oriented government, tasked with the priority of reforming the electoral law; 3) the attempt to form a new government fails and the President of the Republic is forced to dissolve Parliament and call early elections (the “Italicum” system would be used to renew the House, and the so-called “Consultellum” proportional system for the Senate). In our view, of the scenarios outlined above, the only one that could have a significantly negative impact on Italy’s growth prospects is the calling of early elections (given the substantial risk of ungovernability the new Parliament would face). However, this latter outcome is also the least likely.

Italy - Main macroeconomic forecasts 2015 2016E 2017E 2015 2016E 2017E 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q GDP (constant prices) 0.6 0.8 1.0 1.1 1.0 0.8 0.6 0.7 0.6 0.9 1.1 - q/q change 0.2 0.3 0.0 0.1 0.2 0.2 0.3 0.3 Private consumption 0.9 1.2 0.9 0.3 0.4 0.1 0.2 0.3 0.3 0.3 0.2 Fixed investment 0.6 1.8 1.7 1.0 0.8 -0.3 0.1 0.6 0.6 0.6 0.4 Government consumption -0.7 0.5 0.2 0.6 0.2 -0.3 0.0 0.0 0.1 0.1 0.1 Export 4.1 0.9 2.6 1.3 -1.2 1.9 -0.5 0.8 0.7 0.7 0.7 Import 5.8 2.2 2.4 1.1 -0.3 1.5 0.2 0.6 0.6 0.6 0.6 Stockbuilding (% contrib. to GDP) 0.5 0.0 0.0 -0.4 0.2 -0.1 0.2 -0.1 -0.1 0.0 0.1 Current account (% of GDP) 2.2 2.6 2.6 Deficit (% of GDP) -2.6 -2.5 -2.4 Debt (% of GDP) 132.2 132.5 132.5 CPI (y/y) 0.0 0.0 1.1 0.2 -0.1 -0.4 0.0 0.4 1.0 1.2 1.0 Industrial production 0.9 0.6 1.1 -0.2 0.5 -0.4 0.2 0.4 0.2 0.5 0.4 Unemployment (%) 11.9 11.5 11.2 11.6 11.6 11.5 11.5 11.4 11.4 11.3 11.1 10-year rate 1.71 1.30 1.20 1.62 1.49 1.48 1.17 1.05 0.99 1.12 1.28

Source: Intesa Sanpaolo Research elaboration on Thomson Reuters Datastream

Fig. 1 – GDP may have resumed growing in the Summer quarter, as the industrial sector is expected to have resumed contributing positively…

Fig. 2 – We expect domestic demand to slow next year. GDP growth may accelerate only if foreign trade stops contributing negatively

Source: Intesa Sanpaolo elaborations on Istat data Note: GDP % growth rate and contribution of the main components. Source: Intesa

Sanpaolo elaborations and forecasts on Istat data



Fig. 3 – Based on survey data, the gap between “Yes” and “No” voting intentions at the constitutional referendum is too small to reliably forecast an outcome…

Fig. 4 – …and the share of potential abstainers is even larger, at present

Note: % excluding undecideds and abstainers, average of the three latest surveys. Source: EMG Acqua, Ipsos SRL, Istituto Piepoli, ScenariPolitici–Winpoll, Euromedia Research, Istituto Ixè, Demopolis, Index Research, Tecnè, Eumetra Monterosa, IPR Marketing, Lorien Consulting, Demetra, Demos&Pi and Demetra

Source: EMG Acqua, Ipsos SRL, Istituto Piepoli, ScenariPolitici–Winpoll, Euromedia Research, Istituto Ixè, Demopolis, Index Research, Tecnè, Eumetra Monterosa, IPR Marketing, Lorien Consulting, Demetra, Demos&Pi and Demetra



Italian Banking Industry: loans to non-financial corporations are lagging behind

Trends in the Italian banking sector1

In the summer months, loans to the private sector were slightly up for the 6th month in a row, though slowing to +0.4% yoy (net of central counterparties and adjusted for securitisations). For August, ABI (Italian Banking Association) estimates and ECB figures report a slight improvement.

The growth in loans to households stabilised in June-July at 1.4% yoy, after accelerating until May. In particular, the growth in loans for house purchases is correlated with the recovery in residential real estate transactions.

Conversely, loans to non-financial companies continue to disappoint. The annual change of loans adjusted for securitisations in June and July was negative again, at -0.1% and -0.5% yoy respectively.

Outstanding bad loans stabilised, due to sales and securitisations. As a percentage of total loans, from April to July bad loans remained at 10.4% in gross terms and 4.7% net of provisions.

In July the trend in overnight deposits was at double digits (+10.8% yoy), leading to a stronger growth in deposits (+4.9% yoy). Despite the very sharp persistent drop in time deposits and bonds (-15.4%), the annual change in customer funding rose to +0.1% yoy, from the -1.5% average of the May-June period. ABI’s preliminary data for August reports a slight return to negative territory, to -0.2% yoy.

Loans to the private sector, data adjusted to take into account securitisation and net of central counterparties (yoy % change)

Customer funding at Italian banks (yoy % change) (*)

-6

-4

-2

0

2

4

6

Jul10 Jul11 Jul12 Jul13 Jul14 Jul15 Jul16

Households

Non-financial corporations

Private sector

-18-15-12-9-6-30369

Jul12 Jul13 Jul14 Jul15 Jul16

Customer funding (*)Deposits (net of central counterparties)Bonds (net of bank bonds held by Italian MFIs)

Source: Bank of Italy. (*) Net of deposits with central counterparties and bank bonds held by Italian MFIs.

Source: Bank of Italy and Intesa Sanpaolo Research Department calculations.

Loans to non-financial corporations by loan maturity (yoy % change)

Residential real estate transactions and number of mortgages (yoy % change)

-10

-8

-6

-4

-2

0

2

4

6

8

10

Jul10 Jul11 Jul12 Jul13 Jul14 Jul15 Jul16

Up to 1 year

Over 1 year

Total loans

-50

-40

-30

-20

-10

0

10

20

30

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

Transactions Number of mortgages

Source: ECB and Intesa Sanpaolo Research Department calculations Source: ISTAT, OMI and Intesa Sanpaolo Research Department calculations

1 Source: Banking Monitor, published on 23 September 2016 by Intesa Sanpaolo Research - Industry & Banking

Elisa Coletti Economist

+39 02 8796 2097

Loans to the private sector slightly up, thanks to mortgages

Bad loans stabilising

Strong growth in overnight deposits



The spread between lending and borrowing rates narrowed slightly in the summer months to 2.08% in July, due to the significant drop in the rate of loans. Since the beginning of 2016, the bank spread has lost 12bps. Based on ABI estimates, the spread stabilized in August. In details:

The interest rate on the stock of loans to households and businesses fell by 10bps to 3.0% in June-July, a new all-time low, while ABI estimates a reduction by 2bps mom in August. The spread between the Italian rate on new loans to companies and that in the Euro area has been almost wiped out for loans of up to 1M, and has returned to negative territory for loans of higher amount. Rates on new loans to households for house purchase reached new all-time lows, especially fixed rates thus driving renegotiations and the growth in fixed-rate mortgages.

The average cost of outstanding bank funding continued to decline, reaching a new record low of 0.92% in July, thanks to the reduction in all the components and the lower weight of the more burdensome ones. ABI estimates point to a further drop in August.

Rates on outstanding loans to households and non-financial businesses (%)

Rates on outstanding bank funding (%)

0

1

2

3

4

Jul12 Jan13 Jul13 Jan14 Jul14 Jan15 Jul15 Jan16 Jul16

to households for house purchase

to non financial corporations

0

1

2

3

4


Total customer funding Deposits Debt securities

Source: Bank of Italy Source: Bank of Italy and Intesa Sanpaolo calculations

Rates on new household loans for house purchase (%) Short-term spread and overall spread (%)

0

1

2

3

4

5


Variable-rate loansFixed-rate loans (*)Average rate on new loans for house purchase

0

1

2

3

4

5


total spread short-term spread

Note: (*) Initial rate fixation period over 10 years Source: Bank of Italy

Source: Bank of Italy and Intesa Sanpaolo calculations

Further reduction in the spread between lending and borrowing rates



2016 EU-wide stress test results

The European Banking Authority (EBA) conducted another round of stress tests in 2016, including for a set of 51 large European banks covering about 70% of bank assets in Europe (see Appendix 1 for lists of banks). Similar to the earlier stress tests (the last one in 2014), the EBA applied an adverse scenario and calculated the effect on bank balance sheets, profit and loss accounts, and eventually on bank capital. In contrast to earlier stress tests, however, it did not specify a benchmark capital ratio and threshold relative to which a bank can either pass or fail the test.

At a European level, the stress test results offered few surprises, and median ratios under the adverse scenario were robust, at 9.2% for fully-loaded (FL) CET1 and at 4% for FL leverage ratios. The 2016 stress test was stricter and more conservative than the 2014 exercise test, while showing a stronger starting point (with CET1 about 200bps above the starting point in 2014).

EBA EU-wide stress test 2016: lowest CET1 ratio fully-loaded in the adverse scenario (by bank)

MPS=Banca Monte dei Paschi di Siena (IT); AIB=Allied Irish Bank (IE); RLH=Raiffeisen-Landesbanken-Holding (AT); BKIR=Bank of Ireland (IE); POP=Banco Popular Español (ES); UCG=Unicredit (IT); BARC=Barclays (UK); CMZB=Commerzbank (DE); SOCG=Société Générale(FR); DB=Deutsche Bank (DE). Source: Intesa Sanpaolo Research elaboration, EBA

Results for Italian banks under our coverage

We cover four Italian banks of the five that participated in the stress test.

EBA EU-wide stress test 2016 - Italian banks under our coverage - CET1 and leverage ratios fully-loaded CET1 ratio FL Leverage ratio FL Banks Dec-15

(%) Baseline

Dec-2018 (%)

Adverse Dec- 2018

(%)

Delta Adverse 2018/2015

(bps)

Baseline Dec 2018

(%)

Adverse Dec-2018

(%)


(bps) MPS 12.1 12.2 -2.4 -1451 4.9 -0.9 -582 Banco Popolare 12.4 14.6 9.0 -339 4.7 3.5 -120 Unicredit 10.4 11.5 7.1 -329 4.4 3.1 -123 UBI 11.6 13.0 8.8 -277 5.8 4.4 -137 Mean Italy 11.4 12.3 7.6 -380 5.1 3.6 -149 Mean Europe 12.6 13.8 9.2 -340 4.8 3.9 -84

Source: EBA

We show the key findings below:

The outlier was MPS, which reported negative FL CET1 and leverage ratios in the adverse scenario. Just before the publication of the results, it announced a rescue plan, including NPLs spin-off and a capital increase. In particular, the main negative impacts from the application of the adverse scenario on MPS were: (i) on net interest income (about CET1 -660bps), mainly due to the sharp rise in the cost of funding; (ii) on higher cost of credit (about CET1 –230bps); (iii) on AFS reserve (about CET1 -160bps); and (iv) on additional capital deductions (about CET1 -200bps).



Unicredit reported a FL CET1 ratio in the adverse scenario well below the European average, mainly as a result of the lower starting level, while pointing to an impact of the adverse scenario in line with the European average.

UBI and Banco Popolare reported FL CET1 ratios in the adverse scenario almost in line with the European average.



Italian Banks’ NPLs: Trend improving, Disposals uptrend

Italy’s severe recession in recent years caused a sharp deterioration in the credit quality of the Italian banking system in the 2008-2015 period, bringing the legacy non-performing exposures at substantial level. But, the ongoing improvement in the economy is reflected in risk indicators in the initial part of the current year, which were improving or at least stable.

In particular, the incoming flows of non-performing loans (NPLs), including all three impaired categories of bad debts, unlikely to pay and past-due loans, are diminishing. Already, in 4Q15 the flow of total new NPLs, in proportion to outstanding loans fell to 3.3% (net of seasonal factors and on an annualised basis), while it further dropped in 1Q16 to 2.9%, the lowest level since the start of the financial crisis (peak at 5.9% in 4Q13). Regarding the rate of new bad debts to firms it dropped to 3.8% in 2Q16 from 4.1% in 1Q16, i.e. the lowest since 1Q13.

Regarding stocks, the trend is of stabilisation. For the banking system as a whole (including clients resident and not resident in Italy), gross NPLs at YE15 slightly declined for the first time since 2008, totaling EUR 360Bn, of which EUR 210Bn were bad debts, or 18.1% and 10.6% of customer loans, respectively. Net of provisions, NPLs amounted at EUR 197Bn or 10.8% as a ratio to loans, of which EUR 87Bn of bad debts alone, or 4.8%. The bulk, c.79%, of gross NPLs was related to firms, of which c.48% was secured by collateral. Over the last three years, the write-downs made by banks entailed an increase of about 8% points in the NPL coverage ratio, which was 45.4% at YE15. NPLs are covered by capital and provisions, with the Texas ratio (ratio of gross NPLs to the sum of common equity tier 1 capital and loan loss provisions), though relatively high by international comparison, only slight more than 100% at YE15.

In July 2016, Italian banks’ bad debts (related to clients resident in Italy) totaled EUR 198Bn on a gross basis, down by 1.3% vs YE15, while even further declining by 4.6% to EUR 85Bn on a net basis. We note the coverage ratio was 57.2%, up 1.5pp compared to that at YE15.

In addition, distressed loan sales in Italy had until recently been extremely thin in relation to the outstanding stock, though increasing. According to Bank of Italy data, some EUR 16Bn of bad debts were sold and derecognised from banks’ balance sheets in the 2013-2015 period, of which some EUR 9Bn in 2015 (without considering the sale of EUR 8.5Bn bad debts belonging to four banks resolved at the end of 2015).

Italian banking system: Annual loan default rate, calculated on the amounts (*) (%)

Italian banking system: Gross and Net (**) bad debts1 (EUR Bn)

Note: (*) default rate for loan facilities. Ratio of “adjusted bad loans” (“sofferenze rettificate”) in the quarter to the volume of loans not included in the “adjusted bad loans” category. Annual figures are calculated as the sum of the four quarters ending with the quarter under review. Figures refer to banks, financial businesses and other entities reporting to the Central Credit Register.

Source: Bank of Italy and Intesa Sanpaolo Research Department calculations

Note: 1) Residents of Italy. Source: Bank of Italy and Intesa Sanpaolo Research elaboration

0,00,51,01,52,02,53,03,54,04,55,0

Jun09 Jun10 Jun11 Jun12 Jun13 Jun14 Jun15 Jun16

Total loans excluding MFIs

Non-financial corporations

Family businesses

Households

Legacy NPLs from the recession are significant, but credit quality continues to improve gradually

The incoming flows of non-performing loans (NPLs) is diminishing…

…and stocks stabilise

Distressed loan sales thin in relation to the outstanding stock, though increasing



Italian banking system: Bad loans in the banking sector as a % of total loans (*)

Italian banking system: Net (**) bad debt (YTD % change) and Coverage ratio (%) - Trend

(*) The change over time was the result of several events that broke the continuity of the time series. Among these, in January 2011 bad loans were affected by corporate transactions carried out by some banking groups.

Source: Bank of Italy and Intesa Sanpaolo Research Department calculations

Source: Bank of Italy and Intesa Sanpaolo Research elaboration

Asset quality of Top 7 Italian banks

In 2Q16 the credit quality of the Top 7 improved on average compared to YE15. In particular:

Gross NPLs declined by 2.6% YTD to EUR 234.9Bn, down by 0.8pp YTD to 17.9% as a ratio of total loans. Among banks we cover, Unicredit was the best performer with a gross NPL ratio at 14.5%, while MPS performed the worst at 34.9%, followed by BPER at 23.5%.

Gross bad debts rose slightly by 0.5% YTD to EUR 145.5Bn, at 62% of total gross NPEs, while declining by 0.1pp YTD to 11.1% as a ratio to total loans. Among banks we cover, Unicredit performed the best with gross bad debt ratio at 9.6%, while MPS was the worst at 21%, followed by BPER at 15%.

The total coverage ratio increased by 0.8pp YTD to 46.9%, of which 58.8% (+0.1pp) was on bad debts. Among banks we cover, Unicredit had the highest bad debt coverage at 61.6%, followed by MPS at 61.2%, while BP showed the lowest level at 41%.

Net NPLs dropped by 4% YTD to EUR 124.6Bn, and were down by 0.7pp YTD to 10.4% as a ratio to total loans.

Net bad debts rose slightly by 0.3% YTD to EUR 60Bn, while being broadly stable at 5% (-0.1pp) as a ratio to total loans. Among banks we cover, Unicredit was the best performer with a net bad debt ratio at 4%, while MPS performed the worst at 9.8%, followed by BP at 7.7%.

Top 7 Italian banks: Net NPLs ratio (YE08-2Q16 trend) Top 7 Italian banks: Bad debt and NPLs coverage ratios (2Q16)

NPLs= Bad debts +Unlikely to pay + Past due loans. ISP included in the aggregate not shown in the chart. Source: Intesa Sanpaolo Research elaboration on companies’ data

ISP included in the aggregate but not shown in the chart. Other NPLs = Unlikely to pay + Past due loans. Source: Intesa Sanpaolo Research elaboration on companies’ data

0%

4%

8%

12%

16%

20%

Jul9

9

Jul0

0

Jul0

1

Jul0

2

Jul0

3

Jul0

4

Jul0

5

Jul0

6

Jul0

7

Jul0

8

Jul0

9

Jul1

0

Jul1

1

Jul1

2

Jul1

3

Jul1

4

Jul1

5

Jul1

6

Non-financial companiesConsumer householdsFamily businessesTotal

Top 7 banks’ credit quality indicators improved in 2Q16 on average: Unicredit the best performer, while MPS underperformed



Top 7 Italian banks: Net Bad debt and Total NPL ratios (2Q16) Banks under coverage: Estimate buffer (bps) over SREP target after bad debts sale – price scenarios

Other NPLs = Unlikely to pay + Past due loans. ISP included in the aggregate not shown in the chart.Source: Intesa Sanpaolo Research elaboration on companies’ data

Unicredit SREP+G-SIB buffer. Intesa Sanpaolo estimate. Source: Intesa Sanpaolo Research elaboration on companies’ data

Measures to cut NPLs: Atlante/Atlante II Funds & GACS at the forefront

The high incidence of NPLs, a legacy of the long recession, has dented Italian banks’ earnings and, accordingly, their ability to raise capital and extend credit. The necessarily gradual reduction of these loans could benefit from the measures introduced in 2015 and 2016, including those to speed up credit recovery and the state guarantee scheme for securitised bad debts (GACS). Moreover, the recently-created private investment funds, dubbed Atlante and Atlante II, could foster the development of a secondary market for NPLs.

