The organisational structure

The model for segment reporting is in line with the organisational structure used by the Head Office to analyse Group results and is broken down into the following segments: Trade Receivables, Distressed Retail Loans, Tax Receivables, Governance and Services.

The Governance and Services segment manages the Group's financial resources and allocates funding costs to operating segments and subsidiaries through the Group's internal transfer rate system. The internal transfer rate system was updated effective 1 July 2013 to correctly represent the contribution of the different segments to the Group's results, accounting for the changes in the current situation and outlook of financial markets.

Here below are the results achieved in the first nine months of 2014 by the various business segments, which will be analysed in the sections dedicated to the individual segments.

This segment includes the following business areas:

• Italian Trade Receivables, dedicated to supporting the trade receivables of SMEs operating in the domestic market;
• Foreign Trade Receivables, for companies growing abroad or based abroad and working with Italian customers; this area includes IFIS Finance’s operations in Poland;
• Pharma, supporting the trade receivables of local health services' suppliers.

The +19,9% rise in the net banking income of the Trade Receivables segment (155,6 million Euro compared to 129,7 million Euro in the prior year) was mainly due to the higher number of financed companies (+13,1%, over 4.200 SMEs), with a turnover of 8,3 billion Euro compared to 5,7 billion Euro in 2013 (+45,8%), and the performance of the Pharma business area, which collected 22,2 million Euro in interest on arrears (compared to 7,8 million Euro in 2013) as it managed to bring various situations to a successful conclusion. A result achieved amid an acceleration in payments from Italy's Public Administration, with the Bank collecting 649,6 million Euro (compared to 586,1 million in 2013, +10,8%) and posting a turnover of 848,5 million Euro, +51,1% from 561,5 million Euro in the previous year.

Starting from 2014, interest on arrears includes a portion (one million Euro in the period) of the interest accruing from the estimated collection date on receivables from the Health Service: the Bank, based on historical data and available information, estimates that at least 20% can be recovered.

At 31 December 2014 the Bank accrued, but did not recognise, interest on arrears – calculated from the invoice’s original maturity date – related to already collected receivables (totalling approximately 49,1 million Euro) as well as non-collected receivables (approximately 39,0 million Euro) due from the Public Administration.

The decrease in net impairment losses on receivables (from 48,4 million Euro in 2013 to 33,0 million Euro in 2014; -31,8%) shows the improved quality of the Bank’s assets in a still negative reference market: new impaired loans slowed down thanks to constantly improving lending standards and increasingly efficient credit management and monitoring processes.

Loans to customers included in this segment are composed as follows: 27,1% are receivables due from the Public Administration (compared to 27.0% at 31 December 2013) and 72,9% due from the private sector (compared to 73% at 31 December 2013). The aforementioned change is due to both the acceleration in payments registered from the second half of 2013 and the increase in turnover recorded in the first nine months of 2014.

Net impaired loans decreased 30,7% from 162,6 million Euro to 112,6 million Euro.

The ratio of net bad loans to loans improved sharply, from 2,6% at the end of 2013 to 1,3% at 31 December 2014, as did the ratio of net substandard loans to loans, falling from 3,2% to 1,5%. The ratio of total net impaired loans to loans dropped from 8,4% at the end of 2013 to 4,6% at 31 December 2014. Net impaired loans amounted to 25,7% as a percentage of equity. (42,8%).

The following table shows the nominal value of receivables purchased (operating data not recognised in the statements) for factoring transactions outstanding at the end of the period (Total Receivables), broken down into receivables with or without recourse and receivables purchased outright. Please note that the breakdown of purchased receivables in the following table is based on the contract form used by the Bank.

The breakdown of customers by geographic area in Italy, with a separate indication for those abroad, and the breakdown of customers by product sector are as follows:

This is the Banca IFIS Group's segment dedicated to non-recourse factoring and managing distressed retail loans. It serves households under the new CrediFamiglia brand.

