As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/02/04  Sanpaolo Imi SpA                  CB                    19:64M  Banca Fideuram SpA                Merrill Corp/New/FA

Document/Exhibit                   Description                      Pages   Size 

 1: CB          Rights/Exchange/Tender Offer Notification/Response  HTML     33K 
 2: EX-1.0      Underwriting Agreement                              HTML     30K 
 3: EX-2.0      Plan of Acquisition, Reorganization, Arrangement,   HTML     33K 
                          Liquidation or Succession                              
 4: EX-3.0      Articles of Incorporation/Organization or By-Laws   HTML    107K 
 5: EX-4.0      Instrument Defining the Rights of Security Holders  HTML     72K 
 6: EX-5.0      Opinion re: Legality                                HTML    139K 
 7: EX-6.0      Opinion re: Discount on Capital Shares              HTML    642K 
 8: EX-7.0      Opinion re: Liquidation Preference                  HTML    511K 
 9: EX-8.0      Opinion re: Tax Matters                             HTML     12K 
10: EX-9.0      Voting Trust Agreement                              HTML    191K 
11: EX-10.0     Material Contract                                   HTML     17K 
12: EX-11.0     Statement re: Computation of Earnings Per Share     HTML     83K 
13: EX-12.0     Statement re: Computation of Ratios                 HTML  11.61M 
14: EX-13.0     Annual or Quarterly Report to Security Holders      HTML   7.78M 
15: EX-14.0     Material Foreign Patent                             HTML   8.74M 
16: EX-15.0     Letter re: Unaudited Interim Financial Information  HTML   2.53M 
17: EX-16.0     Letter re: Change in Certifying Accountant          HTML   2.23M 
18: EX-17.0     Letter re: Departure of Director                    HTML   2.08M 
19: EX-18.0     Letter re: Change in Accounting Principles          HTML     15K 

SANPAOLO IMI

 

 

ANNUAL REPORT 2002

 

 

 

2002 Annual Report

 

 

SANPAOLO IMI S.p.A.

 

 

REGISTERED OFFICE: PIAZZA SAN CARLO 156, TURIN, ITALY

 

SECONDARY OFFICES:

 

• VIALE DELL’ARTE 25, ROME, ITALY

 

• VIA FARINI 22, BOLOGNA, ITALY

 

COMPANY REGISTER OF TURIN 06210280019

 

SHARE CAPITAL EURO 5,144,064,800 FULLY PAID

 

 

PARENT BANK OF THE SANPAOLO IMI BANKING GROUP

 

MEMBER OF THE INTERBANK DEPOSIT GUARANTEE FUND

 

 

This document has been translated from that issued in Italy from the Italian into the English language solely for the convenience of international readers.

 

 

 

 

 

Contents
	AGENDA OF THE SHAREHOLDERS’ MEETING
	LETTER TO THE SHAREHOLDERS
	KEY FIGURES
	GROUP STRUCTURE
	CONSOLIDATED FINANCIAL STATEMENTS AND REPORTS
	Reclassified consolidated financial statements
	Reclassified consolidated statement of income
	Quarterly analysis of the reclassified consolidated statement of income
	Reclassified consolidated balance sheet
	Quarterly analysis of the reclassified consolidated balance sheet
	Report on Operations
	Economic background
	Action points and initiatives in the year
	Consolidated results
	Embedded value of the life portfolio
	Operating volumes and organization
	Capital and reserves
	Risk management and control
	Supplementary information
	• Performance of share prices
	• Shareholders
	• Ratings
	• Transactions with related parties
	• Offices held by Directors in other companies
	• Stock incentive plans
	Group Business Areas
	Developments after the end of the year
	Independent auditors’ report
	Consolidated financial statements
	Consolidated balance sheet
	Consolidated statement of income
	Consolidated balance sheet (comparison with pro forma schedules)
	Consolidated statement of income (comparison with pro forma schedules)
	Consolidated Explanatory Notes
	Introduction	– Background information on the consolidated financial statements
	Part A	– Accounting policies
	Part B	– Information on the consolidated balance sheet
	Part C	– Information on the consolidated statement of income
	Part D	– Other information
	Attachments
	Statement of changes in consolidated shareholders’ equity
	Statement of consolidated cash flows
	Reconciliation between the Bank’s financial statements and the consolidated financial statements
	List of equity investments higher than 10% in unlisted companies and in limited liability companies
	Methodological notes to determine the pro forma consolidated statements of income and balance sheets for 2001 and for the first quarter of 2002
	Statements of pro forma consolidated statements of income and balance sheets for 2001 and for the first quarter of 2002