Recent approved measures to reduce resolution time and accelerate disposals of NPLs Changes in Insolvency and Foreclosure Regulations

Changes to Fiscal Framework State Guarantee on bad loans securitisation (GACS)

Atlante and Atlante II Funds

Persistency of NPLs also due to clogged judicial system

A broader reform1 adopted in 2015/16, addressing insolvency and foreclosure procedures: o Increase speed and

efficiency of insolvency procedures and property foreclosures;

o Promote higher recovery rates for creditors

Raise civil justice efficiency

New fiscal treatment of loan-loss charges adopted in 2015 to encourage write-offs and disposal of NPLs: o Loan-loss charges

immediately tax deductible in full (instead of pro-quota in five years)

o Remove DTAs related loan-loss charges in 10 years

Tax for the acquisition of foreclosure real estate assets: from 9% to a EUR 200 flat2

The buyer/seller price gap is a key factor restraining NPLs disposal

GACS is a scheme adopted in January 2016 to enable Italian banks to securitise bad debts with a State guarantee in a way not considered to be State aid

Banks’ participation is on a voluntary basis

Atlante Fund (April 2016), is a privately-capital-funded safety network designed to: (i) support recapitalisations of banks that are missing regulatory capital targets; and (ii) ease the deconsolidation of bad debts from banks’ balance sheets.

Atlante II Fund followed (subscription period ongoing) with the sole aim of supporting bad debts’ deconsolidation

Subscribers participation in both funds is on a voluntary basis.

Notes: 1) DL83/Jun-2015, enacted as Law 132/Aug-2015; DL59/May-2016, enacted as Law 119/June-2016. 2) To take advantage of the flat tax a buyer must turn around and sell the property within 24 months. Source: Intesa Sanpaolo Research elaboration, Bank of Italy, ABI

Atlante and Atlante II Funds

With the aim of preventing a negative spiral forming between the perceived need to unload NPLs quickly, causing banks additional losses, fall in shares prices and uncertainty about the outcome of future capital increases, two private funds, Atlante and Atlante II have been launched by the independent asset manager, Quaestio Capital Management SGR (Quaestio SGR).

Fisrt, in April 2016, Quaestio SGR launched Atlante Fund (Atlante), a close-end alternative investment fund, with the dual purpose of ensuring the success of certain banks’ capital increases as required by Supervisory Authorities and favouring the disposal of Italian banks bad loans. The closing was on 29 April 2016, with EUR 4.249Bn in size, over a minimum requirement of EUR 4Bn and an initial expected amount of up to EUR 6Bn. Investors in Atlante



are 67 Italian and foreign institutions, mainly banks (60% of total endowment, with the two major Italian players at a combined EUR 1.7Bn or 40%) and other institutional investors, including insurers and banking foundations, while the State involvement was limited to a minority participation by Cassa Depositi e Prestiti (CDP), a government-related entity. Atlante has an investment period of 18 months (November 2017, extendable for an additional 6m to May 2018) and has a maturity of five years (2021), plus three years renewable annually (2024) (see Appendix 2 for more details on Atlante’s main features).

Atlante fund participants – investment at closing Atlante fund participants – committed investment by Italian bank under coverage

Source: Intesa Sanpaolo Research elaboration on data by Quaestio SGR presentation on 29 April 2016

Source: Intesa Sanpaolo Research elaboration on companies’ data

Atlante fund is intended to invest in two type of assets: (i) shares of banks that must make capital increases at the request of the supervisory authority, acting as a back-stop facility; and (ii) junior and mezzanine tranches of bad debt securitisations of various banks, including those investing in the fund.

Regarding equity investments, the Atlante fund wholly subscribed the capital increases, for a total investment of EUR 2.5Bn (or 59% of the total endowment), of two Italian regional banks under stress, Banca Popolare di Vicenza (29 April 2016, EUR 1.5Bn) and Veneto Banca (30 June 2016, EUR 1Bn), which were requested by the ECB to restore capital ratios in line with SREP targets. As a result, the Atlante acquired a stake of 99.33% and of 97.64%, in the share capital of Banca Popolare di Vicenza and Veneto Banca, respectively.



Atlante Fund – The structure

Source: Intesa Sanpaolo Research elaboration, Quaestio SGR’s presentation on 29 April 2016, BP Vicenza and Veneto Banca press releases

Subsequently, Quaestio SGR launched Atlante II Fund (Atlante II), which differently from Atlante, may only invest in NPLs or instruments linked to NPL deals (for example warrants). On 8 August 2016, Quaestio SGR announced that Atlante II fund received commitment for subscriptions of EUR 1.715Bn, exceeding the minimum requirement (which was undisclosed, while reported at EUR 1.25Bn by the Italian financial media Il Sole 24 Ore on 30 September). Atlante II will continue collections, with the first subscription period closing in September 2016, aimed at reaching EUR 2.5-3.0Bn, while the final deadline for subscriptions will be 31 July 2017, expecting a final size of EUR 3.0-3.5Bn. On 30 September 2016, the Italian economic media Il Sole 24 Ore reported that Atlante II’s first closing could be postponed by one or two weeks (by mid-October) and that the fund should collect funds for EUR 2-2.5Bn, lower than expected. According to the same press article, major subscribers will include EUR 450M from Sga (state-owned), some EUR 500M from Italian insurers, and EUR 340-360M from major Italian banks.

Regarding investments in NPLs, we calculate that Atlante/Atlante II size will be in the 2-2.5Bn range, including the minimum amount for EUR 1.3Bn from the Atlante Fund. Considering that EUR 1.6Bn will be used by Atlante II fund to finance the acquisition of the mezzanine tranche of MPS’ NPLs securitisation within its rescue plan (disposal of EUR 28Bn of gross bad debts, or 9.2Bn net), this will leave resources of EUR 0.4-0.9Bn for other similar operations. The estimated firepower, in terms of bad debt reduction, will depend on expected NPL’s recovery streams and equity investors’ expected yields. While, as in the MPS’s deal, it will foster the usage by banks of the recently-approved state guaranteed assisted securitisation scheme (GACS).

According to Quaestio SGR (presentation on 29 April 2016), an estimated multiplier of 7-10x could apply in case of investments in NPLs-related ABS with only senior and junior tranches (35-40% tranching), while a multiplier of 18-20x in case of investments with mezzanine tranche as well. These multipliers depend also on the sale prices of NPLs. Using these multipliers as a reference, we calculate that Atlante/Atlante II may invest in in securitisations with underlying EUR 3-18Bn gross NPLs, in addition to MPS’s NPLs disposal of EUR 28Bn. Overall, this would represent some 16-23% reduction of outstanding bad loans of the Italian banking system, which is a good task, in our view.

Banks Insurers Foundations CDP Other Investors

Stakes in weak banks(up to 70% of funds)

SPV (NPL securitisation)

Quetsio Capital Management SGR

Best-in-class NPL servicer

ATLANTE(EUR 4.25Bn)

Banca Popolare di Vicenza

Veneto Banca

Junior / Mezanine tranche NPL-related SPV (at least 30% of funds / plus amounts not

used in capital increases)

NPL transfer to SPV

EUR 1.7BnEUR 2.5Bn

EUR 1.5Bn EUR 1Bn



Inaugural GACS scheme

On 12 August 2016, Banca Popolare di Bari (BPB) launched the first public Italian non-performing loans securitisation since 2007, which is also set to be the inaugural deal benefiting from the State guarantee on bad loans securitisation (GACS Scheme) (see appendix 2 for features of the GACS).

In particular, the GACS is a scheme adopted by the Italian Government in January 2016 to enable Italian banks to securitise bad debts with a State guarantee in a way that is not considered to be State aid. Within the scope of the scheme, banks will set up a series of SPV and pools of bad debts will be transferred to them. In order to fund the purchase, SPVs will issue notes of different seniority (junior, Mezzanine and Senior), backed by the transferred pools of assets, under the standard provisions of the Italian securitisation law. The State guarantee will be issued by the Italian Ministry of Finance on the senior notes, which will have to be investment grade, on a voluntary request by the bank.

The transaction envisages the issuance of notes for EUR 151M, equal to approximately 31.4% of GBV, including senior notes (Class A) at 26.4% of GBV, mezzanine notes (Class B) at 2.9%, and junior notes (Class J) at 2.1%. Senior notes are rated investment grade by Moody’s and DBRS, and benefit from the State guarantee.

The portfolio consists of non-performing loans for a total gross book value (GBV) equal to about EUR 480Bn, consisting of both secured loans (63%), backed by residential and/or commercial properties located in Italy, and unsecured loans (37%) extended to individuals and companies. The receivables are serviced by Prelios Credit Servicing.

Series Rating

Moody's Rating DBRS

Amount (EUR M)

% of GBV

Legal final Matuity

Coupon

Class A Baa1 BBB (high) 126.5 26.4 Dec.2036 6mE+0.5% Class B Ba2 B (high) 14.0 2.9 Dec.2036 6mE+6% Class J NR NR 10.035 2.1 Dec.2036 6mE+15% Total 150.54 31.4

Source: Intesa Sanpaolo Research elaboration, Moody’s and DBRS

We see this inaugural deal as positive, considering the tranching (about 84% is senior notes rated investment grade) and the sale price of NPLs (over 31%).



ECB Financing and Institutional Primary Market

Italian banks’ ECB refinancing very attractive with new TLTRO II

In August 2016, Italian banks’ recourse to the Euro-system was EUR 175Bn (stable mom, while up EUR 16Bn YTD), or 4.4% as a ratio of total assets, 2.5pp below the 2012 peak, but still high versus the pre-crisis level (<1%).

In particular, on 24 March 2016 the first of the four new four-year targeted long-term refinancing operations (TLTRO II) was carried out, with some 514 banks taking part, for a total take-out of over EUR 399Bn, or EUR 31Bn net of the voluntary repayments of EUR 368Bn of outstanding TLTRO I. Italian banks’ participation was again very significant, at EUR 29Bn or over 93% of the net amount (EUR 139Bn or 35%, gross). The second TLTRO II of end-September saw a lower participation, by 249 banks, for a gross amount of EUR 45Bn, while net of EUR 11Bn voluntary repayment of TLTRO I it was EUR 34Bn.

Within this framework, in March 2016 the seven major Italian banks repaid EUR 80Bn of TLTRO I, while raising over EUR 101Bn in the new TLTRO II auction, equal to some 25% of total allotment and 75% of net amount.

Moreover, Italian banks held a sizeable amount of ECB-eligible collateral. In particular, the major seven Italian banks reported EUR 263Bn of unencumbered eligible assets as at 1Q16.

Italian banks: ECB financing (trend) Top 7 Italian banks: ECB TLTROs financing at 1Q16

EUR Bn TLTRO I replaced

TLTRO II drawn

TLTRO II Net

TLTROs % TA

Unicredit 18.3 26.6 8.3 2.1 MPS 8.9 10.0 1.5 5.1 BP 11.9 11.9 0.0 9.7 UBI 8.1 10.0 1.9 6.9 BPER 2.0 4.0 2.0 3.3 BPM 3.4 3.0 -0.4 3.3 Top 7 80.2 101.5 21.7 6.6

TA = Total Assets. Note: (*) % of TA at end-July 2016. Source: Intesa Sanpaolo Research elaboration on Bank of Italy data

Intesa Sanpaolo ingluded in the Top 7 aggregate but not shown in the chart. . Source: Intesa Sanpaolo Research elaboration on companies’

Italian banks’ institutional primary market

Institutional benchmark Euro issuance by Italian banks in 2016 to date (27 September) slowed compared to the same period in 2015. In particular:

EUR 8.9Bn of total gross issuance (-40% yoy), while negative net issuance at EUR -12.3Bn (vs positive of EUR 1.2Bn in 2015), also in light of higher maturities (+54% yoy);

The drop in gross issuance was driven by senior bonds down by 77% yoy to EUR 1.7Bn and by covered bonds down by 36% yoy to EUR 4.5Bn.

In contrast, subordinated bonds rose to EUR 2.75Bn (vs EUR 0.7Bn), of which EUR 1.25 Bn AT1 instruments and EUR 1.5Bn T2 bonds.

58% gross issuance was by the two major players.

Regarding the major seven Italian banking group, Euro non-retail bond maturities will decline in the 2017-2018 period: by 10% in 2017, and by 20% in 2018.

Top 7 Italian banks raised 75% of total TLTRO II net of TLTRO I repayment

Primary wholesale market activity slowed significantly in 2016



Italian banks – Institutional EUR-denominated benchmark issuance

Top 7 banks: 2016-18 non-retail bond maturities (FY) at 1Q16

2016 issuance as at 27.09.2016. Source: Intesa Sanpaolo Research elaboration on Bloomberg and Companies’ data

Source: Intesa Sanpaolo Research elaboration on Bloomberg and Companies’ data

We expect the institutional issuance of the Top 7 Italian banks in 2017 to slow due to both lower maturities and subdued loan volumes. In particular, we expect the market to be eventually supported by issuance of new subordinated debt and CoCos instruments, due to the request to banks to maintain additional loss-absorbing capacity (MREL and TLAC). Covered bond issuance is set to continue, in our view.

Italian banks’ benchmark covered bonds

Italian banks’ benchmark covered bonds (CB) posted strong issuance in 2015, with EUR 12.75Bn marking the second strongest year ever, followed by a 2016 YTD issuance of EUR 4.75Bn. Like-for-like comparison shows that 2016 YTD remained weaker than the issuance in the same period in 2015 (at EUR 7Bn). All of the YTD 2016 issuance had a maturity at issuance of 7Y, except for the UBI EUR 250M tap, which falls under the 5-7Y maturity bucket. It is worth noting that the average size of the new issuance in 2016 YTD was lower, at EUR 792M, than that over the same period in 2015, at EUR 929M. With EUR 8.6Bn of bonds having matured in 2016 to date, net issuance was negative at EUR 3.85Bn, compared to the strong positive net issuance of EUR 4.25Bn in the same period in 2015.

The total Italian CBs outstanding to date (3 October 2016) stands at EUR 58.2Bn, under 62 bonds, of which 98% have fixed rates2 and 99% are mortgage-related.

Currently, there are 14 CB programmes in the Italian market in the amount of EUR 178Bn, only one of which – for the amount of EUR 20Bn – has public collateral, while a total EUR 58.2Bn are currently being used (the most used programme is UBI’s, at 63%). Among CB programmes, the soft-bullet format prevails (12), while only two programmes have a Conditional pass-through (CPT) format: one of Unicredit’s programmes, in the amount EUR 25Bn, and the only MPS programme, in the amount of EUR 10Bn.

Furthermore, CBs are also eligible for purchase by the ECB under the ongoing third Covered Bond Purchase Programme (CBPP3).

Italian banks’ covered bond programmes with outstanding wholesale issues (as of 03 October 2016) EUR Bn UCG ISP MPS UBI BP BPM BPER CARIGE CREDEM MEDIOBANCA CARPP BPSO

Amount 35.0 25.0 20.0 20.0 10.0 15.0 10.0 10.0 5.0 5.0 5.0 5.0 8.0 5.0 Used1 10.8 2.5 0.3 11.9 5.7 9.5 1.9 3.4 2.5 2.4 2.0 2.3 2.0 1.0 Cover Pool M M P M M M M M M M M M M M Maturity S-B CPT S-B S-B CPT2 S-B S-B S-B S-B S-B S-B S-B S-B S-B

Notes: 1) Used = Public issues outstanding. CB = Covered bond, M = Mortgages, P = Public, S-B = Soft-Bullet, CPT = Conditional Pass-through; 2) Conversion to conditional pass-through from soft-bullet approved by bondholders’ meeting on 25 June 2015. Source Intesa Sanpaolo Research elaboration on Bloomberg data

2 All but two issuances (EUR 500M 3Y floater and EUR 500M 5Y floater issued by Unicredit in January 2014 and September 2015, respectively) were fixed rate.

We expect the institutional primary market in 2017 to continue to slow, eventually supported by new capital instruments

EUR 4.75Bn issued in 2016 to date ...

... bringing the outstanding to EUR 58.2Bn ...

... under 14 programmes, of which two are CPT



Italian benchmark CB – outstanding volumes at YE (EUR Bn) Italian benchmark CB – issuing volumes and maturities yearly (EUR Bn)

Note: (*) 2016 as of 03.10.2016; Source: Intesa Sanpaolo Research elaboration on Bloomberg data

Note: (*) 2016 as of 03.10.2016; maturity FY. Source: Intesa Sanpaolo Research elaboration on Bloomberg data

Regarding outstanding volumes by maturities at issuance, the bulk (77.6%) is LT in the 7-13Y buckets. In 2016 to date, total maturities amounted to EUR 8.5Bn (up from EUR 1.5Bn in the same period in 2015), while total 2016 maturities are set to reach a record EUR 11.6Bn, followed by EUR 5.4Bn in 2017. The bulk of maturities (EUR 27.8Bn, accounting for around 41.5% of total outstanding CB) will mature in the 2022-2026 period.

Italian benchmark CB – outstanding volumes by year of maturity (EUR Bn)

Italian benchmark CB – outstanding volumes by maturity at issuance (as % of total)

As of 03.10.2016. Source: Intesa Sanpaolo Research elaboration on Bloomberg data As of 03.10.2016. Source: Intesa Sanpaolo Research elaboration on Bloomberg data

Benchmark covered bonds issued by Italian banks under our coverage

Issuance of Italian banks under our coverage (Unicredit, UBI, BP, BPM, BPER and MPS) in the wholesale CB market slowed slightly in 2016 to date, showing a total of EUR 3Bn (from four issuances in 2016 to date, of which UBI’s June 2016 EUR 250M bond got funged on 30 July 2016 by UBI’s existing 01/23 bond), down from EUR 5Bn in the same period of 2015. Maturities of new issuance in 2016 to date were confirmed LT. In particular, all of the 2016 to date issuance, except for UBI’s tap, have maturities at or above the 7Y bucket. With EUR 6.1Bn of bonds that matured in 2016 to date, net issuance stands at negative EUR 3.1Bn, well below the positive EUR 2.75Bn net issuance seen in the same period of 2015. We note here that 2015 maturities were concentrated in a period not included in the like-for-like comparison.

Given strongly supportive market conditions, mainly the ECB’s CBPP3 programme, banks managed to print the CBs under narrow spreads, despite the CBs’ longer maturities. In detail, BPM was the first bank under our coverage to issue a 7Y CB, in June 2016, which printed at 46bps over the mid-swap rate. This was followed by UBI’s tap later in June, which printed at 13bps over the mid-swap rate, much lower than the original bond issued in October 2015 at 36bps over the mid-swap rate, showing better market conditions. The latest issues this year were both 10Y CBs by Unicredit and UBI, which managed to print at 20bps and 19bps over the mid-swap rate, respectively, although the Unicredit one was in the CPT structure.

Bulk of maturities after 2021

Banks under our coverage issued EUR 3Bn of bonds in 2016 to date ...

... at narrow spreads, given supportive market conditions ...



Banks under our coverage account for EUR 36.3Bn, or 62% of total issuance of fixed coupon covered bonds in the Italian market. Unicredit continues to be the biggest issuer, at EUR 13.3Bn (23% of total issuance outstanding), followed by UBI, with EUR 9.5Bn (16%), and MPS, with EUR 5.7Bn (10%). BPM accounts for 6% and BPER and BP for 4% and 3%, respectively.

Banks under our coverage: outstanding volumes at YE (EUR Bn) Banks under our coverage: issuing volumes and maturities yearly (EUR Bn)

Note: (*) 2016 as of 03.10.2016; Source: Intesa Sanpaolo Research elaboration on Bloomberg data

Note: (*) 2016 as of 03.10.2016; maturity FY Source: Intesa Sanpaolo Research elaboration on Bloomberg data

Maturity at issuance of all outstanding CBs is at least in the 5Y bucket, except for Unicredit’s floater coupon bond (EUR 500M), which has a maturity at issuance of 3Y. The highest percentage (43%) of outstanding CBs have maturity at issuance in the 7-10Y bucket, followed by the 10-13Y bucket (40%) and the 5-7Y bucket (16%).

