The Board of Directors of Banca Intesa, which met today under the chairmanship of Giovanni Bazoli, resolved upon the adoption of the new international accounting standards IAS/IFRS. The Board also approved both the effects on the shareholders’ equity deriving from the IAS/IFRS first-time adoption and the consolidated quarterly report as at 31st March 2005 drawn up in accordance with the new international standards, making use of the time extension set forth in Consob’s resolution no. 14990 of 14th April 2005.
2004 figures were restated under IAS/IFRS including the estimated effects of the application of IAS 39 both in the first-time adoption and in the comparative analysis with the 2005 first quarter.
In the first-time adoption of the new international standards particularly rigorous criteria were applied which led to recognising in the shareholders’ equity the negative and not the discretionary positive implications of IAS/IFRS (for instance, it was chosen not to use the option to revaluate real estate assets). Notwithstanding these particularly rigorous choices, mainly applied to the measurement of the loan portofolio, Gruppo Intesa maintained its capital ratios at the levels of the best international standards, with the Tier 1 ratio at 7.6% at 2004 year-end restated after IAS/IFRS (compared to 8.5% before IAS/IFRS) and up to 7.8% as at 31st March 2005.
The 2005 first-quarter results highlighted a further improvement in profitability after sizeable increases registered in 2004, in line with the targets set forth in the 2003-2005 Business Plan. Consolidated net income of Gruppo Intesa amounted to 620 million euro, up 45.5% from 426 million in the 2004 first quarter.
Moreover, the Board of Directors approved two transactions – the details of which are disclosed in two separate press releases – which fulfil the 2003-2005 Business Plan strategic targets as to asset quality improvement and value creation and anticipate actions scheduled in the 2005-2007 Business Plan to be presented to the market this July.
The Board of Directors approved the sale –without recourse – of a portfolio of the Group’s gross book value of doubtful loans equal to 9,067 million euro (as at 31st December 2004) and the sale of 81% of the loan servicing business of Intesa Gestione Crediti, which manages doubtful loans, to Fortress and Merrill Lynch. Gruppo Intesa will receive a cash consideration of 2,045 million euro from the sale of the doubtful loan portfolio with a capital gain of 36 million euro on the net book value as at 31st December 2004 resulting from the IAS/IFRS first-time adoption. Gruppo Intesa will realise a capital gain of 49 million euro from the sale of 81% of the loan servicing business of IGC. The overall transaction will enable Gruppo Intesa to improve the Tier 1 ratio by around 10 bp.
Moreover, the Board approved a strategic agreement between Gruppo Intesa and Crédit Agricole for asset management activities, based on which Crédit Agricole will hold a 65% stake and Gruppo Intesa a 35% stake of the share capital of the asset management company resulting from the integration of Nextra Investment Management, Gruppo Intesa’s asset management company, and Crédit Agricole Asset Management Italia with a long-term distribution agreement. Gruppo Intesa will receive approximately 850 million euro as a cash consideration and will realise a capital gain of approximately 750 million euro with an improvement in the Tier 1 ratio by around 30-40 bp.
Effects deriving from the IAS/IFRS first-time adoption
The impact of the IAS/IFRS first-time adoption has been determined on the basis of all the standards (including IAS 32 and IAS 39) homologated by the EU Commission up to January 2005. Any variations of the current standards or any new standards which might be put into effect during 2005 could modify the impact of the IAS/IFRS first-time adoption.
As indicated above, the first-time adoption of the new accounting standards followed particularly rigorous criteria which led to recognising in the shareholders’ equity the negative and not the discretionary positive implications of IAS/IFRS. In particular, Banca Intesa decided not to apply the fair value option which allows the revaluation of all assets; therefore, the Group’s real estate assets, amongst other things, were carried at cost with no revaluation. Even the stake in the Bank of Italy was carried at cost.
The comparison between IAS/IFRS-compliant restated figures as at 31st December 2004 and pre-IAS/IFRS 2004 financial statements shows that shareholders’ equity declined to 13,969 million euro from 15,564 million. The decrease of 1,595 million euro resulted from the balance between gross decrease of 2,282 million and tax deductibility of 687 million. The 2,282 million decrease was due to negative impacts for 2,734 million and positive ones for 452 million.
Main negative impacts referred to:
- loans and receivables for 1,650 million euro, mainly due to time value adjustments on doubtful and substandard loans (sofferenze and incagli);
- financial assets held for trading for 645 million euro, 349 million of which related to separation of embedded derivatives from structured bonds issued by Banca Intesa in 2003 and 2004 (i.e. the derecognition of up-front revenues recorded in the statements of income of the two years);
- hedging derivatives for 219 million euro due to hedge accounting adjustments.
Main positive impacts, deriving from the application of mandatory rules, referred to:
- derecognition of land depreciation for 195 million euro;
- mark to market of financial assets available for sale for 136 million euro;
- derecognition of allowances for 91 million euro, mainly due to discounting of provisions for risks and charges and actuarial valuation of employee termination indemnities.