 

4

 

	PARENT BANK FINANCIAL STATEMENTS AND REPORTS
	Parent Bank reclassified financial statements
	Parent Bank reclassified statement of income
	Parent Bank reclassified balance sheet
	Report on Operations
	Parent Bank’s results
	Operating volumes and organization
	Capital and reserves
	Supplementary information
	Developments after the end of the year
	Proposal for the approval of the financial statements and allocation of net income for the year
	Report of the Board of Statutory Auditors
	Independent auditors’ report
	Parent Bank financial statements
	Parent Bank balance sheet
	Parent Bank statement of income
	Parent Bank explanatory notes
	Introduction	– Background information on the financial statements
	Part A	– Accounting policies
	Part B	– Information on the balance sheet
	Part C	– Information on the statement of income
	Part D	– Other information
	Attachments
	Statement of changes in shareholders’ equity
	Statement of cash flows
	List of properties owned by the Bank
	OTHER POINTS ON THE AGENDA
	Increase of the legal reserve to the maximum limit provided for by art. 2430, subsection 1 of the Italian Civil Code, allocating part of the merger surplus, of the reserve ex art. 7, subsection 3, Law 218/1990, of the reserve ex D. Lgs. 169/1983 and of part of the share premium reserve
	Authorization for the purchase and sale of own shares
	Remuneration of the Directors
	REPORT ON THE BANK’S SYSTEM OF CORPORATE GOVERNANCE AND IMPLEMENTATION OF THE CODE OF CONDUCT FOR LISTED COMPANIES
	INFORMATION FOR INVESTORS

 

5

 

Agenda of the Shareholders’ Meeting

 

TURIN

 

1^st calling for the extraordinary and ordinary meetings: 28 April 2003

2^nd calling for the extraordinary and ordinary meetings: 29 April 2003

 

Extraordinary part:

 

1.               Increase of the legal reserve to the maximum limit provided for by art. 2430, subsection 1 of the Italian Civil Code, allocating part of the merger surplus, of the reserve ex art. 7, subsection 3, of Law 218/1990, of the reserve ex D. Lgs. 169/1983 and of part of the share premium reserve.

 

Ordinary part:

 

1.               Financial statements as of 31 December 2002, reports of the Board of Directors and the Board for Statutory Auditors; allocation of net income; consolidated Group financial statements as of 31 December 2002.

 

2.               Authorization for the purchase and sale of own shares.

 

3.               Remuneration of the Directors.

 

6

 

Letter to the Shareholders

 

Shareholders,

 

2002 was not an easy year for banks and financial operators, characterized by a persistently weak international economic cycle, by the crisis of several important international industrial groups, by growing political and military tension and by serious uncertainties on the stock markets, with the consequent drop in the stock price.

 

In the twelve months the international stock exchanges lost over 20%; even more dramatic trends featured in Europe, where the FTSE Eurotop lost 33%, and in Italy, where the MIB 30 fell by 26%. Contrary to the initial forecast of an improvement in the recovery, the European economy slowed down considerably in 2002, with GDP averaging 0.8% compared with 2001’s 1.5%, despite the gradual reduction of interest rates to all-time lows in the EU.

 

This scenario created strong pressure on the revenues of Italian and European banks following the compression of lending margins and the drop in commissions from financial services, as well as significant charges in terms of adjustments to loans and share-holding investments.

 

The SANPAOLO IMI Group, leader in the asset management sector in Italy, was affected by these difficult market conditions, registering a decline in revenues and a reversal in profit levels; strict assessment policies were implemented with regard to financial and lending income, involving significant adjustments to the statement of income; consolidated net income was 889 million euro, down 35.4% on the previous year.