Banks under our coverage: outstanding volumes by year of maturity (EUR Bn)

Banks under our coverage: outstanding volumes by maturity at issuance (as % of total)


Banks under our coverage: UCG, UBI and MPS CB outstanding by maturity bucket at issuance (EUR Bn)

Banks under our coverage: BP, BPM and BPER CB outstanding by maturity bucket at issuance (EUR Bn)


... bringing the outstanding amount to EUR 36.3Bn

43% of outstanding CBs are from 7-10Y bucket



Total maturities (EUR 7.9Bn) in 2016 are spread across all banks under our coverage, excluding BPER. In 2017, the maturities are set to decrease (EUR 3.4Bn), with only Unicredit’s, UBI’s and BP’s CBs maturing, followed by slightly higher maturities in 2018 (EUR 4.5Bn) again only from three names we cover, and lower maturities in 2019 (EUR 2Bn).

Banks under our coverage: issuance and maturities* by banks under our coverage (EUR Bn)

Banks under our coverage: maturities in 2017, 2018 and 2019 by banks under our coverage (EUR Bn)

Note: (*) Issuance as of 03.10.2016; maturities FY. Source: Intesa Sanpaolo Research elaboration on Bloomberg data

As of 03.10.2016. Source: Intesa Sanpaolo Research elaboration on Bloomberg data

In the upcoming maturities, Unicredit accounts for the largest percentage (45%) of the 2017-2019 maturities, with EUR 4.5Bn, spread across all three years, followed by UBI (EUR 2Bn), with a bond maturing in 2017 and another one in 2019, and MPS (EUR 1.5Bn), with a bond maturing in 2018.

The total outstanding amount of CBs from banks under our coverage with a remaining maturity in the 1-3Y bucket is EUR 10.8Bn (30% of the total). The second-biggest maturity bucket is the 5-7Y bucket (23%), at EUR 8.5Bn, followed by the 7-10Y bucket (23%), at EUR 8.3Bn, and the 3-5Y bucket (21%), at EUR 7.8Bn. The remaining EUR 1Bn fall under the 10+Y bucket and represent 3% of the total outstanding amount of CBs issued by the banks under our coverage.

Unicredit – issuing volumes and maturities yearly (EUR Bn) UBI – issuing volumes and maturities yearly (EUR Bn)

Note: (*) Issuance as of 03.10.2016; maturity FY. Source: Intesa Sanpaolo Research elaboration on Bloomberg data

Note: (*) Issuance as of 03.10.2016; maturity FY. Source: Intesa Sanpaolo Research elaboration on Bloomberg data



MPS – issuing volumes and maturities yearly (EUR Bn) BPM – issuing volumes and maturities yearly (EUR Bn)

Source: Intesa Sanpaolo Research elaboration on Bloomberg data Source: Intesa Sanpaolo Research elaboration on Bloomberg data

BP – issuing volumes and maturities yearly (EUR Bn) BPER – issuing volumes and maturities yearly (EUR Bn)

Source: Intesa Sanpaolo Research elaboration on Bloomberg data Source: Intesa Sanpaolo Research elaboration on Bloomberg data

We believe that new issuance of CBs by Italian banks could slow down somewhat in 2016 and 2017, as upcoming maturities are decreasing. In our view, banks were and will continue to generally be able to issue CBs at narrow spreads, supported by the ECB’s CBPP3. The programme will be in place at least until March 2017, as will a generally supportive regulatory environment, with the ability to use CBs in the LCR ratios or the exemption of CBs from a bail-in in the case of issuers’ defaults. Furthermore, regulation harmonisation is coming into view and could soon be implemented across Europe, while Italian CB regulation is generally in line with the proposed harmonisation. On the other hand, poor secondary market liquidity continues to put pressure on the primary market activity. Furthermore, slowdown of new issuance could also be a result of banks looking into issuing TLAC/MREL eligible paper, besides the attractive alternative for covered bonds seen in the TLTROs. Thus, in our view, the CB primary market will slow down slightly in the remainder of 2016 and in 2017, supported only marginally by replacement of the maturing bonds.

AT1 and T2 instruments: recent trends (2014-2016 YTD)

European banks

The euro-denominated AT1 bonds issued by European banks registered a slowdown in 2016 to date, with only five new AT1 bonds in the amount EUR 4.2Bn issued, well below the EUR 9.6Bn (from 11 bonds issued) seen in the same period in 2015. European banks issue AT1 bonds, which are Basel III-compliant instruments, given the relatively low costs associated with these securities compared to common equity. The slowdown of issuance in 2016 to date was mainly a result of increased volatility, which resulted in a sell-off in February, as generalised fears regarding growth and bank earnings were seen (general volatility), combined with the Italian banking sector news flow and concerns about Deutsche Bank’s distributable reserves (sector-specific volatility), followed by the UK Brexit vote in June. Given the rough market conditions, banks slowed their AT1 issuance, but the recent ECB clarification of the Maximum Distributable

Activity in Italian CB primary market could slow down in 2016/2017

AT1 issuance in 2016 YTD amounted to EUR 4.2Bn



Amount (MDA) threshold in the Eurozone and the introduction of a total capital requirement, following the 2016 Supervisory Review and Evaluation Process (SREP), might both prove supportive for the AT1 issuance going forward.

In particular, the ECB is preparing changes to Eurozone banks’ Pillar 2 capital requirements for the MDA threshold. The Pillar 2 capital requirements will evolve into Pillar 2 requirement (P2R) and Pillar 2 guidance (P2G) components, resulting in the P2G not being relevant for the MDA threshold, and thus a breach of the P2G would not restrict the issuers from paying discretionary AT1 coupons. According to Fitch, this change will align the ECB requirements with other non-Eurozone supervisors within the EU, while also providing support for the AT1 market. Furthermore, the introduction of total capital requirements following the 2016 SREP ratio might give further incentive for banks with CET1 ratios close to the requirement to issue AT1 and T2 bonds to cover any shortfall to the 1.5% and 2% Pillar 1 requirements, respectively.

The euro-denominated T2 bonds issued by European banks in the amount of EUR 15.3Bn (from 20 bonds issued) in 2016 to date, topped the EUR 13.1Bn (from 14 bonds issued) in the same period of 2015. However, total 2015 issuance amounted to EUR 17.3Bn, from 20 issues. The euro-denominated T2 market showed strong issuance up to the end of May (EUR 12.8Bn from 16 issuances) before the UK Brexit vote, which effectively stopped euro-issuance for next two months, with them only slowly restarting in August.

Although AT1 and higher T2 issuance in 2016 to date was lower vs the same period in 2015, the euro-denominated Basel III-compliant market for European banks increased, given that the outstanding bonds have their first call dates/maturities set from 2019 onwards. As a result, the market looks set to grow even more in the coming years before redemptions start.

European banks: cumulative volumes of euro- denominated AT1 bonds issuance1 (EUR Bn)

European banks: cumulative volumes of euro- denominated T2 bonds issuance1 (EUR Bn)

(*) 2016 as of 03.10.16. Note: 1) Volumes cumulated each year separately. Issuance> EUR 100M. Source: Intesa Sanpaolo Research elaboration, Bloomberg data

(*) 2016 as of 03.10.2016. Note: 1) Volumes cumulated each year separately. Issuance> EUR 100M. Source: Intesa Sanpaolo Research elaboration, Bloomberg data

The highest amount of outstanding euro-denominated AT1 bonds issued from 1 January 2014 to 20 September 2016 were by banks in Spain, followed by banks in the UK, the Netherlands and France. The highest amount of outstanding euro-denominated T2 bonds issued in the same period were from French banks, followed by Spanish, Dutch, British and Swedish banks.

Pillar 2 capital requirement to evolve into P2R and P2G

T2 issuance in 2016 to date amounted to EUR 15.3Bn

Total Basel III-compliant bonds issued in 2014-2016 to date amounted to EUR 85.8Bn

Spain issued the most AT1 bonds, while France led the T2 issuance in 2014-2016 to date



European banks: cumulative volumes of euro- denominated AT1 bonds issuance1 by geography

European banks: cumulative volumes of euro- denominated T2 bonds issuance1 by geography

Note: 1) Issued from 01.01.2014 to 03.10.2016. Source: Intesa Sanpaolo Research elaboration, Bloomberg data

Note: 1) Issued from 01.01.2014 to 03.10.2016. Source: Intesa Sanpaolo Research elaboration, Bloomberg data

Regarding AT1 CoCos issued in 2014-2016 to date: 1) roughly 58% of the outstanding amount has full or partial write-downs from 19 issuances and 42% has conversion to equity from 12 issuances; and 2) among write-down features, around 93% of the outstanding amount has temporary write-downs from 17 issuances.

All AT1 CoCos issued in 2014-2016 to date have a mechanical trigger. In particular, 73% of the outstanding amount has mechanical triggers in line with the 5.125% CET1 level from 20 issuances, proposed by Basel III (the so-called “low trigger”), though around 27% of mechanical triggers is set at or above 7% CET1 (“high trigger”) from 11 issuances.

(See the table below for CoCos AT1 and T2 issued in 2016 to date.)

Additional Tier 1 instruments issued by EU banks in 2016 to date (euro-denominated) Launch Date Name Type Coupon

(%) EUR M Maturity Call Conversion Trigger

(CET1) Contractual

PONV Moody's S&P Fitch

2016 Jan.12 Intesa Sanpaolo AT1 7.000 1,250 Perpetual 19-Jan-21 Temporary Write Down 5.125% No Ba3 B+ BB- Apr.07 BBVA AT1 8.875 1,000 Perpetual 14-Apr-21 Equity Conversion 5.125% No Ba2 - BB Apr.19 Rabobank AT1 6.625 1,250 Perpetual 29-Jun-21 Temporary Write Down 5.125% No Baa3 - BBB- Apr.28 Bankinter AT1 8.625 200 Perpetual 10-May-21 Equity Conversion 5.125% No Ba3 - - May.25 Erste Bank AT1 8.875 500 Perpetual 15-Oct-21 Temporary Write Down 5.125% No Ba3u BB -

Notes: The ratings reported in the table are those at issue date on individual issues; PONV = Point of non-viability; Bonds issued up to 03.10.2016. Source: Intesa Sanpaolo Research elaboration, Bloomberg data (only public issues that amount to a minimum of EUR 100M were included)

T2 plain vanilla instruments issued by EU banks in 2016 to date (euro-denominated) Launch Date Name Type Coupon (%) EUR M Floater/Fixed Maturity Call Spread at issue1 Moody's Fitch S&P 2016 Jan.11 ABN AMRO T2 2.875 1,000 Variable 18-Jan-28 18-Jan-23 245 Baa2 BBB- A- Mar.11 BNP Paribas T2 2.875 750 Fixed 1-Oct-26 - 227 Baa2 BBB+ A Mar.15 Santander T2 3.250 1,500 Fixed 4-Apr-26 - 268 Baa2 BBB BBB+ Mar.16 Commerzbank T2 2.375 1,000 Fixed 23-Mar-26 - 340 Ba1 BBB- BBB Mar.17 BFCM T2 2.375 1,000 Fixed 24-Mar-26 - 190 A3 BBB A Apr.06 ING Bank T2 3.000 1,000 Variable 11-Apr-28 11-Apr-23 285 Baa2 BBB A Apr.12 BPCE T2 2.875 750 Fixed 22-Apr-26 - - Baa3 BBB A- Apr.27 UBI T2 4.250 750 Variable 5-May-26 5-May-21 455 Ba2 BB BBB- Apr.28 Banco De Sabadell T2 5.625 500 Fixed 6-Apr-26 - 499 B1 B+ - Apr.28 Belfius Bank T2 3.125 500 Fixed 11-May-26 - 255 NR BBB- - May.12 Deutsche Bank T2 4.500 750 Fixed 19-May-26 - 400 Ba2 BB+ BBB+ May.18 Argenta Spaarbank T2 3.875 500 Variable 24-May-26 24-May-21 395 - BBB- - May.25 Credit Mutuel Arkea T2 3.250 500 Fixed 1-Jun-26 - - - BBB - May.26 Unicerdit T2 4.375 750 Variable 3-Jan-27 3-Jan-22 - Ba1 BB BBB May.31 HSBC T2 3.125 1,000 Fixed 7-Jun-28 - 240 A2 BBB+ A+ May.31 La Banque Postale T2 3.000 500 Fixed 9-Jul-28 - 225 - BBB- - Aug.03 BNP Paribas T2 2.250 750 Fixed 11-Jan-27 - 195 Baa2 BBB+ A Aug.31 Nordea Bank T2 1.000 1,000 Variable 7-Sep-26 7-Sep-21 125 Baa1 A- A+ Sep.05 CFCM Nord Europe T2 2.125 300 Fixed 12-Sep-26 - 195 - BBB - Sep.19 LBBW T2 2.875 500 Fixed 28-Sep-26 - 255 Baa2 - BBB

The ratings reported in the table are those at issue date on individual issues. Notes: 1) For fixed bond spreads over MID Swap at launch. Bonds issued up to 03.10.2016. Source: Intesa Sanpaolo Research elaboration, Bloomberg data (only public issues that amount to a minimum of EUR 100M were included)

Write-downs account for 58% and equity conversions account for 42% of outstanding amounts

“Low-trigger” accounted for 73% and “high trigger” accounted for 27% of total issuance in 2014-2016 to date



Italian banks

In Italy, three euro-denominated Basel III capital instruments from three different banks were issued in the wholesale capital market in 2016 to date. In January, Intesa Sanpaolo issued EUR 1.25Bn of AT1 bond, followed by UBI and Unicredit in May, each issuing a EUR 0.75Bn T2 bond.

The AT1 bond issued in January by Intesa Sanpaolo represents the fourth AT1 bond in the Italian market, after Unicredit’s issuance of USD and EUR bonds in 2014 and Intesa Sanpaolo’s USD issuance in 2015. All of the issuances received strong demand, with both the USD AT1 bonds (at least 6x over) attracting much stronger demand than the EUR ones (at least 2x over), despite both USD AT1 bonds being non-callable for 10Y from the issue date vs 7Y for Unicredit’s EUR AT1 bond and 5Y for Intesa Sanpaolo’s AT1 bond.

Below, we summarise the main features of Unicredit’s and Intesa Sanpaolo’s AT1 bonds issued in 2014-2016 to date.

AT1 bonds issued by Unicredit and Intesa Sanpaolo in 2014-2016 to date Unicredit Intesa Sanpaolo Currency USD EUR USD EUR Size (M) 1,250 1,000 1,000 1,250 Book size (M) 8,000 2,000 6,000 3,250 Rating: Moody's/S&P/Fitch -/-/BB- -/-/BB- Ba3/B+/BB- Ba3/B+/BB- Launch date 27.03.2014 03.09.2014 10.09.2015 12.01.2016 Maturity Perpetual Perpetual Perpetual Perpetual First call @ issuance 03.06.2024 10.09.2021 17.09.2025 19.01.2021 First call Y 10 7 10 5 Coupon 8.00% 6.75% 7.70% 7.00% Type AT1-Wd/Wu AT1-Wd/Wu AT1-Wd/Wu AT1-Wd/Wu Trigger level CET1 5.125% CET1 5.125% CET1 5.125% CET1 5.125% Price-Bid 100 100 100 100 Current price1 (03.10.2016) 85.0 85.6 88.5 93.5 Spread at reset date2(bps) 518 610 546 688 Demand: Foreign 80% 88% 88%2 89% Major subscribers: Funds 71% 84% 70% 86% Listed Yes Yes No Yes

Note: 1) Current price at 11:00AM on 03.10.2016. 2) Spread over 5Y Mid-swap rate at each coupon resettable date every 5 years after first call date, if not redeemed; 2) Excluding the European accounts. Source: Unicredit, Intesa Sanpaolo, Bloomberg (BGN)

In terms of subscribers, all four AT1 deals issued by Italian banks so far were distributed to different institutional investors, with over 70% going to funds. At least 80% of demand came from foreign investors. All four deals are a temporary write-down type of AT1 bond and have a mechanical trigger in line with the 5.125% CET1 level proposed by Basel III, making them “low-trigger” CoCo bonds.

Three additional issuances of new Basel III capital instruments in Italy in 2016 to date

Foreign demand accounted for at least 80%



Company Section



BP: Credit View NEUTRAL (Ba3/*+, -, BB/Negative)

Key Credit Drivers

BP recorded a net loss in 2Q16 lower than market consensus expectations. 1H16 results were mainly negatively affected by pre-merger loan impairments, while capital ratios were boosted by a EUR 1Bn cash call in June.

BP and BPM called a shareholders’ meetings regarding the merger and the transformation into a joint stock company for 15 October, in line with the expected merger deal timetable, ie, completion by YE16.

No rating actions on BP have occurred since April 2016, when Fitch (outlook downgraded to Negative) and Moody’s (placed in review for upgrade) made announcements, following the agreed merger with BPM.

Outperformer1 YTD (based on credit spread change, price for T1/AT1)

Underperformer1 YTD (based on credit spread change, price for T1/AT1)

CB BPIM 3 5/8 3/17 T2 (bullet) BPIM 6 3/8 5/21 CB BPIM 0 3/4 3/22 T2 (bullet) BPIM 6 11/20 Senior (fx) BPIM 2 5/8 9/18 T1/AT1 BPIM 6.756 6/49 Senior (fx) BPIM 2 3/4 7/20 T1/AT1 BPIM 6.156 6/49

Strengths Weaknesses

Fourth-largest Italian and largest cooperative bank by TA.

Mainly concentrated in the wealthiest area of northern Italy.

Healthy liquidity and capital base > SREP target.

Weak asset quality, worse than average for peers.

Business mostly concentrated in Italy, mainly towards SMEs.

Sizeable exposure to Italian government bonds, though mainly ST.

Total income, operating costs, cost/income ratio (excl systemic charges) (trend)

Net NPE ratios (trend)

Source: Company data, Intesa Sanpaolo Research elaboration Source: Company data, Intesa Sanpaolo Research elaboration

Bonds’ maturity profile, 2016-18 (FY) CET1 ratio (trend) vs SREP target


CB Sen Uns Sub Jun Sub Hybrid IG HOLD - - - - HY - HOLD HOLD - HOLD

1. List of BP’s bonds in Appendix 3 (page 51, 52, 53) In the rating section: *+= under review for a possible upgrade

Maria Grazia Antola Credit Analyst

+39 02 8794 1114



BP in Brief

Banco Popolare Societa Cooperativa attracts deposits and offers commercial banking services. The bank provides consumer credit, corporate finance and asset management services.