The business is closely associated with recovering impaired loans. Loans in the DRL segment are classified as bad and substandard loans: in particular, those loans are initially attributed the same classification as that assigned by the invoice seller, provided the latter is subject to the same law as Banca IFIS; otherwise, if the Bank has not ascertained the debtor's state of insolvency, those loans are classified as substandard.

After initial recognition, at an amount equal to the price paid, receivables are measured at amortised cost, calculated using the effective interest rate method; the effective interest rate is calculated as the rate at which the present value of the expected cash flows (Internal Rate of Return, hereafter IRR), for principal and interest, is equal to the price paid. The Bank measures the individual receivables making up the purchased portfolio based on the assumption that the purchase price is the portfolio's fair value; the consideration paid by the Bank for the entire portfolio accounts for the possibility that some receivables lack proper documentation, also in light of due diligence findings.

Specifically, receivables in the DRL segment are recognised and measured through the following steps:   

• at the time of purchase, receivables are recognised by allocating the portfolio's purchase price among the individual receivables it consists of through the following steps:
  • recognition of the individual receivables at a value equal to the contract price, which is used for the purposes of reporting to the Central Credit Register;
  • after verifying the documentation, if provided in the contract, the Bank returns the loans lacking documentation or beyond the statute of limitations to the seller, and measures the fair value of receivables which actually exist and can be collected; finally, after sending a notice of assignment to the debtor, the Bank can start taking action to collect the receivable;
• once the collection process begins, receivables are measured at amortised cost using the effective interest rate method;
• the effective interest rate is calculated on the basis of the price paid, the transaction costs, if any, and the estimated cash flows and collection time calculated using either a proprietary statistical model (point 5), analytical estimates made by managers, or, in the case of bills of exchange or agreements finalised with the creditor (the so-called settlement plans or expression of willingness), the relevant repayment plans;
• the effective interest rate as set out in the previous point is unchanged over time;
• the cash flows and collection time are estimated using a statistical model, on the basis of historical time series on revenues from similar portfolios over a statistically significant period of time;
• repayment plans referring to bills of exchange or agreements finalised with the creditor are adjusted by a historical proportion of unpaid accounts;
• at the end of each reporting period, interest income accrued on the basis of the original effective interest rate is recognised under Interest Income. Said interest is calculated as follows: Amortised Cost at the beginning of the period x IRR/365 x days in the period;
• in addition, at the end of each reporting period, the expected cash flows for each position are re-estimated;
• should events occur (higher or lower revenues realised or expected compared to forecasts and/or a change in collection times) which cause a change in the amortised cost (calculated by discounting the new cash flows at the original effective rate compared to the amortised cost in the period), this change is also recognised under Interest Income, except in the situation set out in the following point;
• should the loans be classified as bad loans, all the changes as set out in the previous point are recognised under Impairment losses/reversals on receivables;
• should loans be classified as substandard, or should they be objectively impaired, the changes as set out in point 9) are recognised under Impairment losses/reversals on receivables; if an impairment loss had already been recognised, reversals can be recognised up to the amount of said impairment loss, recognising the surplus under Interest Income.

It is important to bear in mind that the recognition of the various economic elements under Interest Income and Impairment losses/reversals is purely for accounting purposes, since it is connected to the classification of receivables; on the other hand, from the viewpoint of business, the economic effects shall be considered on the whole and divided into two macro-categories: interest generated by the measurement at amortised cost (point 7) and the economic components due to the changes in cash flows (points 8-9-10-11).

During the period, the counterparties settled their debt mainly according to the following methods:

• in cash (postal orders, bank transfers, etc.);
• by signing bills of exchange;
• settlement plans agreed with the debtors.

In particular, 32,6 million Euro in cash were collected, essentially in line with expectations; as for the bills of exchange, the new bills amounted to 49,5 million Euro, down compared to 79 million Euro in the prior-year period. This fall was expected due to the change in the credit collection method that, with an expected increase in debtor's underwriting, now prefers settlements plans agreed with debtors. In 2014, this choice led to settlement plans totalling 72,7 million Euro. It should be noted that the above-mentioned financial instruments totalled 122,2 million Euro in 2014, compared to 79 million Euro in 2013.