 

The same difficulties also contributed to creating a strong reaction by the Group, which achieved important operating results and considerably increased transactions with companies as well as with households. As far as loans are concerned, while maintaining a policy of meticulous quality assessment, the Group’s net loans to customers grew by 2.2%. This result is significant as it has been obtained by pursuing a policy of selecting and reducing loans to some important domestic and international groups. The level of service, loans aside, to companies has also risen. Relevant in this context was the development of Banca OPI, which took full advantage of the opportunities, deriving from the need for investments in infrastructure, from both the public sector and partnerships with private customers.

 

Increases were also registered in transactions with households and private customers, in terms of mortgages, personal loans and consumer credit, with regard both to asset management and financial services. The effect of the devaluation of the stock exchanges

 

7

 

on customer financial assets was largely offset by a net flow of asset management of 3.2 billion euro and a positive trend of direct deposits and assets under administration flows (+1.7% and +3.7% respectively), confirming the capacity of the distribution networks to maintain a relationship of trust and service with customers, despite the adverse market situation, as proven by the increase in traditional banking services.

 

Operational development was accompanied by constant attention to cost control: thanks to a drop in personnel costs and to actions to rationalize the organizational structure, the Group kept administrative costs quite stable despite considerable integration charges.

 

The solid financial situation, summarized by a Tier 1 ratio of 7.3% and by a total ratio of 10.7%, the quality of assets and the positive operating results attained in a difficult market, make it possible to propose to shareholders the distribution of a dividend of 0.30 euro per share and represent a solid base on which to build a strategy of sustainable development over the years to come.

 

The Group responded to the adverse market conditions with effective structural actions, accelerating the integration processes of its distribution networks: in May, a decision was made to integrate Banca Sanpaolo Invest into Banca Fideuram, in June the merger with Cardine Banca took place followed, at the end of the year, by the merger with Banco di Napoli. These company transactions were accompanied by important operating initiatives: all the finance and treasury operations were centralized in the Parent Bank. The integration of the IT systems continued and will be completed by June 2003 for the branches of the former Banco di Napoli and extended, as of the end of the year, to the Cardine bank networks, being completed in the first half of 2004.

 

The strong impulse to the integration processes is closely linked with the definition of a highly innovative organizational model for the branch networks, which intends to combine the improvement in operating efficiency and the distribution capacity with the local roots and excellent service and the provision of a quick response to customers.

 

This new distribution model represents the mainstay of the three-year plan for 2003-2005 presented last February by the Board of Directors, confirming the Group’s strategic decision to reinforce primarily its position in the domestic banking market, consolidating that gained in services to households and companies thanks to investments and internal and external growth actions performed in previous years. The Group’s banking networks, which at the beginning of 2000 included just over 1,300 branches, now number more than 3,000 branches providing extensive coverage of most of the country. The operating links with the Cassa di Risparmio di Firenze Group

 

8

 

and with the Cassa dei Risparmi di Forlì have also been strengthened, completing the Group’s national coverage and distribution capacities.

 

The Plan shows company loans and services and management of households’ savings as being priority markets.

 

On the loans front, the decision to dedicate attention to all corporate segments resulted in the progressive diversification of the portfolio: despite the confirmed commitment to sustain the main Italian industrial groups, the exposure to several groups in Italy and abroad and, consequently, the level of concentration, were reduced. The weight of the first 10 borrowers in the loan portfolio has fallen over the last three years from 13.4% to 10.4%, while loans to small- and medium-sized companies and to households have increased, both through the banking channel and in the form of consumer credit, where the Group concentrated its investments in Finemiro for synergic development with the banking activity. Corporate loans and services will be strengthened throughout the country, accepting the challenge that the new Basel rules present to banks and companies and thus allocating to this customer segment the network of approximately 130 branches created during the last 18 months and the activity of the specialized companies within the Group aimed at creating innovative financial products.

 

With the acquisition of Banka Koper, the Public Offer for Inter-Europa Bank, the restoration and consolidation of West Bank and the establishment of a widespread network of offices in the New Europe, the Group is capable of offering efficient services to Italian customers and of contributing to the support of economic and financial relations with countries in that region.