Consolidated income statement – Main items

EUR M 2Q15 1Q16 2Q16 qoq % yoy % 1H15 1H16 yoy % Net interest 402 352 340 -3.4 -15.5 789 691 -12.4 Net fees and commissions 350 317 323 1.8 -7.9 771 639 -17.1 Total income 882 807 753 -6.6 -14.6 1,830 1,560 -14.7 Operating costs 530 515 514 -0.2 -3.0 1,067 1,030 -3.5 Operating profit 352 291 239 -18.0 -32.1 763 530 -30.5 Total provisions and write-downs 223 686 304 -55.7 36.4 428 990 NM of which: net write-downs to loans 194 684 296 -56.8 52.7 375 980 NM Systemic charges (*) 0 44 40 -8.8 NM 23 85 NM Profit before tax 125 -439 -105 NM NM 308 -544 NM Goodwill impairment 0 0 0 NM NM 0 0 NM Net profit (loss) attributable to the Group 84 -314 -66 NM NM 293 -380 NM

(*) Systemic charges: contribution to SRF, DGS, bank levies, DTAs fee. NM = Not meaningful. Source: Intesa Sanpaolo Research elaborations on company data BP: Consolidated balance sheet – Main items

ASSETS EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Cash and cash balances 549 587 581 -1.1 5.8 Financial assets and hedging instruments 28,371 27,531 29,366 6.7 3.5 Due from banks 4,393 2,818 3,496 24.1 -20.4 Due from customers 80,272 78,422 79,446 1.3 -1.0 Equity investments 1,085 1,166 1,133 -2.8 4.5 Tangible and intangible assets 4,179 4,175 4,153 -0.5 -0.6 Non-current assets and held for sale 135 110 75 -31.5 -44.1 Other assets 6,038 5,428 5,449 0.4 -9.8 TOTAL ASSETS 125,021 120,237 123,699 2.9 -1.1 LIABILITIES EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Due to banks 17,726 16,335 16,204 -0.8 -8.6 Due to customers and debt securities in issue 83,762 82,141 83,146 1.2 -0.7 Financial liabilities and hedging instruments 7,687 8,565 10,252 19.7 33.4 Provisions for risks and charges 1,245 1,061 1,001 -5.6 -19.6 Non-current liabilities and held for sale 1,828 342 0 NM NM Other liabilities 4,287 3,247 4,132 27.3 -3.6 Minorities 67 53 87 NM 30.6 Shareholders’ equity 8,419 8,494 8,876 4.5 5.4 TOTAL LIABILITIES 125,021 120,237 123,699 2.9 -1.1

NM = Not meaningful. Source: Intesa Sanpaolo Research elaborations on company data BP - Key consolidated economic-financial indicators (historical trend)

2012 2013 2014 2015 1H16 Profitability ratios (%) ROAE (excl impairment on goodwill and other intangibles) NM NM NM 5.4 NM ROAA (excl impairment on goodwill and other intangibles) NM NM NM 0.4 NM Cost/income ratio (excl systemic charges) 70.3 64.8 67.0 60.6 66.0 Asset Quality ratios (%) Net bad debt ratio 4.7 6.4 7.5 8.2 7.7 Cost of risk (bps) 139 196 446 103 247 Liquidity ratios (%) Loan/deposit ratio 97 96 92 96 96 B3 LCR (Liquidity Coverage Ratio) --- --- --- > 180 > 150 B3 NSFR (Net Stable Funding Ratio) --- --- --- c. 97 >100 Capital and Leverage ratios (%) B2 cT1 (up to YE13) / B3 CET1 phase-in 10.1 9.7 11.9 13.2 14.8 B3 CET1 fully -loaded --- --- 11.3 12.4 14.1 B2 T1 (up to YE13) / B3 T1 phase-in 11.2 10.6 0.0 13.2 14.8 B2 TC (up to YE13) / B3 TC phase-in 14.0 13.3 0.0 15.9 18.1 B3 Leverage ratio phase-in --- --- --- 5.0 5.3 B3 Leverage ratio fully-loaded --- --- --- 4.7 5.0 Headcount and Branch network Number employees – monthly mathematical average 18,038 17,671 17,179 16,731 16,660 Number of branches in Italy 1,922 1,924 1,812 1,813 1,695

B2 = Basel 2; B3 = Basel 3; cT1 = core Tier 1; T1 = Tier 1; TC = Total Capital. Source: Intesa Sanpaolo Research elaborations on company data.



BPER: Credit View NEUTRAL (Ba2/Negative, BB-/Positive, BB/Stable) Key Credit Drivers

BPER reported net profit in 1Q16 below market consensus. The major positive lever was the increase in capital ratios at best-in-class level due to the rollover of AIRB models.

Stress test also pointed to very good resilience of BPER in the adverse scenario.

We see potential for BPER to take part in the sector consolidation, with the aim of increasing in size.

On 27 September 2016, Moody’s assigned a Ba2 long- term issuer rating to BPER, with Negative outlook, while upgrading the rating on covered bonds by 2 notches to Aa2

Outperformer 1YTD (based on credit spread change, price for T1/AT1)

Underperformer 1YTD (based on credit spread change, price for T1/AT1)

CB BPEIM 0 1/2 07/20 T2 (floater) NA* CB BPEIM 3 3/8 10/18 T2 (floater) NA* Senior (fx) - T1/AT1 - Senior (fx) - T1/AT1 -


Sixth-largest Italian bank and third-largest cooperative bank.

Strong retail funding.

Best-in-class leverage and capital ratio well above SREP.

Poor asset quality and high cost of risk, above peers.

Weak profitability.

Exposure to fragile economies of Italy’s southern regions.

Total income, operating costs, cost/income ratio (excl. Systemic charges) (trend)



Bonds’ maturity profile 2016-18 (FY) CET1 ratio (trend) vs SREP target


CB Sen Uns Sub Jun Sub Hybrid IG HOLD - - - - HY - - HOLD - -

1. List of BPER’s bonds in Appendix 3 (page 52,53) * NA = Not Applicable for only one benchmark bond


+39 02 8794 1114



BPER in brief

Banca Popolare dell'Emilia Romagna SC is a cooperative bank that operates branches throughout Italy. The bank attracts deposits and offers loans, credit cards, pension plans, investment funds, insurance, asset management, and online trading services.

Consolidated income statement – Main items EUR M 2Q15 1Q16 2Q16 qoq % yoy % 1H15 1H16 yoy % Net interest 308 297 294 -1.1 -4.8 622 590 -5.2 Net fees and commissions 181 177 181 2.2 0.2 360 358 -0.5 Total income 527 505 549 8.6 4.1 1,082 1,054 -2.6 Operating costs 317 315 325 3.2 2.4 628 640 1.9 Operating profit 210 190 224 17.7 6.7 455 414 -8.9 Total provisions and write-downs 170 131 163 24.4 -4.2 334 294 -12.0 of which: net write-downs to loans 150 114 162 41.8 7.8 298 276 -7.3 Systemic charges (*) 10 15 11 -24 11 10 26 NM Profit before tax 37 47 45 -4.2 23.9 116 93 -19.7 Goodwill impairment 0 0 0 NM NM 0 0 NM Net profit (loss) attributable to the Group 28 31 34 9.0 20.5 73 65 -11.6

(*) Systemic charges: contribution to SRF, DGS, bank levies, DTAs fee. NM = Not meaningful. Source: Intesa Sanpaolo Research elaborations on company data

Consolidated balance sheet – Main items ASSETS EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Cash and cash balances 365 390 340 -12.9 -6.9 Financial assets and hedging instruments 11,820 11,601 13,087 12.8 10.7 Due from banks 1,476 1,087 1,045 -3.9 -29.2 Due from customers 43,426 43,703 43,990 0.7 1.3 Equity investments 264 415 431 3.7 NM Tangible and intangible assets 1,445 1,456 1,436 -1.4 -0.7 Non-current assets and held for sale 3 0 0 NM NM Other assets 2,125 2,608 2,122 -18.6 -0.2 TOTAL ASSETS 60,925 61,261 62,450 1.9 2.5 LIABILITIES EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Due to banks 6,092 5,523 8,086 46.4 32.7 Due to customers and debt securities in issue 46,160 47,256 45,665 -3.4 -1.1 Financial liabilities and hedging instruments 285 266 314 18.2 10.2 Provisions for risks and charges 557 611 639 4.6 14.9 Non-current liabilities and held for sale 0 0 0 NM NM Other liabilities 2,174 1,954 2,084 6.7 -4.2 Minorities 622 627 675 7.5 8.4 Shareholders’ equity 5,035 5,025 4,987 -0.7 -1.0 TOTAL LIABILITIES 60,925 61,261 62,450 1.9 2.5

NM = Not meaningful. Source: Intesa Sanpaolo Research elaborations on company data

Key consolidated economic-financial indicators (trend) 2012 2013 2014 2015 1H16 Profitability ratios (%) ROAE (excl. impairment on goodwill and other intangibles) NM 0.2 0.3 4.6 2.7 ROAA (excl. impairment on goodwill and other intangibles) NM 0.0 0.0 0.4 0.2 Cost/income ratio (excl. Systemic charges) 57.4 56.0 56.9 57.7 60.7 Asset quality ratios(%) Net bad debt ratio 3.9 5.3 6.4 6.8 7.0 Cost of risk (bps) 199 168 185 162 126 Liquidity ratios (%) Loan/deposit ratio 102 99 96 92 96 B3 LCR (liquidity coverage ratio) --- --- 125 136 112 B3 NSFR (net stable funding ratio) --- --- 115 111 > 100 Solvency and leverage ratios (%) B2 cT1 (up to YE13) / B3 CET1 phase-in o 8.3 8.6 11.3 11.5 14.5 B3 CET1 fully –loaded --- --- 10.9 11.2 14.1 B2 T1 (up to YE13) / B3 T1 phase-in 8.3 8.6 11.3 11.7 14.6 B2 TC (up to YE13) / B3 TC phase-in 12.1 11.9 12.2 12.8 16.0 B3 Leverage phase-in --- --- 7.2 7.1 7.0 B3 Leverage fully-loaded --- --- 6.9 6.9 6.9 Headcount and branch network Number of employees and other personnel 11,834 11,718 11,593 11,447 11,451 Number of branches in Italy + Luxembourg 1,297 1,308 1,274 1,217 1,176

NM = Not meaningful. B2 = Basel 2; B3 = Basel 3; cT1 = core Tier 1; CET1 = Common Equity Tier 1; T1 = Tier 1; TC = Total Capital. Source: Intesa Sanpaolo Research elaboration on company data



BPM: Credit View NEUTRAL (Ba3/*+, -, BB+/*-)

Key Credit Drivers BPM reported 2Q16 net profit above market consensus expectations. Asset quality showed a broadly stable

trend, while the capital position was confirmed to be well above the ECB SREP target.

BPM and BP called a shareholders’ meetings regarding the merger and the transformation into a joint stock company for 15 October, in line with the expected merger deal timetable, ie, completion by YE16.

No rating actions on BPM have occurred since April 2016, when Moody’s (placed on review for upgrade) and Fitch (placed on rating watch negative) made announcements, following the agreed merger with BP.



CB PMIIM 0 7/8 09/22 T2 (bullet) NA* CB PMIIM 0 5/8 06/23 T2 (bullet) NA* Senior (fx) NA* T1/AT1 NA* Senior (fx) NA* T1/AT1 NA*


Seventh-largest Italian bank and fourth-largest cooperative bank.

Strong position in Italy’s wealthy northern regions.

Flexible funding, with good access to retail customers.

Solid capitalisation, well above the SREP target.

Significant exposure to the real estate sector, though declining.

Business concentrated in Italy, mainly towards SMEs.

Sizeable exposure to Italy’s bonds.




Bonds maturity profile, 2016-18 (FY) CET1 ratio (trend) vs SREP target


CB Sen Uns Sub Jun Sub Hybrid IG HOLD - - - - HY - HOLD HOLD - HOLD

1. List of BPM’s bonds in Appendix 3 (page 51,52, 53) *) NA = Not Applicable for only one benchmark bond In the rating section: *+/*-= under review for a possible upgrade/downgrade


+39 02 8794 1114



BPM in brief

Banca Popolare di Milano Scarl (BPM) is a cooperative bank that operates branches throughout Italy. It attracts deposits and offers commercial banking services. The bank offers brokerage, trust, lease financing, asset management, private banking, and factoring services, manages mutual funds, and provides insurance services.

Consolidated income statement – Main items EUR M 2Q15 1Q16 2Q16 qoq % yoy % 1H15 1H16 yoy % Net interest 207 207 197 -4.8 -4.9 403 403 0.0 Net fees and commissions 158 151 152 0.5 -4.0 307 303 -1.1 Total income 398 389 450 15.7 13.1 824 839 1.9 Operating costs 232 238 245 3.1 5.5 469 483 3.0 Operating profit 165 151 205 35.5 23.9 355 356 0.4 Total provisions and write-downs 92 66 85 29.5 -7.0 167 151 -9.7 of which: net write-downs to loans 95 66 92 39.0 -2.8 181 159 -12.3 Systemic charges (*) 4 14 0 NM NM 12 14 16.1 Profit before tax 107 73 150 NM 40.5 212 223 4.8 Goodwill impairment 0 0 0 NM NM 0 0 NM Net profit (loss) attributable to the Group 86 48 110 NM 27.0 154 158 2.6

(*) Systemic charges: contribution to SRF, DGS, bank levies, DTAs fee. NM = Not meaningful. Source: Intesa Sanpaolo Research elaborations on company data

BPM: Consolidated balance sheet – Main items ASSETS EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Cash and cash balances 224 301 206 -31.4 -8.0 Financial assets and hedging instruments 11,701 11,405 10,413 -8.7 -11.0 Due from banks 1,163 1,225 1,812 48.0 55.9 Due from customers 33,483 34,187 34,520 1.0 3.1 Equity investments 331 342 340 -0.5 2.9 Tangible and intangible assets 825 857 869 1.4 5.3 Non-current assets and held for sale 6 0 0 NM NM Other assets 1,576 1,886 1,536 -18.6 -2.5 TOTAL ASSETS 49,308 50,203 49,698 -1.0 0.8 LIABILITIES EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Due to banks 4,495 4,839 4,728 -2.3 5.2 Due to customers and debt securities in issue 36,802 37,602 36,790 -2.2 0.0 Financial liabilities and hedging instruments 1,371 1,232 1,504 22.1 9.7 Provisions for risks and charges 468 435 410 -5.7 -12.4 Non-current liabilities and held for sale 0 0 0 NM NM Other liabilities 1,666 1,448 1,674 15.6 0.5 Minorities 19 20 20 0.7 5.6 Shareholders’ equity 4,488 4,627 4,571 -1.2 1.9 TOTAL LIABILITIES 49,308 50,203 49,698 -1.0 0.8

NM = Not meaningful. Source: Intesa Sanpaolo Research elaborations on company data BPM: Key consolidated economic-financial indicators (historical trend) 2012 2013 2014 2015 1H16 Profitability ratios (%) ROAE (excl impairment on goodwill and other intangibles) NM 0.8 5.9 6.7 7.2 ROAA (excl impairment on goodwill and other intangibles) NM 0.1 0.5 0.6 0.6 Cost/income ratio (excl Systemic charges) 76.3 58.6 60.0 57.7 59.3 Asset quality ratios(%) Net bad debt ratio 2.5 3.4 4.2 4.4 4.5 Cost of risk (bps) 158 171 128 104 92 Liquidity ratios (%) Loan/deposit ratio 90.3 90.6 87.1 90.9 93.8 B3 LCR (Liquidity Coverage Ratio) --- --- --- > 100 > 100 B3 NSFR (Net Stable Funding Ratio --- --- --- --- > 100 Solvency and Leverage ratios (%) B2 cT1 (up to YE13) / B3 CET1 phase-in o 8.4 7.2 11.6 11.5 11.7 B3 CET1 fully–loaded --- --- 12.4 12.2 12.2 B2 T1 (up to YE13) / B3 T1 phase-in 9.0 7.8 12.2 12.1 12.2 B2 TC (up to YE13) / B3 TC phase-in 12.1 10.7 15.4 14.3 14.1 B3 Leverage ratio phase-in --- --- 7.9 7.7 7.9 B3 Leverage ratio fully-loaded --- --- --- --- 7.9 Headcount and Branch network Total head count at period-end 8,312 7,846 7,759 7,743 7,720 Number of branches in Italy 769 716 654 655 655

B2 = Basel 2; B3 = Basel 3; cT1 = core Tier 1; T1 = Tier 1; TC = Total Capital. Source: Intesa Sanpaolo Research elaborations on company data



MPS: Credit View NEUTRAL (B3/*, -, B-/*)

Key Credit Drivers MPS reported a net profit in 2Q16 above market consensus expectations, while asset quality remained very

weak and below that of peers.

Shown in a European stress test to be the weakest bank to a severe economic shock, MPS announced (on 29 July) a rescue plan aimed at selling the entire stock of bad loans while increasing coverage ratios and offsetting the related losses, in order to restore capital ratios at current level, via a EUR 5Bncapital increase.

Following a management reshuffling, with a new CEO appointed in mid-September, MPS will present a new business plan on 24 October, while a EGM meeting will be scheduled by end-November. MPS is working on the capital plan structure, including a voluntary conversion of subordinated bonds into equity, under study but for which no technicalities have been provided yet.

We expect the conversion of subordinated bonds together with the participation of anchor investors MPS is looking for (according to media, including Il Sole 24 Ore) to reduce the high execution risk of the capital plan.

In August, following the announcement of the rescue plan, Fitch placed MPS’ rating on Rating Watch Evolving, while Moody’s changed its review trend from negative to uncertain.



CB MONTE 2 7/8 7/24 T2 (bullet) MONTE 5.6 9/20 CB MONTE 5 02/18 T2 (bullet) MONTE 5 4/20 Senior (fx) NA* T1/AT1 MONTE 0 6/49 Senior (fx) NA* T1/AT1 MONTE 6.6 12/49


Third-largest Italian bank by total assets.

Turnouround ongoing, but progress slow.

Adequate liquidity.

Very weak asset quality, worse than peers.

Limited capital ratios buffer over SREP.

Sizeable exposure to Italy’s bonds (also M/LT).



2015 net of Alexandria deal restatementl. Source: Company data, Intesa Sanpaolo Research elaboration

Source: Company data, Intesa Sanpaolo Research elaboration

Bonds’ maturity profile, 2016-18 (FY) CET1 ratio (trend) vs SREP targets


0.0

2.0

4.0

6.0

8.0

10.0

FY16 FY17 FY18

EUR Bn Non Retail Retail

CB Sen Uns Sub Jun Sub Hybrid

IG BUY - - - - HY - BUY HOLD - HOLD


+39 02 8794 1114



MPS in brief

Banca Monte dei Paschi di Siena S.p.A. attracts deposits and offers commercial banking services. MPS provides credit, asset management services, insurance, mutual funds, internet banking, and investment banking services.