The comparison between IAS/IFRS-compliant restated figures for 2004 and pre-IAS/IFRS 2004 financial statements shows that consolidated net income went down by 43 million euro to 1,841 million from 1,884 million.
On comparing IAS/IFRS-compliant restated figures as at 31st December 2004 with pre-IAS/IFRS 2004 financial statements, capital ratios decreased maintaining, however, the levels of best international standards: Core Tier 1 ratio to 6.7% from 7.6%, Tier 1 ratio to 7.6% from 8.5% and total capital ratio to 11% from 11.6%.
2005 first-quarter income statement compared to the 2004 figures under IAS/IFRS
The 2005 first-quarter consolidated income statement registered operating income of 2,507 million euro, up 10% with respect to 2,280 million of the 2004 corresponding period and down 1.3% on the 2004 fourth quarter estimated.
As part of it, net interest income amounted to 1,334 million euro up 4.1% from 1,282 million of the 2004 corresponding period; the increase would be 3.3% excluding IAS/IFRS impact related to higher interest income from the recovery of time value on non-performing loans and lower interest expense due to the reallocation over the product residual life of up-front revenues from structured bonds issued by the Group (derecognised from the shareholders’ equity under the first-time adoption). A 4.1% increase was registered on the previous quarter estimated (there would be a 3.6% increase excluding the above-mentioned IAS/IFRS impact).
Net fee and commission income amounted to 955 million euro, up 15.1%, with respect to 830 million of the 2004 first quarter driven by commissions on placement of third-party structured bonds (for approximately 110 million euro, whereas not present in the corresponding period of 2004), expected to record already in the first quarter most of the amount planned for the whole year, and bancassurance (more than doubled to 79 million euro from 32 million). A decrease was instead registered in tax collection (which halved to 29 million euro from 54 million euro) and assets under management (down 15% to 181 million euro from 214 million). Net fee and commission income grew by 3% on the 2004 fourth quarter estimated due to commissions on placement of third-party structured bonds (up to around 110 million euro from around 30 million), bancassurance (+17%) and current accounts (+9%); while tax collection decreased to one third of the amount registered in the previous quarter (to 29 million euro from 86 million). Profits on trading amounted to 185 million euro, up compared to 112 million of the 2004 first quarter and down compared to 216 million of the 2004 fourth quarter estimated.
Operating costs equalled 1,316 million euro with a 3.8% decrease with respect to 1,368 million of the 2004 corresponding period due to personnel expenses (-2.7%), other administrative expenses (-4.9%) and depreciation and amortisation (-7.1%); a 12.3% decrease was registered compared to the 2004 fourth quarter estimated.
Consequently, operating margin amounted to 1,191 million euro, up 30.6% with respect to 912 million of the 2004 first quarter. The cost/income ratio marked a sizeable improvement decreasing from 60% to 52.5%, a level which benefited from particularly favourable seasonal effects. Operating margin increased by 14.5% on the 2004 fourth quarter estimated.
Total provisions and net value adjustments (net provisions for risks and charges, net adjustments to loans and receivables, net impairment losses on other assets) equalled 236 million euro, in line with 229 million of the 2004 corresponding period and down compared to 508 million of last year’s fourth quarter estimated. Profits/losses on investments held to maturity and on other investments showed a positive balance for 61 million euro in the quarter, mainly due to real estate disposals, compared to a 3 million negative balance in the 2004 first quarter and a 101 million positive balance in the 2004 fourth quarter estimated.
Income before taxes from continuing operations registered 1,016 million euro, up 49.4% compared to 680 million in the 2004 first quarter and up 60% on the 2004 fourth quarter estimated.
Consolidated net income registered 620 million euro, compared to 426 million in the 2004 first quarter (+45.5%) and 466 million in the 2004 fourth quarter estimated (+33%), after the deduction of income taxes for 372 million euro and the allocation of minority interests for 24 million euro, in line with the targets set forth by the 2003-2005 Business Plan for 2005.
Balance sheet as at 31st March 2005 compared to the 2004 figures under IAS/IFRS
As regards the consolidated balance sheet figures, as at 31st March 2005 loans to customers amounted to 157 billion euro, down 1.6% with respect to 31st December 2004 restated after IAS/IFRS owing to the contraction of repurchase agreements (which halved with a decrease to 2.6 billion euro from 5.7 billion). Doubtful loans net of adjustments equalled 3 billion euro, holding steady from 31st December 2004 restated after IAS/IFRS with an impact of 1.9% on total loans and a coverage degree of 76%, both in line with 31st December 2004 after IAS/IFRS. Taking into account the sale - without recourse - approved today, doubtful loans net of adjustments decrease to 1 billion euro, with an impact on total loans of 0.6%.
Customer deposits under administration amounted to 469 billion euro, substantially unchanged compared to 2004 year-end. As part of it, direct customer deposits equalled 172 billion euro down 4% on 31st December 2004 due to the decrease of repurchase agreements (down 23% to 7.2 billion euro from 9.4 billion) and bonds (down 3.9% to 53 billion from 55 billion); indirect customer deposits amounted to 297 billion euro, up 1.3% on 31st December 2004 with assets under management equal to 118 billion euro, unchanged from 2004 year-end. In the 2005 first quarter, Gruppo Intesa placed nearly 2.5 billion of third-party structured bonds and over 1.6 billion of life insurance policies of IntesaVita.