 

Concerning asset management products, instruments and techniques adopted by the Sanpaolo Network in terms of sales and advisory services to households are concerned, these will be exported to the other distribution networks, benefiting markets in the South and North-East. Simultaneously, the Sanpaolo IMI Wealth Management product factory continues to improve product performance and innovation, taking full advantage of the opportunities offered by the insurance, pensions and welfare market.

 

The Plan provides for initiatives aimed at improving earnings in all the other main business areas, as well as the active management of the investment portfolio, in order to optimize the allocation and performance of the capital invested and to free up resources to use for new, selected development opportunities. The partnership projects set up or being studied with the foreign groups SCH and CDC Ixis/EULIA are moving in this direction.

 

9

 

These actions to relaunch operations and revenues will be accompanied by strict policies to rationalize structures and to keep costs down, starting by rationalizing head offices and subsidiaries, with investments in the IT systems of the Macchina Operativa Integrata and with a staff policy enabling a reduction of Group’s total personnel and, at the same time, implementing a rejuvenation of staff and boosting resources dedicated to the distribution structures.

 

The financial targets of the Plan, in which a gradually recovering and fragile economic scenario can be envisaged for 2003 with more sustained growth over the next two years, can be summarized in a RoE progressively increasing by 9% in 2003 up to 15% in 2005 (1). The simultaneous action on revenues and costs will enable the Group to make significant improvements to the cost/income ratio, taking it from the current 65% to below 55% in 2005.

 

These are ambitious aims, especially considering the market conditions that are characterizing the early part of 2003 and the uncertainty that continues to prevail with regard to the performance of the international economy and financial markets, also due to the conflict in Iraq, but to which management is fully committed.

 

The operating evolution in the first two months of the year confirms the Group’s ability to grow in the market, in terms of asset management – with a positive net inflow of mutual funds (1.8 billion euro in the two months), life insurance (about 1.3 billion euro) and other investment products – and in terms of dealing activities and services for households and companies. Despite a negative impact on asset management of 2.4 billion euro resulting from the devaluations of the markets, the stock of financial assets rose by 0.9% from the beginning of the year, while net loans to customers grew by 1.7%. The performance of the financial markets and interest rates continues to pressurize the unit contribution margins to which the Group is responding with an improvement in quality and an expansion of the range of services offered, with the aim of satisfying customer needs and the interest of shareholders.

 

The Chairman

Turin, 25 March 2003

 

(1)  The 15% RoE target cannot be directly compared with that presented in December 2001 at the time of the merger with Cardine following a change in the calculation method suggested by the need to comply with international practice. The adoption of the previous method – which substantially excluded current income from the average equity – would take the current RoE target to 16.5% in 2005.

 

10

 

The position of the SANPAOLO IMI Group

 

 

The strategic choices for the 2003-2005 Plan: the five guidelines

 

 

2003-2005 Plan: the expected results

 

 

(1)       Administrative costs (excluding indirect duties and taxes) and amortization (excluding adjustments to goodwill and merger and consolidation differences) / Net interest and other banking income (including other net income).

 

11

 

Key figures

 