Consolidated income statement – Main items (Alexandria deal restated as CDS derivative) EUR M 2Q15 1Q16 2Q16 qoq % yoy % 1H15 1H16 yoy % Net interes 554 548 487 -11.2 -12.1 1,161 1,035 -10.8 Net fees and commissions 484 457 484 5.9 -0.1 927 941 1.5 Total income 1,255 1,185 1,159 -2.2 -7.7 2,628 2,345 -10.8 Operating costs 657 645 634 -1.7 -3.6 1,311 1,279 -2.4 Operating profit 598 541 525 -2.8 -12.2 1,317 1,066 -19.1 Total provisions and write-downs 547 355 339 -4.4 -38.1 1,031 693 -32.7 of which: net write-downs to loans 516 346 372 7.7 -27.8 984 718 -27.0 Systemic charges (*) 0 71 109 52.6 NM 0 180 NM Profit before tax 176 122 78 -36.3 -55.7 412 201 -51.3 Net profit (loss) attributable to the Group 185 93 209 NM 12.6 329 302 -8.2

(*) Systemic charges: contribution to SRF, DGS, bank levies, DTAs fee. NM = Not Meaningful. Source: Intesa Sanpaolo Research elaboration on company data

Consolidated balance sheet – Main items (Alexandria deal restated as CDS derivative) ASSETS EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Cash and cash balances 822 1,189 795 -33.2 -3.3 Financial assets and hedging instruments 32,990 35,209 36,023 2.3 9.2 Due from banks 8,327 8,242 7,953 -3.5 -4.5 Due from customers 117,436 111,366 107,548 -3.4 -8.4 Equity investments 908 908 948 4.4 4.4 Tangible and intangible assets 3,122 3,142 3,060 -2.6 -2.0 Non-current assets and held for sale 0 0 0 NM NM Other assets 10,596 8,956 8,060 -10.0 -23.9 TOTAL ASSETS 174,202 169,012 164,388 -2.7 -5.6 LIABILITIES EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Due to banks 18,831 17,493 19,466 11.3 3.4 Due to customers and debt securities in issue 122,891 119,275 112,045 -6.1 -8.8 Financial liabilities and hedging instruments 14,534 15,922 15,855 -0.4 9.1 Provisions for risks and charges 1,403 1,363 1,315 -3.5 -6.3 Non-current liabilities and held for sale 0 0 0 NM NM Other liabilities 7,285 5,337 5,750 7.7 -21.1 Minorities 24 26 26 0.0 7.0 Shareholders’ equity 9,234 9,596 9,929 3.5 7.5 TOTAL LIABILITIES 174,204 169,012 164,386 -2.7 -5.6


Key consolidated economic-financial indicators (historical trend) 2012 2013 2014 2015 1H16 Profitability ratios(%) ROAE (excl impairment on goodwill and Alexandria deal restatement)

NM NM NM 5.2 6.4

ROAA (excl impairment on goodwill and Alexandria deal restatement)

NM NM NM 0.2 0.4

Cost/income ratio (excl. Systemic charges) 64.4 71.0 66.4 50.4 54.5 Asset Quality ratios (%) Net bad debt ratio 5.1 6.8 7.1 8.7 9.8 Cost of risk (bps) 188 211 654 179 134 Liquidity ratios (%) Loan/deposit ratio 104.7 100.6 97.4 93.4 96.0 B3 LCR (Liquidity Coverage Ratio) --- --- --- 222.0 170.8 B3 NSFR (Net Stable Funding Ratio) --- --- --- 100.8 98.3 Solvency and Leverage ratios (%) B2 cT1 (up to YE13) / B3 CET1 phase-in ratio 8.9 10.0 8.5 12.0 12.1 B3 CET1 fully-loaded --- --- NA 11.7 11.8 B2 T1 (up to YE13) / B3 T1 phase-in ratio 9.5 10.7 8.5 12.8 12.9 B2 TC (up to YE13) / B3 TC phase-in ratio 13.7 15.2 12.8 16.0 15.6 B3 Leverage phase-in ratio --- --- --- 5.3 5.2 B3 Leverage fully-loaded ratio --- --- --- --- --- Headcount and Branch network Total head count at period-end 30,303 28,417 25,961 25,731 25,697 Number of branches in Italy 2,671 2,334 2,186 2,133 2,047 Number of branches and Rep. offices abroad 39 39 40 40 40

NM = Not meaningful. B2 = Basel 2; B3 = Basel 3; cT1 = core Tier 1; CET1 = Common Equity Tier 1; T1 = Tier 1; TC = Total Capital. Source: Intesa Sanpaolo Research elaboration on company data

1. List of MPS’s bonds in Appendix 3 (page 51, 52, 53) * NA = Not Applicable for only one benchmark bond



UBI: Credit View NEUTRAL (Baa2/Stable, BBB-/Stable, BBB/Negative)

Key Credit Drivers

In 2Q16, UBI reported a net loss that was lower than market consensus had expected. Results were mainly affected by one-off charges, largely driven by a substantial increase in the impaired loans coverage.

UBI’s focus is now on the implementation of the recently announced (June 2016) businsess plan, aimed at simplifying its organisational structure through the change from a federal model to a Single Bank.

We continue to expect UBI to take part in the likely sector consolidation in Italy, with a role of aggregator.

S&P (06.07.2016) confirmed UBI’s ratings and outlook, following the business plan presentation.



CB UBIIM 1 01/23 T2 (bullet) - CB UBIIM 0 3/8 9/26 T2 (bullet) - Senior (fx) UBIIM 2 7/8 02/19 T1/AT1 - Senior (fx) UBIIM 2 3/4 04/17 T1/AT1 -


Fifth-largest Italian bank and second-largest cooperative bank.

Strong territorial roots in northern Italy.

Solid capital ratios, well above the SREP target.

Weak profitability.

Business concentrated in Italy, mainly towards SMEs.

Sizeable exposure to Italy’s bonds.




Bonds maturity profile, 2016-18 (FY) CET1 ratio (trend) vs SREP target


CB Sen Uns Sub Jun Sub Hybrid IG HOLD HOLD - - - HY - - HOLD - -


+39 02 8794 1114 1. List of UBI’s bonds in Appendix 3 (page 51, 52, 53) * NA = Not Applicable for only one benchmark bond



UBI in brief

UBI Banca (Unione di Banche Italiane ScpA) attracts deposits and offers business loans, pension and investment fund management, mortgages, insurance, and online securities brokerage services and banking. UBI Banca operates a network of banks and performs centralised functions of governance, control and organisation for those banks.

Consolidated income statement – Main items (EUR M) EUR M 2Q15 1Q16 2Q16 qoq % yoy % 1H15 1H16 yoy % Net interest 424 393 383 -2.6 -9.6 861 776 -9.8 Net fees and commissions 328 337 330 -2.0 0.7 669 667 -0.2 Total income 850 779 820 5.4 -3.5 1,723 1,599 -7.2 Operating costs 521 492 507 3.0 -2.6 1,039 1,000 -3.8 Gross operating profit 329 286 313 9.5 -4.9 684 599 -12.3 Total provisions and write-downs 203 161 1,122 NM NM 399 1,283 NM of which: net write-downs to loans 199 155 1,051 NM NM 389 1,206 NM Systemic charges (*) 23 32 0 NM NM 23 32 39.9 Profit before tax 126 125 -808 NM NM 285 -683 NM Net profit (loss) attributable to the Group 49 42 -829 NM NM 124 -787 NM

(*) Systemic charges: contribution to SRF, DGS, bank levies, DTAs fee. Source: Intesa Sanpaolo Research elaboration on company data

UBI: Consolidated balance sheet – Main items ASSETS EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Cash and cash balances 484 530 477 -10.0 -1.5 Financial assets and hedging instruments 22,416 20,834 20,532 -1.4 -8.4 Due from banks 3,192 3,430 3,930 14.6 23.1 Due from customers 85,340 84,586 83,907 -0.8 -1.7 Equity investments 248 261 254 -2.7 2.4 Tangible and intangible assets 3,516 3,502 3,345 -4.5 -4.9 Non-current assets and held for sale 11 11 64 NM NM Other assets 4,247 4,047 4,152 2.6 -2.2 TOTAL ASSETS 119,454 117,201 116,660 -0.5 -2.3 LIABILITIES EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Due to banks 9,050 10,454 13,691 31.0 51.3 Due to customers and debt securities in issue 94,327 91,512 87,525 -4.4 -7.2 Financial liabilities and hedging instruments 1,436 1,282 1,723 34.5 20.0 Provisions for risks and charges 632 608 931 53.3 47.4 Non-current liabilities and held for sale 0 0 0 NM NM Other liabilities 3,573 2,827 3,472 22.8 -2.8 Minorities 549 536 476 -11.2 -13.3 Shareholders’ equity 9,887 9,982 8,842 -11.4 -10.6 TOTAL LIABILITIES 119,454 117,201 116,660 -0.5 -2.3


UBI -Key consolidated economic-financial indicators (historical trend)

2012 2013 2014 2015 1H16 Profitability ratio (%) ROAE (excl impairment on goodwill and other intangibles) 0.9 2.9 1.6 1.2 NM ROAA (excl impairment on goodwill and other intangibles) 0.1 0.2 0.1 0.1 NM Cost/income ratio (excl. Systemic charges) 63.0 61.1 60.7 60.7 62.5 Asset quality ratios(%) Net bad debt ratio 3.2 3.9 4.7 5.1 4.6 Cost of risk (bps) 91 107 108 95 288 Liquidity ratios (%) Loan/deposit ratio 94.0 95.5 91.9 92.4 95.9 B3 LCR (Liquidity Coverage Ratio) --- --- --- > 100 > 100 B3 NSFR (Net Stable Funding Ratio --- --- --- > 100 > 100 Solvency and Leverage ratios (%) B2 cT1 (up to YE13) / B3 CET1 phase-in o 10.3 12.6 12.3 12.1 11.4 B3 CET1 fully-loaded --- --- 11.5 11.6 11.0 B2 T1 (up to YE13) / B3 T1 phase-in 10.8 13.2 12.3 12.1 11.4 B2 TC (up to YE13) / B3 TC phase-in 16.0 18.9 15.3 13.9 14.5 B3 Leverage ratio phase-in --- --- --- 6.0 5.7 B3 Leverage ratio fully-loaded --- --- --- 5.8 5.5 Headcount and Branch network Total head count at period-end 19,089 18,337 18,132 17,716 17,590 Number of branches in Italy 1,727 1,725 1,668 1,554 1,531

B2 = Basel 2; B3 = Basel 3; cT1 = core Tier 1; CET! = Common Equity Tier 1; T1 = Tier 1= TC = Total Capital. Source: Intesa Sanpaolo Research elaboration on company data



UniCredit: Credit View NEUTRAL (Baa1/Stable, BBB-/Stable, BBB+/Negative)

Key Credit Drivers

Unicredit reported a 2Q16 net profit above market consensus expectations, with the CET1 capital ratio remaining its main negative spot showing almost no buffer over regulatory prudential requirements.

Unicredit will present a strategic plan on 13 December 2016, in line with management’s timetable, which we expect to include a capital increase, as well other actions, such as assets disposals and NPLs reductions.

Moody’s in May (18.05.2016) confirmed Unicredit’s ratings and outlook.

We upgrade our investment recommendation on junior subordinate bonds to HOLD from SELL.



CB UCGIM 4 3/8 1/22 T2 (bullet) UCGIM 5 3/4 9/17 CB UCGIM 0 3/8 10/26 T2 (bullet) UCGIM 6.95 10/22 Senior (fx) UCGIM 2 3/23 T1/AT1 UCGIM 8 1/8 12/49 Senior (fx) UCGIM 1 1/2 6/19 T1/AT1 UCGIM 6 3/4 12/49


A leading European bank and Italy’s largest by TA.

High geographical and product diversification.

Adequate liquidity and flexible funding.

Low leverage.

Heavy cost base.

Capital ratios at lowest level vs peers, with almost no buffers against regulatory requirements (SREP/G-SIB).

Weak asset quality in Italy, but improving.




Bonds’ maturity profile, 2016-18 (FY) CET1 ratio (trend) vs SREP/G-SIB targets


CB Sen Uns Sub Jun Sub Hybrid

IG HOLD HOLD - - - HY - - HOLD HOLD HOLD


+39 02 8794 1114

1. List of Unicredit’s bonds in Appendix 3 (page 51, 52, 53)



UniCredit in brief

UniCredit S.p.A. attracts deposits and offers commercial banking services. The bank offers consumer credit, mortgages, life insurance, business loans, investment banking, asset management, and other services. UniCredit operates on a worldwide basis.

Consolidated income statement – Main items (EUR M) EUR M 2Q15 1Q16 2Q16 qoq % yoy % 1H15 1H16 yoy % Net interest 2,999 2,876 2,918 1.4 -2.7 5,962 5,795 -2.8 Net fees and commissions 1,997 1,946 1,932 -0.7 -3.3 4,011 3,878 -3.3 Total income 5,735 5,476 6,139 12.1 7.1 11,484 11,615 1.1 Operating costs 3,435 3,291 3,289 0.0 -4.3 6,853 6,579 -4.0 Gross operating profit 2,299 2,186 2,850 30.4 24.0 4,631 5,036 8.8 Total provisions and write-downs 1,076 783 1,134 44.9 5.4 2,111 1,917 -9.2 of which: net write-downs to loans 913 755 914 20.9 0.1 1,893 1,669 -11.8 Systemic charges (*) 196 390 301 -22.9 53.6 406 691 NM Profit before tax 1,043 736 1,324 NM 27.0 2,123 2,060 -3.0 Net profit (loss) attributable to the Group 522 406 916 NM NM 1,034 1,321 27.7

(*) Systemic charges: contribution to SRF, DGS, bank levies, DTAs fee. Source: Intesa Sanpaolo Research elaboration on company data

Unicredit: Consolidated balance sheet – Main items ASSETS EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Cash and cash balances 9,962 10,303 12,523 21.5 25.7 Financial assets and hedging instruments 259,951 251,851 276,843 9.9 6.5 Due from banks 86,192 80,073 69,078 -13.7 -19.9 Due from customers 473,930 473,999 489,155 3.2 3.2 Equity investments NA NA NA NM NM Tangible and intangible assets 15,733 15,789 15,232 -3.5 -3.2 Non-current assets and held for sale 3,751 2,820 3,501 24.1 -6.7 Other assets 25,607 25,598 25,144 -1.8 -1.8 TOTAL ASSETS 875,126 860,433 891,477 3.6 1.9 LIABILITIES EUR M 30.06.2015 31.12.2015 30.06.2016 YTD % yoy % Due to banks 121,454 111,373 113,036 1.5 -6.9 Due to customers and debt securities in issue 580,859 584,268 596,408 2.1 2.7 Financial liabilities and hedging instruments 85,505 80,627 94,159 16.8 10.1 Provisions for risks and charges 10,017 9,855 9,876 0.2 -1.4 Non-current liabilities and held for sale 1,448 1,880 2,770 47.3 NM Other liabilities 22,377 18,945 21,930 15.8 -2.0 Minorities 3,272 3,399 3,174 -6.6 -3.0 Shareholders’ equity 50,195 50,087 50,123 0.1 -0.1 TOTAL LIABILITIES 875,126 860,433 891,477 3.6 1.9


Key consolidated economic-financial indicators (trend) 2012 2013 2014 2015 1H16 Profitability ratios (%) ROAE (excl. impairment on goodwill and other intangibles) 1.6 NM 4.3 3.5 5.4 ROAA (excl. impairment on goodwill and other intangibles) 0.1 NM 0.2 0.2 0.3 Cost/income ratio (excl. Systemic charges) 59.3 61.1 59.9 60.8 56.6 Asset quality ratios(%) Net bad debt ratio 3.4 3.7 4.2 4.2 4.0 Cost of risk (bps) 171 279 91 87 68 Liquidity ratios (%) Loan/deposit ratio 94 87 84 81 82 B3 LCR (Liquidity Coverage Ratio) --- --- > 100 > 100 > 100 B3 NSFR (Net Stable Funding Ratio) --- --- --- --- --- Solvency and Leverage ratios (%) B2 cT1 (up to YE13) / B3 CET1 phase-in o 10.8 9.6 10.4 10.6 10.5 B3 CET1 fully –loaded --- --- 10.0 10.9 10.3 B2 T1 (up to YE13 / B3 T1 phase-in 11.4 10.1 11.3 11.5 11.3 B2 TC (up to YE13) / B3 TC phase-in 14.5 13.6 13.6 14.2 14.0 B3 Leverage phase-in --- --- --- 4.7 4.6 B3 Leverage fully-loaded --- --- --- 4.5 4.3 Operating structure Headcount– FTE 156,354 132,122 129,021 125,510 123,888 Branches in Italy 4,298 4,171 4,009 3,873 3,614 Branches abroad 5,024 4,783 3,507 3,061 2,992

Intesa Sanpaolo Research elaborations on company data



Appendix 1: EBA EU-wide stress test 2016 results EBA EU-wide stress test 2016: by lowest CET1 ratio fully-loaded in the adverse scenario (by Bank)

CTY Banks Dec-15

(%)

Baseline Dec-2018

(%)

Adverse Dec- 2018

(%)


( bps)

Delta Adverse/ Base 2018

(bps) TOTAL 12.6 13.8 9.2 -340 -460 IT Banca Monte dei Paschi di Siena S.p.A. 12.1 12.2 -2.4 -1451 -1468 IE Allied Irish Banks plc 13.1 13.9 4.3 -880 -959 AT Raiffeisen-Landesbanken-Holding GmbH 10.2 12.3 6.1 -408 -621 IE The Governor and Company of the Bank of Ireland 11.3 15.0 6.1 -513 -888 ES Banco Popular Español S.A. 10.2 13.5 6.6 -358 -683 IT UniCredit S.p.A. 10.4 11.5 7.1 -329 -437 UK Barclays Plc 11.4 12.5 7.3 -405 -518 DE Commerzbank AG 12.1 13.1 7.4 -471 -571 FR Société Générale S.A. 10.9 11.6 7.5 -341 -411 DE Deutsche Bank AG 11.1 12.1 7.8 -332 -428 ES Criteria Caixa, S.A.U. 9.7 11.0 7.8 -184 -316 AT Erste Group Bank AG 12.2 13.6 8.0 -423 -553 ES Banco de Sabadell S.A. 11.7 12.8 8.0 -369 -477 UK The Royal Bank of Scotland Group PLC 15.5 15.9 8.1 -745 -781 NL Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. 12.0 13.3 8.1 -387 -523 ES Banco Bilbao Vizcaya Argentaria S.A. 10.3 12.0 8.2 -208 -384 ES Banco Santander S.A. 10.2 13.2 8.2 -199 -497 DE Bayerische Landesbank 12.0 12.4 8.3 -365 -407 FR BNP Paribas 10.9 12.1 8.5 -236 -358 DE Norddeutsche Landesbank Girozentrale 12.1 13.2 8.6 -347 -454 UK HSBC Holdings 11.9 12.4 8.8 -312 -365 IT Unione Di Banche Italiane Società Per Azioni 11.6 13.0 8.8 -277 -416 NL ING Groep N.V. 12.7 12.5 9.0 -371 -352 IT Banco Popolare - Società Cooperativa 12.4 14.6 9.0 -339 -561 HU OTP Bank Nyrt. 12.9 14.6 9.2 -372 -534 DE Landesbank Baden-Württemberg 16.0 15.6 9.4 -658 -618 FR Groupe BPCE 12.8 14.4 9.5 -331 -489 DE DekaBank Deutsche Girozentrale 13.5 14.2 9.5 -397 -464 NL ABN AMRO Group N.V. 15.4 16.2 9.5 -591 -667 DE Volkswagen Financial Services AG 11.7 12.9 9.6 -211 -335 ES BFA Tenedora de Acciones S.A.U. 13.7 14.4 9.6 -417 -484 FR La Banque Postale 14.5 15.0 9.8 -470 -513 DE Landesbank Hessen-Thüringen Girozentrale 13.1 14.4 10.1 -301 -432 UK Lloyds Banking Group Plc 13.0 16.4 10.1 -291 -630 IT Intesa Sanpaolo S.p.A. 12.5 12.8 10.2 -226 -259 FR Groupe Crédit Agricole 13.7 14.8 10.5 -319 -432 BE KBC Group NV 14.9 16.2 11.3 -361 -491 BE Belfius Banque SA 14.6 17.6 11.4 -323 -619 PL Powszechna Kasa Oszczędności Bank Polski SA 13.4 14.7 11.4 -198 -329 FR Groupe Crédit Mutuel 15.5 16.6 13.4 -216 -324 DK Nykredit Realkredit 19.2 22.0 13.9 -533 -817 DK Jyske Bank 16.0 19.8 14.0 -201 -585 DK Danske Bank 15.5 17.7 14.0 -147 -364 SE Nordea Bank - group 16.5 18.6 14.1 -236 -451 NO DNB Bank Group 14.3 16.6 14.3 -1 -226 FI OP Osuuskunta 19.2 20.9 14.6 -455 -631 SE Skandinaviska Enskilda Banken - group 18.8 21.6 16.6 -225 -495 NL N.V. Bank Nederlandse Gemeenten 26.2 28.1 17.6 -855 -1043 SE Svenska Handelsbanken - group 21.2 23.1 18.5 -270 -454 SE Swedbank – group 25.1 27.5 23.1 -203 -442 DE NRW.BANK 42.5 39.4 35.4 -714 -404