The economic performance in the period was affected by the aforementioned trends in collection. In particular, the collection from settlement plans, due to the conservative approach adopted by the Bank to calculate the amortised cost, impact the income statement about one quarter after the date they are signed, i.e. when the customer has paid an amount at least equal to three monthly instalments.

The purchases made in the period led to the acquisition of financial receivables portfolios with a par value of 2.026 million Euro at a price of 56,3 million Euro (i.e. 2,8% of the par value), consisting of 213.174 cases.

Furthermore, to strike a balance between the operations of the business units and the interests of the various stakeholders, in late 2014 the Bank sold a portfolio of bills of exchange with a par value of 219 million Euro and a Book Value of 48,1 million Euro, adding 3,6 million Euro to net banking income.

As a result of these transactions, the portfolio managed by the DRL segment covers 775.252 cases, for a par value of 5.630,2 million Euro.

It is Banca IFIS Group’s segment specialised in purchasing tax receivables arising from insolvency proceedings; it operates under the Fast Finance brand and offers to buy both accrued and accruing tax receivables on which repayment has already been requested or which shall be requested in the future, and that arose during insolvency proceedings or in prior years. As a complement to its core business, this segment seldom acquires also trade receivables from insolvency proceedings.

Since the Public Administration is the counterparty, tax receivables are classified as performing; trade receivables, on the other hand, may be classified as impaired loans, if required.

Net banking income is generated by the interest accrued according to the amortised cost method and funding costs allocated to the segment; specifically, the positions acquired over the last few years are making a growing contribution to profit or loss.

The Tax Receivables segment posted 11,0 million Euro (9,3 million Euro in 2013, +18,5%). The two figures cannot be compared on a like-for-like basis: the result at 31 December 2013 included the double impact of the revision of estimated cash flows, higher than expected, and debt collection time, shorter than expected, with a 5,2 million Euro non-recurring positive contribution to net banking income. A non-recurring item, amounting to 1,2 million Euro, was recognised also during this year. It refers to the collection of a loan previously written off by the former Fast Finance. Net of these non-recurring items, net banking income more than doubled from the previous year, rising from 4,1 million Euro in 2013 to 9,8 million Euro in 2014.

During the period, 27,2 million Euro were collected, in line with estimates; 454 receivables were acquired at an average price of 42,6 million Euro, i.e. approximately 68,5% of the par value of the tax receivables net of enrolments (i.e. 62,2 million Euro).

With these purchases, the portfolio managed by the segment covers 4.938 cases, for a par value of 167,8 million Euro and a book value of 119,5 million Euro.

Governance and services

Within the scope of its management and coordination activities, the Governance and Services segment exercises strategic, managerial, and technical-operational control over operating segments and subsidiaries.

Furthermore, it provides the operating segments and subsidiaries with the financial resources and services necessary to perform their respective business activities. The Internal Audit, Compliance, Risk Management, Communications, Strategic Planning and Management Control, Administration and General Affairs, Human Resources, Organisation and ICT functions, as well as the structures responsible for raising, allocating (to operating segments and subsidiaries), and managing financial resources, are centralised in the Parent Company.

Specifically, this segment includes both the contribution of the securities portfolio to net interest income for the period, amounting to 103,9 million Euro – compared to 126,3 million Euro in 2013 – and the cost of retail funding exceeding core loans and held in order to guarantee an adequate level of liquidity under economic stress scenarios.

The Governance and Services segment saw its receivables fall by 35,9 million Euro (-25,6%) mainly due to 52,7 million Euro in reverse repurchase agreements with Cassa di Compensazione e Garanzia coming to maturity. Such fall was partially offset by the 22,6 million Euro increase in margin lending with Cassa di Compensazione e Garanzia related to repurchase agreements in government bonds on the MTS platform.