		2002		2001 pro forma (1)		Change 2002 / 2001 pro forma (%)		2001
CONSOLIDATED STATEMENT OF INCOME (€/mil)
Net interest income		3,773		3,959		-4.7		2,788
Net commissions and other net dealing revenues		2,809		3,056		-8.1		2,608
Administrative costs		-4,648		-4,647		+0.0		-3,600
Operating income		2,360		2,770		-14.8		2,118
Provisions and net adjustments to loans and financial fixed assets		-1,426		-1,007		+41.6		-737
Income before extraordinary items		722		1,591		-54.6		1,231
Net income of the Group		889		1,376		-35.4		1,203
CONSOLIDATED BALANCE SHEET (€/mil)
Total assets		203,773		213,427		-4.5		170,191
Loans to customers (excluding NPLs and SGA loans)		124,115		121,469		+2.2		94,085
Securities		22,591		28,543		-20.9		22,127
Equity investments		4,064		4,898		-17.0		4,697
Subordinated liabilities		6,613		5,829		+13.4		5,607
Shareholders’ equity of the Group		10,537		10,933		-3.6		8,182
CUSTOMER FINANCIAL ASSETS (€/mil)
Customer financial assets		356,281		357,875		-0.4		305,404
• Direct deposits		137,049		134,803		+1.7		106,784
• Indirect deposits		219,232		223,072		-1.7		198,620
• Asset management		131,515		138,479		-5.0		125,977
• Asset administration		87,717		84,593		+3.7		72,643
PROFITABILITY RATIOS (%)
RoE (2)		8.3		12.9				15.5
Cost / Income ratio (3)		65.1		61.6				62.1
Net commissions / Administrative costs		60.4		65.8				72.4
CREDIT RISK RATIOS (%)
Net non-performing loans / Net loans to customers		1.1		1.1				1.0
Net problem loans and loans in restructuring / Net loans to customers		1.1		1.2				1.0
SOLVENCY RATIOS (%) (4)
Tier 1 ratio		7.3		7.2				7.2
Total ratio		10.7		9.5				9.5
SHARES
Number of shares (millions)		1,837		1,837		—		1,404
Quoted price per share (€)
• average		9.439		14.375		-34.3		14.375
• low		5.231		8.764		-40.3		8.764
• high		13.702		18.893		-27.5		18.893
Earnings / Average number of shares in circulation (€)		0.48		0.75		-36.0		0.87
Dividend per share (€)		0.30		0.57		-47.4		0.57
Dividend per share/ Average annual price (%)		3.18		3.97				3.97
Price / Book value		1.1		2.2		-50.0		2.2
Shareholders’ equity / Number of shares in circulation (€)		5.74		5.95		-3.5		5.90
OPERATING STRUCTURE
Employees		45,650		46,556		-1.9		35,028
Domestic branches		3,069		3,049		+0.7		2,212
Foreign branches and representative offices		153		150		+2.0		95
Financial planners		4,955		5,510		-10.1		5,506

 

(1)       The pro forma figures have been prepared, according to the criteria detailed in the Explanatory Notes, assuming the merger with Cardine Banca and the acquisition of the interest in Banka Koper as of 1/1/2001.

(2)       Net income / Average net shareholders’ equity.

(3)       Administrative costs (excluding indirect duties and taxes) and amortization (excluding adjustments to goodwill and merger and consolidation differences) / Net interest and other banking income (including other net income).

(4)       Solvency ratios as of 31/12/2001 are not pro forma

 

The pro forma figures for 2001 are unaudited.

 

12

 

Group structure

 

Central Functions

• Parent Bank Functions

• Shareholding Investments

Santander Central Hispano (2.9%)

CDC Ixis (3.4%)

Other shareholdings

• Treasury

Parent Bank

Sanpaolo IMI US Financial (United States)

Sanpaolo IMI Bank International (Madeira, Portugal)

• Macchina Operativa Integrata (Integrated Operating Vehicle)

Domestic Banking Networks

• Sanpaolo Network and Consumer Banking

Parent Bank

Sanpaolo Leasint

Finconsumo Banca (1)

Finemiro Banca

Sanpaolo Bank (Luxembourg)

Sanpaolo Bank (Austria)

Sanpaolo Bank (Switzerland)

• Cardine

• Former Banco di Napoli Italian Branch Network

Parent Bank

• Banca OPI

• Large Groups and Structured Finance

Parent Bank

• Other Italian Networks

Cassa di Risparmio di Firenze (19.5%)

Cassa dei Risparmi di Forlì (21%) (2)

• Tax Collection

Personal Financial Services

• Banca Fideuram (73.4%)

Banca Sanpaolo Invest

Banque Privée Fideuram Wargny (France)

Fideuram Fondi

Fideuram Vita

Fideuram Bank (Luxembourg)

Fideuram Assicurazioni

Fideuram Fiduciaria

Fideuram Bank Suisse (Switzerland)

Fideuram Gestions (Luxembourg)

Fideuram Asset Management (Ireland)

Sanpaolo Invest Ireland (Ireland)

Wealth Management and Financial Markets

• Sanpaolo IMI Wealth Management

Sanpaolo IMI Asset Management

Banco di Napoli Asset Management (3)

Sanpaolo Vita

Sanpaolo Life (Ireland)

Sanpaolo IMI Wealth Management (Luxembourg)