Source: EBA



EBA EU-wide stress test 2016: by lowest CET1 ratio fully-loaded in the adverse scenario (aggregate by country)

Source: EBA

EBA EU-wide stress test 2016: by lowest leverage ratio fully-loaded in the adverse scenario (aggregate by country)

Source: EBA



Appendix 2: Atlante Fund and GACS scheme

Atlante Fund

Atlante Fund – Main features Size - EUR 4,249M at close date on 28 April 2015

- Launch on 11 April 2016 - Closing on 28 April (24h). Possibility to reopen the fund at a later stage is open and would require a 66% majority of current stakeholders

Investors - 67 Italian and foreign investors, including banks (60%), insurers, Italian banking foundations, and Cassa Depositi e Prestiti (CDP) - No one can have a stake over 20% of the fund - No special treatment will be reserved to the banks invested in the fund

Maturity - 5Y (29 April 2021), extendable by 3Y (29 April 2024) Investment period ‘[?]-18m (November 2017), extendable by 6m (May 2018) Leverage - No leverage in Atlante itself. Technically the maximum leverage allowed is

110%, but it is only for liquidity reasons Target return - Target annual yield of 6%

- Regarding junior tranches in NPL-related securitisation, the fund’s target IRR is in line with an investment in B-rated HY bond, Merril Lynch HY-B rated YTM of 6.23%, below the 12.2% (or 16-18% gross of fees) IRR offered by funds investing in distressed debt / Merril Lynch HY –CCC and lower rated index YTM of 18.98%.

Quaestio SGR - AUM c.EUR 14Bn - Participated by Fondazione Cariplo (37.65%), Locke Srl (22%), Cassa Geometri (18%), Opera don Bosco (15.6%), and Fondaszione Forlì (6.75%) - The fund’s regulations ensure the management company’s formal and substantive independence from the investors. SGR decisions related to the fund will be regularly monitored by the ECB.

Source: Presentation by Quaestio SGR on 29 April 2016

Atlante fund investment structure (EUR Bn) Atlante fund - Timetable

11 April 2016 Launch of the Fund 29 April 2016 Closing of the Fund May 16-Nov17 Investment period -May 16-June 17 Capital increases up to

70% of the funds and NPLs up to 30%

-June17-Nov 17 NPLs at least 30% plus funds not used in capital increases

Nov 17-May 18 Investment period over, possibility to invest in capital increases and NPLs deals already agreed

Up to June 2019 Further capital increases of the participated banks, if requested by regulators

Up to 29 April 2021 Only divestments Apr-21/Apr-24 Only divestments;

maturity of the fund extendable year by year.

Source: Intesa Sanpaolo Research elaboration on data by Quaestio SGR presentation on 29 April 2016 Source: Intesa Sanpaolo Research elaboration on data by Quaestio SGR presentation on 29 April 2016



Rating Agencies’ View on Atlante Fund - Strengths and weaknesses Strengths Weaknesses

Backstop of capital increases by a few Italian smaller and mid-size banks, currently facing troubles to restore capital ratios at level requested by the Supervisory Authorities due to high levels of NPLs.

It could avoid a bail-on of bonds, including those held by retail investors, which would be controversial.

Potentially support credit portfolio clean-up in the system fostering the disposal of problematic assets and open up the secondary market for NPL securitisations.

In particular, while the GACS scheme enables participating banks to issue ABS where senior tranches benefit from the state-guarantee, Atlante could allow to sell junior tranches at a higher price than that offered in the current market.

The initial size of the fund seems relatively small to produce benefits for the whole system.

Though the vehicle financing strategy is not known yet, the proposed capital structure could reduce the effectiveness of this measure to support the whole system in the future.

In the long term, participation of Italian banks to the fund leaves them exposed to the risk of potential losses as well as some tail risk, depending on Atlante’s final financing structure.

The financial profile of large banks will weaken and rating could come under pressure, if they are called to continue to provide extraordinary support to the banking sector.

Source: Intesa Sanpaolo Research elaboration on S&P, Moody’s and Fitch



GACS Scheme

GACS Scheme

Source: Intesa Sanpaolo Research elaboration

The GACS Scheme’s main features are as follows:

It has an 18-month duration (from 16 February 2016) extendable up to a maximum of a further 18 months.

GACS is an unconditional, irrevocable and first-demand guarantee.

GACS exclusively covers the senior notes and is issued upon three pre-conditions:

NPLs’ derecognition, via the sale of junior notes (at least 50% +1);

the senior tranche received an IG rating at minimum; and

an external independent servicer is hired.

Junior notes are not to be repaid until full repayment of senior tranches.

The guarantee will be priced according to the market based on the CDS price of a basket of Italian issuers (financial and corporates) with the same risk profile (rating) as the senior note. There would be a basic step-up fee and an additional penalty over time.

A liquidity facility could be requested by the rating agency.

NPLs portfolio

Senior Investors

Investors in NPLs)

Senior notes

Junior notes

Cas

NPLs

Bank SP

Italian TreasuryServicer



Appendix 3: Italian Banks Benchmark Euro-Denominated Bonds Italian bank bonds denominated in euro (institutional) – Senior

Bond Type Outst.

Price YTM

% SPRD TYPE SPRD

-1W (bps)

-1M (bps)

YTD

(bps) 52-week

range Ratings € M

Investment Grade 3.10.16 4.1.16 max min Mdy S&P Fitch BACRED 4 5/8 10/11/16 FX 750 100.1 -0.8 ASW -65 -64.8 -71.4 -102.8 71 -58 - BBB- - BACRED 0 7/8 11/14/17 FX 1,250 100.8 0.1 ASW 33 -1.2 -8.7 -26.2 84 33 - BBB- - BACRED 2 1/4 03/18/19 FX 750 104.4 0.5 ASW 69 -0.1 -5.9 -21.5 125 67 - BBB- - BACRED 1 5/8 01/19/21 FX 600 103.9 0.7 ASW 89 1.7 -3.7 -48.1 150 87 - BBB- BBB+ ISPIM 3 3/4 11/23/163 FX 1,303 100.5 -0.2 ASW -4 -10.1 -15.4 -28.3 56 -4 Baa1 BBB- BBB+ ISPIM 5 02/28/17 FX 1,000 102.0 -0.1 ASW 14 -2.9 -6.6 -16.7 63 14 Baa1 BBB- BBB+ ISPIM 4 3/4 06/15/173 FX 1,254 103.3 0.0 ASW 21 -2.9 -7.5 -16.5 69 20 Baa1 BBB- BBB+ ISPIM 4 11/09/172 FX 1,711 104.3 0.1 ASW 29 -1.2 -5.4 -12.7 77 28 Baa1 BBB- BBB+ ISPIM 4 11/08/184 FX 1,287 107.8 0.2 ASW 48 0.3 -0.9 -13.6 103 42 Baa1 BBB- BBB+ ISPIM 3 01/28/19 FX 1,000 106.0 0.4 ASW 62 2.2 6.2 -10.9 119 49 Baa1 BBB- BBB+ ISPIM 4 3/8 10/15/19 FX 1,250 111.5 0.5 ASW 81 3.2 10.5 -0.5 134 68 Baa1 BBB- BBB+ ISPIM 1 1/8 01/14/20 FX 1,500 101.6 0.6 ASW 84 1.3 12.0 0.8 133 70 Baa1 BBB- BBB+ ISPIM 4 1/8 04/14/203 FX 1,159 112.1 0.6 ASW 90 2.6 13.7 6.2 143 74 Baa1 BBB- BBB+ ISPIM 2 06/18/21 FX 1,200 105.8 0.7 ASW 91 2.6 12.4 -11.5 165 76 Baa1 BBB- BBB+ ISPIM 3 1/2 01/17/22 FX 750 113.4 0.9 ASW 109 2.7 15.5 -8.5 182 91 Baa1 BBB- BBB+ ISPIM 1 1/8 03/04/22 FX 1,500 101.4 0.9 ASW 97 2.2 15.3 -8.2 166 79 Baa1 BBB- BBB+ ISPIM 4 10/30/23 FX 1,000 119.3 1.1 ASW 125 4.3 17.6 7.0 190 104 Baa1 BBB- BBB+ UBIIM 2 3/4 04/28/17 FX 750 101.6 0.0 ASW 17 -2.5 -7.3 -32.4 82 16 Baa2 BBB- BBB UBIIM 2 7/8 02/18/19 FX 1,000 106.3 0.2 ASW 44 0.1 -15.2 -72.9 159 43 Baa2 BBB- BBB UCGIM 2 1/4 12/16/16 FX 1,000 100.4 0.0 ASW 19 4.8 4.6 -9.5 52 12 Baa1 BBB- BBB+ UCGIM 4 7/8 03/07/17 FX 1,500 102.0 0.0 ASW 22 -3.1 -8.2 -14.2 70 16 Baa1 BBB- BBB+ UCGIM 3 3/8 01/11/18 FX 1,000 104.0 0.2 ASW 40 -1.7 -8.6 -4.8 87 34 Baa1 BBB- BBB+ UCGIM 3 5/8 01/24/19 FX 1,250 106.8 0.6 ASW 87 2.2 8.5 2.4 143 66 Baa1 BBB- BBB+ UCGIM 1 1/2 06/19/19 FX 1,000 102.3 0.6 ASW 85 1.6 9.4 7.0 136 63 Baa1 BBB- BBB+ UCGIM 4 3/8 01/29/20 FX 750 113.1 0.4 ASW 64 1.8 3.2 -2.9 127 57 Baa1 BBB- BBB+ UCGIM 3 1/4 01/14/21 FX 1,250 109.3 1.0 ASW 125 3.9 20.9 4.6 201 99 Baa1 BBB- BBB+ UCGIM 2 03/04/231 FX 1,100 103.5 1.4 ASW 148 3.5 20.4 -30.5 186 124 Baa1 BBB- BBB+ ISPIM 0 12/20/163 FL 672 100.0 0.0 DISC 29 -0.3 -0.8 -1.0 55 27 Baa1 BBB- BBB+ ISPIM 0 03/03/173 FL 365 100.0 0.1 DISC 40 4.4 3.5 3.8 50 33 Baa1 BBB- BBB+ ISPIM 0 05/18/173 FL 1,107 100.0 0.1 DISC 36 0.7 2.0 -4.6 56 33 Baa1 BBB- BBB+ ISPIM 0 04/17/19 FL 1,000 100.8 0.4 DISC 74 3.1 0.6 -11.2 110 69 Baa1 BBB- BBB+ ISPIM 0 06/15/20 FL 1,000 100.6 0.6 DISC 90 1.2 1.0 -3.5 120 87 Baa1 BBB- BBB+ UBIIM 0 10/30/184 FL 111 99.4 9.0 DISC 137 0.1 -1.9 -10.8 154 129 Ba2 BBB- BBB UCGIM 0 04/10/17 FL 1,250 100.3 0.1 DISC 41 2.3 0.2 -7.4 66 37 Baa1 BBB- BBB+ UCGIM 0 02/19/20 FL 1,000 100.4 0.6 DISC 88 1.9 3.3 0.6 120 81 Baa1 BBB- BBB+

BACRED=Mediobanca; ISPIM=Intesa Sanpaolo; UBIIM=Unione di Banche Italiane; UCGIM=Unicredit. TYPE: FX=Fixed; FL=Floating. YTM: yield to maturity. SPRD TYPE: ASW=Asset Swap, DISC=Discount Margin, Z-SPR=Z-Spread. SPRD: spread to maturity. Ratings: reported in the table refer to individual issues. Notes: 1) YTD from launch date for bonds issued in 2016; 2) Bond issued in exchange for subordinated bond; 3) Bond subject to a tender offer for cash; 4) Bond originally issued as LT2 bond. Source: Intesa Sanpaolo Research elaboration on Bloomberg data at 08:42. Italian bank bonds denominated in euro (institutional) – Senior

Bond Type Outst.

Price YTM

% SPRD TYPE SPRD

-1W (bps)

-1M (bps)

YTD

(bps) 52-week range Ratings € M

High Yield 3.10.16 4.1.16 max min Mdy S&P Fitch BPIM 2 3/8 01/22/18 FX 750 101.1 1.5 ASW 172 -0.1 16.7 -37.4 361.1 149.4 Ba3 /*+ - BB BPIM 2 5/8 09/21/18 FX 500 101.9 1.6 ASW 186 0.1 14.5 -41.5 379.3 170.4 Ba3 /*+ - BB BPIM 3 1/2 03/14/19 FX 1,250 103.6 2.0 ASW 221 -7.5 11.8 -33.4 416.7 207.2 Ba3 /*+ - BB BPIM 2 3/4 07/27/20 FX 1,000 102.3 2.1 ASW 232 -6.0 14.5 -14.1 402.4 208.0 Ba3 /*+ - BB ICCREA 2.95 11/14/16 FX 500 100.3 0.0 ASW 12 -15.5 -20.1 -68.4 114.4 8.1 - BB BBB- MONTE 3 5/8 04/01/19 FX 1,000 97.9 4.5 ASW 465 5.7 102.6 125.4 762.7 292.7 B3 /* - B- /* PMIIM 4 1/4 01/30/19 FX 500 107.3 1.0 ASW 130 -0.2 3.7 -64.9 270.9 123.3 Ba3 /*+ - BB+ /*- VENBAN 4 01/20/17 FX 500 99.4 5.9 ASW 616 31.1 136.7 -1.7 1313.9 304.3 - B - VENBAN 4 05/20/19 FX 500 96.5 5.4 ASW 547 -3.2 11.1 52.6 812.1 333.6 - B - VICEN 3 1/2 01/20/17 FX 500 99.3 5.9 ASW 606 1.8 178.3 -89.8 1715.4 411.0 - - B- VICEN 5 10/25/18 FX 400 96.1 7.1 ASW 703 5.0 80.9 34.6 1259.7 423.3 - - B- VICEN 2 3/4 03/20/20 FX 750 88.0 6.8 ASW 632 16.7 105.3 70.5 920.4 395.2 - - B-

BPIM=Banco Popolare; ICCREA=ICCREA; MONTE=Monte dei Paschi di Siena; PMIIM=Banca popolare di Milano; VENBAN=Veneto Banca; VICEN=Banca pop. Vicenza. TYPE: FX=Fixed; FL=Floating. YTM: yield to maturity. SPRD TYPE: ASW=Asset Swap, DISC=Discount Margin, Z-SPR=Z-Spread. SPRD: spread to maturity. Ratings: reported in the table refer to individual issues; Rating on credit watch if *, Rating on credit watch positive if *+, Rating on credit watch negative if *-. Source: Intesa Sanpaolo Research elaboration on Bloomberg data at 08:42.



Italian bank bonds denominated in euro (institutional) – Subordinated (T2 and LT2)

Bond First call

date Type

Outst. Price

YTM SPRD TYPE SPRD

-1W (bps)

-1M (bps)

YTD

(bps) 52-week

range Ratings € M %

High Yield 3.10.16 4.1.16 max min Mdy S&P Fitch Tier 2 (T2) and Lower Tier 2 (LT2) BANCAR 7.321 12/20/20 - FX 200 89.0 10.7 Z-SPR 1,089 -19.1 97.2 320.1 1,626 481 - - - BPIM 5.473 11/12/16 - FX 142 101.2 -5.9 Z-SPR -554 -143.2 -438.3 -892.6 570 -422 B3 /*+ - BB- BPIM 6 11/05/202 - FX 710 104.7 4.7 Z-SPR 488 -1.6 14.3 -22.4 723 372 B3 /*+ - BB- BPIM 6 3/8 05/31/212 - FX 318 106.6 4.7 Z-SPR 491 1.3 14.9 -31.1 806 382 B3 /*+ - BB- ISPIM 5 09/23/196 - FX 1,051 109.2 1.8 Z-SPR 201 7.8 25.3 -51.7 345 170 Ba1 BB BBB ISPIM 5.15 07/16/206 - FX 922 111.8 1.9 Z-SPR 208 7.6 19.5 -21.7 353 177 Ba1 BB BBB ISPIM 6 5/8 09/13/23 - FX 1,446 117.7 3.7 Z-SPR 371 21.5 52.6 82.2 426 266 Ba1 BB BBB ISPIM 2.855 04/23/251 - FX 500 97.9 3.1 Z-SPR 301 1.6 29.5 75.1 330 214 Ba1 BB BBB ISPIM 3.928 09/15/26 - FX 1,000 101.3 3.8 Z-SPR 353 6.7 43.7 89.2 386 244 Ba1 BB BBB MONTE 5 04/21/204 - FX 369 68.4 17.7 Z-SPR 1,794 -189.4 481.8 1131.4 2,022 417 Ca /* - CC /* MONTE 5.6 09/09/204 - FX 379 68.5 17.3 Z-SPR 1,749 -185.7 429.0 1060.1 1,961 447 Ca /* - CC /* PMIIM 7 1/8 03/01/21 - FX 475 108.3 5.0 Z-SPR 514 -1.9 15.9 15.0 722 407 B3 /*+ - BB /*- UCGIM 5 3/4 09/26/17 - FX 1,000 104.8 0.8 Z-SPR 104 2.1 0.3 -42.1 183 85 Ba1 BB BBB UCGIM 6 1/8 04/19/21 - FX 579 115.3 2.5 Z-SPR 268 5.1 24.5 -8.1 540 230 Ba1 BB BBB UCGIM 6.95 10/31/22 - FX 1,500 113.1 4.4 Z-SPR 452 -4.6 24.1 101.6 583 315 Ba1 BB BBB BPEIM 0 05/15/172,3 05/12 FL 220 99.0 - DISC 260 -0.9 2.6 -96.9 379 177 - - BB- BPIM 0 11/22/162,3 11/11 FL 138 99.6 - DISC 422 0.9 -107.9 153.1 578 185 B3 /*+ - - BPIM 0 02/08/172,3 02/12 FL 82 99.3 8.3 DISC 302 18.2 31.1 19.3 414 196 B3 /*+ - BB- ISPIM 0 02/20/185,6 - FL 148 99.4 1.0 DISC 132 -0.7 -11.4 -11.5 185 106 Ba1 BB BBB MONTE 0 11/30/173,4 11/12 FL 369 67.5 - DISC 3,612 -72.6 1464.4 2877.8 3,704 369 Ca /* - CC /* MONTE 0 01/15/183,4 01/13 FL 104 67.5 163.0 DISC 3,260 -269.4 1154.1 2524.1 3,542 367 Ca /* - - ISPIM 0 05/28/185,6 - VR 251 101.1 1.0 DISC 135 -0.2 -12.6 -21.0 193 108 Ba1 BB BBB ISPIM 0 06/26/185,6 - VR 109 99.3 - DISC 143 -3.8 -12.5 -26.5 200 131 Ba1 BB BBB UBIIM 4 1/4 05/05/26 05/21 VR 750 99.8 4.3 Z-SPR 447 0.3 15.2 34.1 512 405 Ba2 BB BBB- UCGIM 5 3/4 10/28/25 10/20 VR 1,000 104.7 4.5 Z-SPR 466 -0.1 14.7 105.5 581 327 Ba1 BB BBB UCGIM 4 3/8 01/03/27 01/22 VR 750 99.4 4.5 Z-SPR 463 -1.1 14.4 36.7 551 425 Ba1 BB BBB VENBAN 9 1/2 12/01/251 12/20 VR 200 69.3 20.7 Z-SPR 2,087 -45.8 605.2 1051.2 2,505 971 - CCC - VICEN 9 1/2 09/29/251 09/20 VR 200 69.0 21.2 Z-SPR 2,143 -27.1 668.2 1104.9 2,637 771 - - CC