As at 31st March 2005 capital ratios resulted in: Core Tier 1 ratio at 6.9% (6.7% at 31st December 2004 restated after IAS/IFRS), Tier 1 ratio at 7.8% (7.6% at 31st December 2004) and total capital ratio at 11% (unchanged with respect to 31st December 2004). Taking into account the transactions approved today (sales of doubtful loans and 81% of the loan servicing business of IGC and the strategic agreement for asset management activities), all other things being equal, capital ratios improve as follows: Core Tier 1 ratio to 7.3-7.4%, Tier 1 ratio to 8.2-8.3% and total capital ratio to 11.4-11.5%.
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As at 31st March 2005 Gruppo Intesa’s operating structure was made up of 3,681 branches - of which 3,056 in Italy and 625 abroad - and 57,919 employees, 287 higher than at 31st December 2004.
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Results by business areas
The Retail Division serves Households, Affluent and Private customers, SMEs with turnover up to 50 million euro, Religious and Non-Profit Entities and includes product companies in the fields of wealth management, industrial credit and leasing. In the first quarter of 2005, the Division showed a sustained trend in profitability, owing to a significant revenue growth and a reduction in costs and provisions. Operating income rose by 15% to 1,395 million euro from 1,213 million in the 2004 first quarter, accounting for 56% of consolidated operating income (53% in the 2004 first quarter). Operating costs registered a 4.4% decrease to 719 from 752 million and led to a 46.6% increase in operating margin, which rose to 676 million euro from 461 million and a decrease in the cost/income ratio from 62% down to 52%, a level which benefited from particularly favourable seasonal effects. Total provisions and net value adjustments halved to 58 million euro from 116 million. As a result, income before tax from continuing operations was up 79.1% to 618 million euro from 345 million.
The Corporate Division serves companies with a turnover exeeding 50 million euro and is responsible for relations with Mid Corporates, Large Corporates, Financial Institutions and Public Administrations; it includes Caboto, product companies in the fields of factoring and tax collection and the international network made up of branches, representative offices and subsidiaries specialised in corporate banking. In the first quarter of 2005, the Division showed an improvement in profitability due to a reduction in provisions. Operating income amounted to 435 million euro in line with 433 million in the 2004 first quarter, accounting for 17% of consolidated operating income (compared to a 19% contribution in the 2004 first quarter). With operating costs up 1.1% to 191 million euro from 189 million, operating margin totalled 244 million euro, unchanged with the 2004 first quarter; the cost/income ratio kept steady at 44%. Total provisions and net value adjustments dropped by 15.2% to 47 million euro from 55. Therefore, income before tax from continuing operations increased by 5.8% to 200 million euro from 189 million.
The Italian Subsidiary Banks Division, which includes subsidiary banks strongly rooted in regional markets, highlighted a significant growth in profitability owing to a revenue growth and a reduction in costs and provisions. Operating income rose by 9.2% to 378 million euro from 346 million in the 2004 first quarter, with a 15% contribution to consolidated operating income (unchanged with respect to the 2004 corresponding quarter). With operating costs down 2.2% to 181 million euro from 185 million, operating margin was up 22.4% to 197 million euro from 161 million and the cost/income ratio went down to 48% from 53%. Total provisions and net value adjustments decreased by 28.8% to 23 million euro from 32 million. Therefore, income before tax from continuing operations rose by 37.7% from 130 million euro to 179 million.
The International Subsidiary Banks Division, which is in charge of subsidiary banks abroad providing retail and commercial banking services, showed an improvement in profitability, determined by the revenue growth registered by the Central-Eastern European subsidiaries. Operating income rose by 8.6% to 252 million euro from 232 million in the 2004 first quarter making a 10% contribution to consolidated operating income (the same contribution as in the 2004 first quarter). Operating costs amounted to 142 million euro, in line with 141 million in the 2004 first quarter; operating margin, therefore, went up 20.9% to 110 million euro from 91 million and the cost/income ratio dropped to 56% from 61%. Total provisions and net value adjustments rose by 17.5% to 30 million euro from 26 million. As a result, income before tax from continuing operations increased by 29.2% to 84 million euro from 65 million.
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As regards this year’s outlook, Banca Intesa, also in the light of the first-quarter results, confirms the targets of further significant improvement in net income set out in its 2003-2005 Business Plan and taken as a reference basis for the 2005-2007 Business Plan.
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The consolidated reclassified statement of income and the consolidated balance sheet included in the Report approved by the Board of Directors are attached in order to provide more complete information of results generated in the 2005 first quarter. It must be pointed out that the auditing firm in charge of auditing the first-time adoption of IAS/IFRS has not yet completed its examination and that this quarterly report has not been subject to control by the auditing firm.
Last updated 30 May 2005 at 17:23