Sanpaolo IMI Institutional Asset Management

Sanpaolo IMI Alternative Investments

• Eptaconsors (60.7%) (4)

• Banca IMI

IMI Bank (Luxembourg)

IMI Investments (Luxembourg)

IMI Capital Markets USA (United States)

Banca IMI Securities (United States)

• Sanpaolo IMI Private Equity

LDV Holding (Netherlands)

International Activities

• Banque Sanpaolo (France)

• Foreign Network

Parent Bank

Sanpaolo IMI Bank Ireland (Ireland)

• Sanpaolo IMI Internazionale (5)

Banka Koper (Slovenia; 62.1%)

Inter-Europa Bank (Hungary; 32.5%)

West Bank (Romania; 72.4%)

IMI Investimenti

 

(1)       On 3 March 2003 an agreement was reached for the sale to Santander Central Hispano of the 50% stake held by SANPAOLO IMI.

(2)       The share will rise to 29.8% due to the exercising of a put option by Fondazione Cassa dei Risparmi di Forlì, as provided for by the preliminary agreement stipulated with SANPAOLO IMI on 29 November 2000.

(3)       On 4 March 2003 Bank of Italy authorized the merger by incorporation of Banco di Napoli Asset Management into Sanpaolo IMI Asset Management, effective as of 1 September 2003.

(4)       On 29 January 2003 the share rose to 60.7% following the completion of the acquisition of the 20.24% interest held by Cassa di Risparmio di Firenze.

(5)       The conferral of the interests in Banka Koper, Inter-Europa Bank and West Bank to Sanpaolo IMI Internazionale has still to be completed.

 

13

 

Consolidated financial statements and reports
RECLASSIFIED CONSOLIDATED FINANCIAL STATEMENTS
REPORT ON OPERATIONS
INDEPENDENT AUDITORS’ REPORT
CONSOLIDATED FINANCIAL STATEMENTS
ATTACHMENTS

 

14

 

Reclassified consolidated financial statements
RECLASSIFIED CONSOLIDATED STATEMENT OF INCOME
QUARTERLY ANALYSIS OF THE RECLASSIFIED CONSOLIDATED STATEMENT OF INCOME
RECLASSIFIED CONSOLIDATED BALANCE SHEET
QUARTERLY ANALYSIS OF THE RECLASSIFIED CONSOLIDATED BALANCE SHEET

 

 

15

 

Reclassified consolidated financial statements

 

Reclassified consolidated statement of income

 

		2002		2001 pro forma (1)		Change 2002 / 2001 pro forma
		(€/mil)		(€/mil)		(%)
NET INTEREST INCOME		3,773		3,959		-4.7
Net commissions and other net dealing revenues		2,809		3,056		-8.1
Profits and losses from financial transactions and dividends on shares		286		300		-4.7
Profits from companies carried at equity and dividends from shareholdings		292		228		+28.1
NET INTEREST AND OTHER BANKING INCOME		7,160		7,543		-5.1
Administrative costs		-4,648		-4,647		+0.0
• personnel		-2,856		-2,862		-0.2
• other administrative costs		-1,528		-1,519		+0.6
• indirect duties and taxes		-264		-266		-0.8
Other operating income, net		358		353		+1.4
Adjustments to tangible and intangible fixed assets		-510		-479		+6.5
OPERATING INCOME		2,360		2,770		-14.8
Adjustments to goodwill and merger and consolidation differences		-212		-172		+23.3
Provisions and net adjustments to loans and financial fixed assets		-1,426		-1,007		+41.6
INCOME BEFORE EXTRAORDINARY ITEMS		722		1,591		-54.6
Net extraordinary income		296		414		-28.5
INCOME BEFORE TAXES		1,018		2,005		-49.2
Income taxes for the period		-450		-517		-13.0
Change in reserves for general banking risks		364		-6		n.s.
Income attributable to minority interests		-43		-106		-59.4
NET INCOME		889		1,376		-35.4

 

(1)       The pro forma statement of income for 2001 has been prepared, according to the criteria detailed in the Explanatory Notes, assuming the merger with Cardine Banca and the acquisition of the interest in Banka Koper as of 1/1/2001.