BANCAR=Banca Carige; BPIM=Banco Popolare; ISPIM=Intesa Sanpaolo; MONTE=Monte dei Paschi di Siena; PMIIM=Banca popolare di Milano; UCGIM=Unicredit; BPEIM=Banca pop. Emilia Romagna; UBIIM=Unione di Banche Italiane; VENBAN=Veneto Banca; VICEN=Banca pop. Vicenza. TYPE: FX = Fixed; FL = Floating; VR = Variable; FT = Flat Trading. YTM: yield to maturity or yield to call for callable bonds excluding “not called bonds”. SPRD TYPE: ASW=Asset Swap, DISC=Discount Margin, Z-SPR=Z-Spread. SPRD: spread to maturity or spread to first call date for callable bonds. Ratings reported in the table on individual issues; Rating on credit watch if *, Rating on credit watch positive if *+, Rating on credit watch negative if *-. Notes: 1) YTD from launch date for bonds issued in 2016; 2) Bond subject to buy-back; 3) Bond not called; 4) Bond subject of a tender offer for swap with senior bond; 5) Bond subject of a tender offer for swap with senior bond the issuer call option has been removed; 6) Bond subject of a tender offer for swap with LT2 bond. Source: Intesa Sanpaolo Research elaboration on Bloomberg data at 08:42.

Italian bank bonds denominated in euro (institutional) – Junior subordinated (UT2)

Bond First call

date Type

Outst. Price

YTM SPRD TYPE

SPRD -1W (bps)

-1M (bps)

YTD

(bps) 52-week

range Ratings

€ M %

High Yield 3.10.16 4.1.16 max min Mdy S&P Fitch Upper Tier 2 (UT2) ISPIM 6 5/8 05/08/18 - FX 840.6 107 1.8 Z-SPR 202 3.9 -4.4 -114.8 421 191 Ba2 BB- BB+ UCGIM 6.7 06/05/18 - FX 835.3 108 2.0 Z-SPR 225 3.9 12.8 -28.5 357 153 Ba3 BB- BB+

ISPIM=Intesa Sanpaolo; UCGIM=Unicredit. TYPE: FX = Fixed; FL = Floating; VR = Variable; FT = Flat Trading. YTM: yield to maturity or yield to call for callable bonds excluding “not called bonds”. SPRD TYPE: ASW=Asset Swap, DISC=Discount Margin, Z-SPR=Z-Spread. SPRD: spread to maturity or spread to first call date for callable bonds. Ratings reported in the table on individual issues. Source: Intesa Sanpaolo Research elaboration on Bloomberg data at 08:42.

Italian bank bonds denominated in euro (institutional) – Hybrids (T1 and AT1)

Tier 1 (T1) First call

date Type Outst. Price YTM SPRD TYPE SPRD

-1W (pts)1

-1M (pts)1

YTD

(pts)1

52-week range1 Mdy S&P Fitch

€ M % max min BPIM 6.156 06/29/492,3 06/17 VR 57 93.3 16.4 Z-SPR 1,700 -0.1 0.3 -6.1 101 90 Caa2 /*+ - B- BPIM 6.756 06/29/492,3 06/17 VR 108 93.0 17.5 Z-SPR 1,819 0.0 0.0 -6.1 101 90 Caa2 /*+ - B- ISPIM 8.047 06/29/492,3 06/18 VR 580 107.7 3.3 Z-SPR 355 -0.4 -0.6 -3.4 112 106 Ba3 B+ BB ISPIM 8 3/8 10/29/492,3 10/19 VR 742 113.4 3.6 Z-SPR 383 -0.4 -0.5 -2.5 118 108 Ba3 B+ BB MONTE 6.587 12/29/494,5,6 02/11 FT 243 41.3 1589.0 DISC 1,516 0.6 -8.2 -26.0 81 32 C /*+ - C MONTE 0 06/29/494,5,6 09/11 FT 108 41.2 635.7 DISC 1,509 0.4 -7.3 -25.5 80 31 - - - PMIIM 9 06/29/492 06/18 VR 195 103.7 6.6 Z-SPR 682 -0.1 0.0 -4.0 109 99 Caa2 /*+ - B+ /*- UCGIM 8 1/8 12/29/492,3 12/19 VR 469 111.5 4.2 Z-SPR 437 -0.2 -0.4 -1.5 115 101 B1 B+ - UCGIM 9 3/8 07/29/492,3 07/20 VR 246 109.4 6.5 Z-SPR 669 -0.1 0.3 -3.5 114 100 B1 B+ BB Additional Tier 1 (AT1)

ISPIM 7 12/29/492 01/21 VR 1,250 93.2 8.9 Z-SPR 913 -1.8 -5.1 -6.9 100 85 Ba3 B+ BB- UCGIM 6 3/4 12/29/492 09/21 VR 1,000 85.4 10.6 Z-SPR 1,079 -0.3 -2.3 -8.5 99 71 - - BB-

BPIM=Banco Popolare; ISPIM=Intesa Sanpaolo; MONTE=Monte dei Paschi di Siena; PMIIM=Banca popolare di Milano; UCGIM=Unicredit. TYPE: FX = Fixed; FL = Floating; VR = Variable; FT = Flat Trading. YTM: yield to maturity or yield to call for callable bonds excluding “not called bonds”. SPRD TYPE: ASW=Asset Swap, DISC=Discount Margin, Z-SPR=Z-Spread. SPRD: spread to maturity or spread to first call date for callable bonds. Ratings reported in the table on individual issues; Rating on credit watch if *, Rating on credit watch positive if *+, Rating on credit watch negative if *-. Notes: 1) change in prices ; 2) YTC for callable bonds excluding “not called bonds”; 3) Bond subject to buy-back; 4) Bond not called; 5) Bond subject of a tender offer for swap with senior bond; 6) Last coupon payment skipped . Source: Intesa Sanpaolo Research elaboration on Bloomberg data at 08:42.



Italian covered bonds denominated in euro (institutional) - Fixed

Bond Issue Date

Oust. € M

Price (mid)

Yield %

Spread over

Benchmrk (bps)

ASW Spread

(bps)

-1W (bps)

-1M (bps)

YTD (bps)

52-week range

Mdy S&P Fitch

DBR BTP max min BACRED 1 1/8 06/17/19 06/14 750 103.6 -0.2 52 -19 1 -2.2 -3.2 -25.4 39 2 - - A+ /*+ BACRED 3 5/8 10/17/23 10/13 750 125.2 0.0 51 -61 3 -1.1 -1.3 -40.8 60 4 - - A+ /*+ BACRED 1 3/8 11/10/25 11/15 750 109.5 0.3 58 -81 12 -0.9 -1.1 -48.7 76 13 - - A+ /*+ BANCAR 3 3/4 11/25/16 11/09 1180 100.5 0.2 98 98 40 -7.0 -1.6 -26.3 83 35 Ba1 - BB+ BANCAR 3 7/8 10/24/18 10/13 750 106.5 0.7 139 79 92 -2.0 -1.6 8.4 111 69 Ba1 - BB+ BANCAR 1 1/4 01/28/21 10/15 500 101.0 1.0 167 82 116 -2.7 -2.2 13.0 131 97 Ba1 - BB+ BPEIM 3 3/8 10/22/18 10/13 1000 107.3 -0.2 51 -9 1 -2.0 -3.8 -21.9 36 2 Aa2 - - BPEIM 0 1/2 07/22/20 07/15 750 102.5 -0.2 53 -21 2 -2.8 -3.9 -26.3 43 3 Aa2 - - BPEIM 0 7/8 01/22/22 01/15 750 104.6 0.0 58 -42 12 -1.4 -2.0 -26.1 61 13 Aa2 - - BPIM 3 5/8 03/31/17 03/10 946 101.8 -0.2 57 17 4 -5.6 -4.9 -60.7 84 4 A2 /*+ - - BPIM 0 3/4 03/31/22 03/15 1000 104.0 0.0 59 -41 12 -1.2 -1.8 -54.2 84 13 A2 /*+ - - BPSOIM 1 3/8 08/05/19 08/14 500 104.5 -0.2 49 -22 -2 -2.2 -3.1 -24.4 38 0 - - A+ BPSOIM 0 3/4 04/04/231 04/16 500 104.1 0.1 61 -53 14 -0.5 -0.8 -27.2 42 14 - - A+ CARPP 0 7/8 01/31/22 12/14 1000 104.6 0.0 58 58 12 -1.3 -1.8 -25.2 68 13 Aa2 - - CARPP 0 7/8 06/16/23 09/15 1000 105.1 0.1 61 -53 12 -0.9 -1.5 -31.7 72 12 Aa2 - - CRDEM 1 7/8 02/27/19 02/14 750 105.1 -0.2 48 -20 -3 -2.0 -4.1 -28.0 40 -2 Aa2 - A+ /*+ CRDEM 3 1/4 07/09/20 07/13 500 113.1 -0.2 46 10 -4 -2.2 -3.6 -34.8 48 -2 Aa2 - A+ /*+ CRDEM 0 7/8 11/05/21 11/14 750 104.7 0.0 56 -34 9 -1.1 -1.8 -26.2 52 9 Aa2 - A+ /*+ ISPIM 3 1/4 04/28/17 07/12 1813 102.0 -0.3 44 4 -11 -1.1 -3.0 -31.1 25 -11 Aa2 - - ISPIM 2 1/4 09/24/18 09/13 750 104.9 -0.2 45 -14 -4 -2.1 -2.5 -22.8 30 -3 Aa2 - - ISPIM 3 3/4 09/25/19 09/12 1000 111.9 -0.2 47 -24 -4 -2.7 -2.9 -26.1 36 -2 Aa2 - - ISPIM 5 01/27/21 07/12 1353 122.5 -0.2 47 -38 -3 -2.0 -2.6 -35.4 46 -2 Aa2 - - ISPIM 0 5/8 01/20/22 01/15 1000 104.2 -0.2 41 -59 -5 -1.3 -1.5 -39.0 53 -4 Aa2 - - ISPIM 3 5/8 12/05/22 12/12 1250 122.8 -0.1 48 -55 0 -1.3 -2.6 -37.5 56 1 Aa2 - - ISPIM 0 5/8 03/23/231 03/16 1250 104.4 -0.1 45 -69 -2 -1.2 -2.1 -34.8 33 -1 Aa2 - - ISPIM 3 3/8 01/24/25 01/13 1000 126.6 0.1 65 -86 4 -1.5 -2.5 -43.5 69 5 Aa2 - - ISPIM 1 3/8 12/18/25 12/15 1250 110.1 0.3 52 -87 5 -1.2 -1.2 -46.8 73 6 Aa2 - - ISPIM 3 1/4 02/10/26 02/14 1250 126.9 0.3 76 -84 14 -1.5 -2.8 -34.4 70 14 Aa2 - - MONTE 5 02/09/18 02/11 1470 106.2 0.4 108 50 58 -4.2 -5.6 -11.4 117 38 A2 /* - BBB /* MONTE 2 7/8 04/16/21 04/14 1000 110.5 0.5 116 34 71 -0.9 -2.1 -20.3 137 48 A2 /* - BBB /* MONTE 1 1/4 01/20/22 10/15 750 103.0 0.7 118 4 79 -1.3 -2.7 -13.1 140 79 A2 /* - BBB /* MONTE 2 7/8 07/16/24 07/14 1500 114.7 0.9 132 -3 89 -0.7 -1.7 -30.4 150 79 A2 /* - BBB /* MONTE 2 1/8 11/26/25 11/15 1000 107.9 1.2 147 7 103 -0.8 -1.8 -21.1 159 103 A2 /* - BBB /* PMIIM 3 1/2 10/17/16 10/09 878 100.1 -0.4 29 29 -31 -15.2 -22.6 -69.2 52 -26 A2 /*+ - BBB+ /*- PMIIM 0 7/8 09/14/22 09/15 1000 105.0 0.0 56 -46 10 -0.7 -1.7 -50.6 86 10 A2 /*+ - - PMIIM 0 5/8 06/08/23 06/16 750 103.6 0.1 59 -54 10 -1.5 -2.2 -31.4 47 11 A2 /*+ - - PMIIM 1 1/2 12/02/25 12/15 750 107.6 0.6 91 -49 45 -0.9 -1.7 -34.8 107 45 A2 /*+ - - UBIIM 3 3/8 09/15/17 09/10 1000 103.4 -0.2 45 2 -5 2.8 1.8 -19.0 26 -8 Aa2 - - UBIIM 4 12/16/19 12/09 1000 114.0 -0.4 36 -36 -18 -4.8 -3.2 -35.7 36 -16 Aa2 - - UBIIM 3 1/8 10/14/20 10/13 1500 113.7 -0.3 44 -36 -8 -1.8 -4.0 -39.1 46 -6 Aa2 - - UBIIM 5 1/4 01/28/21 01/11 1000 123.8 -0.2 42 -42 -8 -2.4 -3.4 -40.8 45 -6 Aa2 - - UBIIM 1 01/27/23 10/15 1000 106.7 -0.1 60 -70 -2 -0.9 0.3 -43.6 61 -3 Aa2 - - UBIIM 3 1/8 02/05/24 02/14 1000 122.4 0.1 53 -77 3 -0.5 -1.4 -40.6 65 4 Aa2 - - UBIIM 1 1/4 02/07/25 11/14 1000 108.6 0.2 59 -73 8 -1.1 -1.7 -41.6 68 8 Aa2 - - UBIIM 0 3/8 09/14/261 09/16 1000 99.4 0.4 55 -77 15 -1.6 -3.9 -3.9 19 15 Aa2 - - UCGIM 3 3/8 10/31/17 10/10 1000 103.8 -0.2 50 8 0 3.7 2.0 -12.8 21 -6 Aa2 A AA UCGIM 4 01/31/18 08/12 1000 105.6 -0.2 49 -9 -4 -1.8 -2.3 -17.5 63 -3 Aa2 A AA UCGIM 4 1/4 07/31/18 06/11 1000 108.2 -0.2 46 -14 -4 -1.4 -2.2 -20.4 31 -3 Aa2 A AA UCGIM 1 7/8 01/31/19 06/13 1000 104.9 -0.2 46 -20 -4 -1.7 -2.4 -25.6 39 -3 Aa2 A AA UCGIM 2 3/4 01/31/20 01/13 1000 110.0 -0.2 48 -29 -5 -2.3 -3.3 -31.9 43 -4 Aa2 A AA UCGIM 2 5/8 10/31/20 09/13 1000 111.7 -0.2 47 -33 -6 -1.9 -2.5 -31.3 44 -5 Aa2 A AA UCGIM 5 10/31/21 09/11 1000 126.3 -0.2 50 -46 -3 0.2 0.3 -32.2 54 -3 Aa2 A AA UCGIM 4 3/8 01/31/22 11/09 1000 124.3 -0.2 54 -44 -6 -1.0 -1.7 -38.3 53 -5 Aa2 A AA UCGIM 5 1/4 04/30/23 02/11 1250 134.8 0.0 62 -68 -1 -1.1 -2.2 -36.4 62 0 Aa2 A AA UCGIM 3 01/31/24 01/14 1000 121.2 0.1 58 -74 6 -0.5 -1.8 -32.7 64 6 Aa2 A AA UCGIM 0 3/4 04/30/25 03/15 1000 104.1 0.3 59 -74 11 -1.3 -2.1 -29.0 66 -73 - - AA+ UCGIM 0 3/8 10/31/261 09/16 1000 99.2 0.5 57 -76 15 -1.6 -4.9 -4.4 20 16 - - AA+

BACRED=Mediobanca; BANCAR=Banca Carige; BPEIM=Banca pop. Emilia Romagna; BPIM=Banco Popolare; BPSOIM=Banca Popolare Sondrio; CARPP=Cassa Risparmio Parma; CRDEM=Credito Emiliano; ISPIM=Intesa Sanpaolo; MONTE=Monte dei Paschi di Siena; PMIIM=Banca popolare di Milano; UBIIM=Unione di Banche Italiane; UCGIM=Unicredit. Ratings reported in the table on individual issues; Rating on credit watch if *, Rating on credit watch positive if *+, Rating on credit watch negative if *-. Notes: 1) YTD from launch date for bonds issued in 2016. Source: Bloomberg BGN data on 03/10/16 at 08:42. Italian covered bonds denominated in euro (institutional) - Floater

Bond Issue Date

Outst. € M

Price (mid)

DISC MRG Spread (bps)

-1wk (bps)

-1m (bps)

YTD (bps)

52-week range Mdy S&P Fitch

max min UCGIM 0 01/31/17 01/14 500 100.1 15 -0.5 0.5 -9.3 32 13 Aa2 A AA UCGIM 0 10/31/20 09/15 500 100.0 29 -0.5 -0.6 -1.1 45 20 - - AA+

UCGIM=Unicredit. Ratings reported in the table on individual issues. Source: Bloomberg BGN data on 03/10/16 at 08:42.