 

The pro forma statement of income for 2001 is unaudited.

 

16

 

Quarterly analysis of the reclassified consolidated statement of income

 

		2002										2001 pro forma (1)
		Fourth quarter		Third quarter		Second quarter		First quarter pro forma (1)		Quarterly average		Fourth quarter		Third quarter		Second quarter		First quarter		Quarterly average
		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)
NET INTEREST INCOME		960		936		950		927		943		1,001		956		1,005		997		990
Net commissions and other net dealing revenues		755		668		689		697		702		776		726		798		756		764
Profits and losses from financial transactions and dividends on shares		64		13		125		84		72		141		6		81		72		75
Profits from companies carried at equity and dividends from shareholdings		53		55		135		49		73		60		7		101		60		57
NET INTEREST AND OTHER BANKING INCOME		1,832		1,672		1,899		1,757		1,790		1,978		1,695		1,985		1,885		1,886
Administrative costs		-1,224		-1,128		-1,176		-1,120		-1,162		-1,234		-1,105		-1,178		-1,130		-1,162
• personnel		-745		-691		-721		-699		-714		-727		-683		-744		-708		-716
•other administrative costs		-410		-375		-384		-359		-382		-444		-358		-358		-359		-380
•indirect duties and taxes		-69		-62		-71		-62		-66		-63		-64		-76		-63		-66
Other operating income, net		94		93		93		78		90		78		89		102		84		89
Adjustments to tangible and intangible fixed assets		-160		-127		-112		-111		-127		-146		-120		-111		-102		-120
OPERATING INCOME		542		510		704		604		591		676		559		798		737		693
Adjustments to goodwill and merger and consolidation differences		-88		-39		-44		-41		-53		-50		-42		-41		-39		-43
Provisions and net adjustments to loans and financial fixed assets		-661		-453		-156		-156		-357		-443		-192		-228		-144		-252
INCOME BEFORE EXTRAORDINARY ITEMS		-207		18		504		407		181		183		325		529		554		398
Net extraordinary income		126		34		80		56		74		38		167		130		79		103
INCOME BEFORE TAXES		-81		52		584		463		255		221		492		659		633		501
Income taxes for the period		42		-77		-243		-172		-113		6		-93		-188		-242		-129
Change in reserves for general banking risks		353		13		-2		—		91		-6		-1		1		—		-2
Income attributable to minority interests		—		-14		-15		-14		-11		12		-58		-36		-24		-26
NET INCOME		314		-26		324		277		222		233		340		436		367		344

 

(1)       The pro forma quarterly statements of income have been prepared, according to the criteria detailed in the Explanatory Notes, assuming the merger with Cardine Banca and the acquisition of the interest in Banka Koper as of 1/1/2001.

 

The quarterly statements of income are unaudited.

 

17

 

Reclassified consolidated balance sheet

 

		31/12/2002		31/12/2001 pro forma (1)		Change 31/12/02 - 31/12/01 pro forma
		(€/mil)		(€/mil)		(%)
ASSETS
Cash and deposits with central banks and post offices		1,406		1,172		+20.0
Loans		148,701		151,346		-1.7
• due from banks		22,000		26,436		-16.8
• loans to customers		126,701		124,910		+1.4
Dealing securities		19,694		24,557		-19.8
Fixed assets		9,596		11,889		-19.3
• investment securities		2,897		3,986		-27.3
• equity investments		4,064		4,898		-17.0
• intangible fixed assets		406		444		-8.6
• tangible fixed assets		2,229		2,561		-13.0
Differences arising on consolidation and on application of the equity method		1,030		1,243		-17.1
Other assets		23,346		23,220		+0.5
Total assets		203,773		213,427		-4.5
LIABILITIES
Payables		161,505		171,285		-5.7
• due to banks		24,456		36,482		-33.0
• due to customers and securities issued		137,049		134,803		+1.7
Provisions		3,813		4,278		-10.9
• for taxation		670		1,219		-45.0
• for termination indemnities		961		955		+0.6
• for risks and charges		1,839		1,761		+4.4
• for pensions and similar		343		343		—
Other liabilities		20,971		20,309		+3.3
Subordinated liabilities		6,613		5,829		+13.4
Minority interests		334		793		-57.9
Shareholders’ equity		10,537		10,933		-3.6
Total liabilities		203,773		213,427		-4.5

 

(1)       The pro forma balance sheet figures at 31/12/2001 have been prepared, according to the criteria detailed in the Explanatory Notes, assuming the merger with Cardine Banca and the acquisition of the interest in Banka Koper as of 1/1/2001.