Italian Banks under our coverage: CDS performance

Leading IG Italian banks: CDS Sen 5Y vs CDS Italy 5Y vs. iTraxx Fin Sen 5Y ( bps)

Leading HY Italian banks: CDS Sen 5Y vs iTraxx Crossover 5Y 5Y (bps)

ISP not shown in the charts; Source: Intesa Sanpaolo Research elaboration on Bloomberg (CDS CMAN) data on 30.09.16 16 at market close

ISP not shown in the charts. Source: Intesa Sanpaolo Research elaboration on Bloomberg (CDS CMAN) data on 30.09.16 16 at market close

Leading IG Italian banks: CDS Sub 5Y vs. iTraxx Fin Sub 5Y ( bps)

Leading HY Italian banks: CDS Sub 5Y vs iTraxx Crossover 5Y 5Y (bps)

ISP not shown in the charts; Source: Intesa Sanpaolo Research elaboration on Bloomberg (CDS CMAN) data on 30.09.16 16 at market close

ISP not shown in the charts. Source: Intesa Sanpaolo Research elaboration on Bloomberg (CDS CMAN) data on 30.09.16 16 at market close



Disclaimer Analyst certification The financial analysts who prepared this report, and whose names and roles appear within the document, certify that: (1) The views expressed on the Companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed.

Specific disclosures

1. Neither the analysts nor any persons closely associated with the analysts have a financial interest in the securities of the Companies.

2. Neither the analysts nor any persons closely associated with the analysts serve as an officer, director or advisory board member of the Companies.

3. Two of the analysts named in the document are member of AIAF.

4. The analyst named in this document is not registered with or qualified by FINRA, the U.S. regulatory body with oversight over Banca IMI Securities Corp. Accordingly, the analyst may not be subject to FINRA Rule 2241 and NYSE Rule 472 with respect to communications with a subject company, public appearances and trading securities in a personal account. For additional information, please contact the Compliance Department of Banca IMI Securities Corp at 212-326-1133.

5. The analysts of this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

6. The research department supervisors do not have a financial interest in the securities of the Companies.

This research has been prepared by Intesa Sanpaolo SpA and distributed by Banca IMI SpA Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and FINRA). Intesa Sanpaolo SpA accepts full responsibility for the contents of this report and also reserves the right to issue this document to its own clients. Banca IMI SpA and Intesa Sanpaolo SpA, which are both part of the Intesa Sanpaolo Group, are both authorised by the Banca d'Italia and are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.

Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.

This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgment. No Intesa Sanpaolo SpA or Banca IMI SpA entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report. This document may only be reproduced or published together with the name of Intesa Sanpaolo SpA and Banca IMI SpA.

Intesa Sanpaolo SpA and Banca IMI SpA have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo SpA, 90 Queen Street, London EC4N 1SA. Intesa Sanpaolo SpA has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Intesa Sanpaolo’s web site (www.intesasanpaolo.com).

Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or persons closely associated with them, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise.

Intesa Sanpaolo SpA issues and circulates research to Major Institutional Investors (as defined in SEC Rule 15a-6) in the USA only through Banca IMI Securities Corp., 1 William Street, New York, NY 10004, USA, Tel: (1) 212 326 1199.

Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 16190 of 29.10.2007 either as a printed document and.or in electronic form.

Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.

US persons: This document is intended for distribution in the United States only to Major US Institutional Investors as defined in SEC Rule 15a-6. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Coverage policy and frequency of research reports

The list of companies covered by the Research Department is available upon request. Intesa Sanpaolo SpA aims to provide continuous coverage of the companies on the list in conjunction with the timing of periodical accounting reports and any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent company report published by Intesa Sanpaolo SpA’s Research Department for a full analysis of company profile.strategy, risks, and recommendation methodology. Research is available on Banca IMI’s web site (www.bancaimi.com or www.intesasanpaolo.com) or by contacting your sales representative.

Credit Research Publications in Last 12M The list of all recommendations on any financial instrument or issuer produced by Intesa Sanpaolo Research Department and distributed during the preceding 12-month period is available on the Intesa Sanpaolo website at the following address: www.group.intesasanpaolo.com/scriptIsir0/si09/studi/eng_archivio_racc_credit.jsp

Valuation methodology

Banca IMI’s credit views are based on the expected trend of the company’s fundamentals. The view reflects the sector trend and the competitive scenario, the company’s financial strength, as well as its profitability outlook and competitive positioning. In our credit quality valuation, we consider management’s intention and ability to meet debt obligations, the company’s dividend policy and, in general, its attention to bondholders’ interests. Among key financial ratios, for those sectors where relevant, we assess the company’s ability to generate operating cash flow, its capacity to repay maturing debt through cash flow, its net interest coverage ratio and capital ratios.

http://www.group.intesasanpaolo.com/scriptIsir0/si09/studi/eng_archivio_racc_credit.jsp



In the case of significant events, which could determine a change in our credit view, we may place our recommendation under review. This review does not necessarily imply a change in the credit view.

Corporate credit view key

Credit rating key Credit view Definition POSITIVE We expect an improvement in fundamentals over the next six months NEUTRAL We expect substantially stable fundamentals over the next six months NEGATIVE We expect a deterioration in fundamentals or visibility on fundamentals over the next six months SUSPENDED The credit view for this company has been suspended as there is not a sufficient fundamental basis for determining an

investment view. The previous credit view, if any, is no longer in effect for this company NOT ASSIGNED The company is or may be covered by the Research Department but no credit view is assigned either voluntarily

or to comply with applicable regulations and.or firm policies in certain circumstances, including when Intesa Sanpaolo Group is acting in an advisory capacity in a merger or strategic transaction involving the company

Historical Credit view

BP - Historical credit views (-1Y) BPER - Historical credit views (-1Y) Date Credit View 19/09/2016 Neutral 24/06/2016 Neutral 19/05/2016 Neutral 13/05/2016 Neutral 14/04/2016 Neutral 05/04/2016 Neutral 22/03/2016 Neutral 15/03/2016 Neutral 12/02/2016 Neutral 24/12/2015 Neutral 04/12/2015 Neutral 03/12/2015 Neutral 30/11/2015 Neutral 27/11/2015 Neutral 16/11/2015 Neutral 17/09/2015 Neutral

Date Credit View 19/09/2016 Neutral 24/06/2016 Neutral 15/06/2016 Neutral 14/04/2016 Neutral 15/03/2016 Neutral 24/12/2015 Neutral 04/12/2015 Neutral 03/12/2015 Neutral 30/11/2015 Neutral 27/11/2015 Neutral 17/09/2015 Neutral

BPM - Historical credit views (-1Y) MPS - Historical credit views (-1Y) Date Credit View 19/09/2016 Neutral 24/06/2016 Neutral 15/06/2016 Neutral 19/05/2016 Neutral 13/05/2016 Neutral 14/04/2016 Neutral 05/04/2016 Neutral 22/03/2016 Neutral 15/03/2016 Neutral 11/02/2016 Neutral 24/12/2015 Neutral 04/12/2015 Neutral 03/12/2015 Neutral 30/11/2015 Neutral 27/11/2015 Neutral 13/11/2015 Neutral 17/09/2015 Neutral

Date Credit View 19/09/2016 Neutral 24/06/2016 Neutral 15/06/2016 Neutral 06/05/2016 Neutral 14/04/2016 Neutral 15/03/2016 Neutral 08/02/2016 Neutral 24/12/2015 Neutral 18/12/2015 Neutral 04/12/2015 Neutral 03/12/2015 Neutral 30/11/2015 Neutral 27/11/2015 Neutral 09/11/2015 Neutral 17/09/2015 Neutral

UBI - Historical credit views (-1Y) Unicredit - Historical credit views (-1Y) Date Credit View 19/09/2016 Neutral 24/06/2016 Neutral 15/06/2016 Neutral 17/05/2016 Neutral 14/04/2016 Neutral 15/03/2016 Neutral 16/02/2016 Neutral 24/12/2015 Neutral 04/12/2015 Neutral 03/12/2015 Neutral 30/11/2015 Neutral 27/11/2015 Neutral 17/09/2015 Neutral

Date Credit View 19/09/2016 Neutral 24/06/2016 Neutral 15/06/2016 Neutral 12/05/2016 Neutral 14/04/2016 Neutral 12/04/2016 Neutral 15/03/2016 Neutral 24/12/2015 Neutral 17/12/2015 Neutral 04/12/2015 Neutral 03/12/2015 Neutral 27/11/2015 Neutral 17/09/2015 Neutral



Historical Credit Recommendation

BP - Historical Credit Recommendation (-1Y) BP - Historical Credit Recommendation (-1Y) Date Covered Bonds 19/09/2016 Hold 24/06/2016 Hold 15/06/20169 Buy 19/05/2016 Buy 13/05/2016 Buy 14/04/2016 Buy 05/04/2016 Buy 22/03/2016 Buy 15/03/2016 Buy 12/02/2016 Buy 24/12/2015 Buy 04/12/2015 Buy 03/12/2015 Buy 30/11/2015 Buy 27/11/2015 Buy 16/11/2015 Buy

Date Senior Unsecured 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Buy 19/05/2016 Buy 13/05/2016 Buy 14/04/2016 Buy 05/04/2016 Buy 22/03/2016 Buy 12/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 16/11/2015 Hold

BP - Historical Credit Recommendation (-1Y) BP - Historical Credit Recommendation (-1Y) Date Subordinated 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 19/05/2016 Hold 13/05/2016 Hold 14/04/2016 Hold 05/04/2016 Hold 22/03/2016 Hold 12/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Buy 16/11/2015 Buy

Date Hybrids 19/09/2016 Hold 24/06/2016 Hold 19/05/2016 Buy 19/05/2016 Buy 13/05/2016 Buy 14/04/2016 Buy 05/04/2016 Buy 22/03/2016 Hold 12/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Buy 16/11/2015 Buy

BPER - Historical Credit Recommendation (-1Y) BPER - Historical Credit Recommendation (-1Y) Date Covered Bonds 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Buy 14/04/2016 Buy 15/03/2016 Buy 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 27/11/2015 Hold

Date Subordinated 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 14/04/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold

BPM - Historical Credit Recommendation (-1Y) BPM - Historical Credit Recommendation (-1Y) Date Covered Bonds 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Buy 19/05/2016 Buy 13/05/2016 Buy 14/04/2016 Buy 05/04/2016 Buy 22/03/2016 Buy 15/03/2016 Buy 11/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 27/11/2015 Hold 13/11/2015 Hold

Date Senior Unsecured 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 19/05/2016 Hold 13/05/2016 Hold 14/04/2016 Hold 05/04/2016 Hold 22/03/2016 Hold 11/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 13/11/2015 Hold



BPM - Historical Credit Recommendation (-1Y) BPM - Historical Credit Recommendation (-1Y) Date Subordinated 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 19/05/2016 Hold 13/05/2016 Hold 14/04/2016 Hold 05/04/2016 Hold 22/03/2016 Hold 11/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 13/11/2015 Hold

Date Hybrids 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 19/05/2016 Hold 13/05/2016 Hold 14/04/2016 Hold 05/04/2016 Hold 22/03/2016 Hold 11/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 13/11/2015 Hold

MPS - Historical Credit Recommendation (-1Y) MPS - Historical Credit Recommendation (-1Y) Date Covered Bonds 19/09/2016 Buy 24/06/2016 Hold 15/06/2016 Buy 06/05/2016 Buy 14/04/2016 Buy 15/03/2016 Buy 08/02/2016 Buy 24/12/2015 Buy 18/12/2015 Buy 04/12/2015 Buy 03/12/2015 Buy 30/11/2015 Buy 27/11/2015 Buy 09/11/2015 Buy

Date Senior Unsecured 19/09/2016 Buy 24/06/2016 Hold 15/06/2016 Hold 06/05/2016 Hold 14/04/2016 Hold 08/02/2016 Hold 24/12/2015 Hold 18/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 09/11/2015 Hold

MPS - Historical Credit Recommendation (-1Y) MPS - Historical Credit Recommendation (-1Y) Date Subordinated 19/09/2016 Hold 24/06/2016 Sell 15/06/2016 Hold 06/05/2016 Hold 14/04/2016 Hold 08/02/2016 Hold 24/12/2015 Hold 18/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 09/11/2015 Hold

Date Junior Subordinated 06/05/2016 Hold 14/04/2016 Hold 08/02/2016 Hold 24/12/2015 Hold 18/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 09/11/2015 Hold

MPS - Historical Credit Recommendation (-1Y)

Date Hybrids 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 06/05/2016 Hold 14/04/2016 Hold 08/02/2016 Hold 24/12/2015 Hold 18/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 09/11/2015 Hold



UBI - Historical Credit Recommendation (-1Y) UBI - Historical Credit Recommendation (-1Y) Date Covered Bonds 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 17/05/2016 Hold 14/04/2016 Hold 15/03/2016 Hold 16/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 30/11/2015 Hold 27/11/2015 Hold

Date Senior Unsecured 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 17/05/2016 Hold 14/04/2016 Hold 16/02/2016 Hold 24/12/2015 Hold 04/12/2015 Hold 03/12/2016 Hold 30/11/2015 Hold

UBI - Historical Credit Recommendation (-1Y) Date Subordinated 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Buy 17/05/2016 Buy

UNICREDIT - Historical Credit Recommendation (-1Y) UNICREDIT - Historical Credit Recommendation (-1Y) Date Covered Bonds 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 12/05/2016 Hold 14/04/2016 Hold 12/04/2016 Hold 15/03/2016 Hold 15/03/2016 Hold 24/12/2015 Hold 17/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold 27/11/2015 Hold

Date Senior Unsecured 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 12/05/2016 Hold 14/04/2016 Hold 12/04/2016 Hold 24/12/2015 Hold 17/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold

UNICREDIT - Historical Credit Recommendation (-1Y) UNICREDIT - Historical Credit Recommendation (-1Y) Date Subordinated 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 12/05/2016 Hold 14/04/2016 Hold 12/04/2016 Hold 24/12/2015 Hold 17/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold

Date Junior Subordinated 19/09/2016 Hold 24/06/2016 Sell 15/06/2016 Hold 12/05/2016 Hold 14/04/2016 Hold 12/04/2016 Hold 24/12/2015 Hold 17/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold

UNICREDIT - Historical Credit Recommendation (-1Y)

Date Hybrids 19/09/2016 Hold 24/06/2016 Hold 15/06/2016 Hold 12/05/2016 Hold 14/04/2016 Hold 12/04/2016 Hold 24/12/2015 Hold 17/12/2015 Hold 04/12/2015 Hold 03/12/2015 Hold



Credit view allocations

Intesa Sanpaolo Research Credit View distribution at August 2016 Number of Companies subject to credit views: 26** Positive Neutral Negative Total Credit Research coverage - last credit view (%) 27 73 0 of which Intesa Sanpaolo's clients* (%) 71 74 0

(*) Companies on behalf of whom Intesa Sanpaolo and the other companies of the Intesa Sanpaolo Group have provided corporate and investment banking services in the last 12 months; percentage of clients in each rating category; ** Total number of companies covered is 27.

Investment recommendations

Banca IMI’s recommendations on the issuer(s) bonds or relative CDS are based on the following rating system:

Investment recommendations Recommendation Definition BUY We expect the bond or CDS subject to the recommendation to outperform the reference index, sector or

benchmark in a period up to six months HOLD We expect the bond or CDS subject to the recommendation to perform in line with the reference index, sector or

benchmark in a period up to six months SELL We expect the bond or CDS subject to the recommendation to underperform the reference index, sector or

benchmark in a period up to six months

Company specific disclosures

Intesa Sanpaolo S.p.A. and the other companies belonging to the Intesa Sanpaolo Banking Group (jointly also the “Intesa Sanpaolo Banking Group”) have adopted written guidelines “Modello di Organizzazione, Gestione e Controllo” pursuant to Legislative Decree 8 June, 2001 no. 231 (available at the Intesa Sanpaolo website, webpage http://www.group.intesasanpaolo.com/scriptIsir0/si09/governance/eng_wp_governance.jsp, along with a summary sheet, webpage https://www.bancaimi.com/en/bancaimi/chisiamo/documentazione/normative) setting forth practices and procedures, in accordance with applicable regulations by the competent Italian authorities and best international practice, including those known as Information Barriers, to restrict the flow of information, namely inside and/or confidential information, to prevent the misuse of such information and to prevent any conflicts of interest arising from the many activities of the Intesa Sanpaolo Banking Group which may adversely affect the interests of the customer in accordance with current regulations.

In particular, the description of the measures taken to manage interest and conflicts of interest – related to Articles 69-quater and 69-quinquies of the Issuers’ Regulation issued by Consob with Resolution no. 11971 of 14.05.1999 as subsequently amended and supplemented, Article 24 of “Rules governing central depositories, settlement services, guarantee systems and related management companies” issued by Consob and Bank of Italy, FINRA Rule 2241 and NYSE Rule 472, as well as the FCA Conduct of Business Sourcebook rules COBS 12.4.9 and COBS 12.4.10 - between the Intesa Sanpaolo Banking Group and issuers of financial instruments, and their group companies, and referred to in research products produced by analysts at Intesa Sanpaolo is available in the "Research Rules" and in the extract of "A business model for managing privileged information and conflicts of interest" published on the website of Intesa Sanpaolo S.p.A.

At the Intesa Sanpaolo website, webpage www.group.intesasanpaolo.com/scriptIsir0/si09/studi/eng_archivio_conflitti_mad.jsp you can find the archive of Intesa Sanpaolo Banking Group's conflicts of interest.

Furthermore, in accordance with the aforesaid regulations, the disclosures of the Intesa Sanpaolo Banking Group’s conflicts of interest are available through the above-mentioned webpage. The conflicts of interest published on the internet site are updated to at least the day before the publishing date of this report. We highlight that disclosures are also available to the recipient of this report upon making a written request to Intesa Sanpaolo – Equity & Credit Research, Via Manzoni, 4 - 20121 Milan - Italy. For the issuers and/or financial instruments mentioned in this report for which no recommendation has been made, and which are not subject to coverage by the Intesa Sanpaolo Research Department, we have not supplied information regarding possible conflicts of interest with the Intesa Sanpaolo Group.

http://www.group.intesasanpaolo.com/scriptIsir0/si09/governance/eng_wp_governance.jsp

https://www.bancaimi.com/en/bancaimi/chisiamo/documentazione/normative

http://www.group.intesasanpaolo.com/scriptIsir0/si09/studi/eng_archivio_conflitti_mad.jsp



Notes



Intesa Sanpaolo Research Department – Head of Research Gregorio De Felice Head of Equity & Credit Research Giampaolo Trasi +39 02 8794 9803 [email protected] Credit Research Maria Grazia Antola (Head) Banking +39 02 8794 1114 [email protected] Alessandro Chiodini Utilities +39 02 8794 1115 [email protected] Melanie Gavin Telecoms & High Yield +39 02 8794 1118 [email protected] Bedri Nuredini Credit Analyst +39 02 8794 2838 [email protected] Maria Gabriella Tronconi Industrials & High Yield +39 02 8794 1117 [email protected] Barbara Pizzarelli Research Assistant +39 02 8794 1116 [email protected]

Banca IMI SpA

Largo Mattioli, 3 20121 Milan, Italy Tel: +39 02 7261 1

Banca IMI Securities Corp.

1 William Street 10004 New York, NY, USA Tel: (1) 212 326 1100

Banca IMI London Branch

90 Queen Street London EC4N 1SA, UK Tel +44 207 894 2600

Italian Banks Sector - Intesa Sanpaolo Group · 4 October 2016 Intesa Sanpaolo Research Department...

Documents

Transcript of Italian Banks Sector - Intesa Sanpaolo Group · 4 October 2016 Intesa Sanpaolo Research Department...