 

The pro forma balance sheet figures as of 31/12/2001 are unaudited.

 

18

 

Quarterly analysis of the reclassified consolidated balance sheet

 

		2002								2001 pro forma (1)
		31/12		30/9		30/6		31/3 pro forma (1)		31/12		30/9		30/6		31/3
		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)		(€/mil)
ASSETS
Cash and deposits with central banks and post offices		1,406		1,042		1,029		1,454		1,172		710		688		709
Loans		148,701		145,679		146,607		147,273		151,346		144,674		145,957		145,269
• due from banks		22,000		21,977		22,735		21,189		26,436		22,681		21,340		23,434
• loans to customers		126,701		123,702		123,872		126,084		124,910		121,993		124,617		121,835
Dealing securities		19,694		23,737		25,100		25,657		24,557		23,724		28,029		24,712
Fixed assets		9,596		10,093		10,660		11,732		11,889		12,620		12,750		14,574
• investment securities		2,897		3,117		3,642		3,931		3,986		4,995		5,286		7,028
• equity investments		4,064		4,170		4,120		4,837		4,898		4,621		4,433		4,511
• intangible fixed assets		406		390		407		426		444		442		449		426
• tangible fixed assets		2,229		2,416		2,491		2,538		2,561		2,562		2,582		2,609
Differences arising on consolidation
and on application of the equity method		1,030		1,095		1,141		1,120		1,243		1,260		1,260		1,167
Other assets		23,346		23,128		22,995		23,116		23,220		23,763		24,871		25,611
Total assets		203,773		204,774		207,532		210,352		213,427		206,751		213,555		212,042
LIABILITIES
Payables		161,505		163,743		166,657		168,360		171,285		164,162		169,456		166,504
• due to banks		24,456		26,902		30,201		32,943		36,482		34,789		38,629		36,888
• due to customers and securities issued		137,049		136,841		136,456		135,417		134,803		129,373		130,827		129,616
Provisions		3,813		4,291		4,159		4,565		4,278		3,945		5,108		5,840
• for taxation		670		1,194		1,058		1,392		1,219		1,027		1,029		1,730
• for termination indemnities		961		969		989		993		955		966		979		969
• for risks and charges		1,839		1,786		1,769		1,810		1,761		1,616		1,700		1,731
• for pensions and similar		343		342		343		370		343		336		1,400		1,410
Other liabilities		20,971		19,765		19,755		19,611		20,309		21,469		22,414		22,671
Subordinated liabilities		6,613		6,218		6,155		5,793		5,829		5,621		5,401		5,365
Minority interests		334		429		437		797		793		882		831		841
Shareholders’ equity (2)		10,537		10,328		10,369		11,226		10,933		10,672		10,345		10,821
Total liabilities		203,773		204,774		207,532		210,352		213,427		206,751		213,555		212,042

 

(1)       The pro forma balance sheet figures have been prepared, according to the criteria detailed in the Explanatory Notes, assuming the merger with Cardine Banca and the acquisition of the interest in Banka Koper as of 1/1/2001.

(2)       Reserves are net of own shares held by the Parent Bank.

 

The pro forma balance sheet figures and the balance sheet figures as of 30/9/2002 are unaudited.

 

19

 

Report on Operations
ECONOMIC BACKGROUND
ACTION POINTS AND INITIATIVES IN THE YEAR
CONSOLIDATED RESULTS
EMBEDDED VALUE OF THE LIFE PORTFOLIO
OPERATING VOLUMES AND ORGANIZATION
CAPITAL AND RESERVES
RISK MANAGEMENT AND CONTROL
SUPPLEMENTARY INFORMATION
GROUP BUSINESS AREAS
DEVELOPMENTS AFTER THE END OF THE YEAR

 

20

 

Economic background

 

The international context

 

During 2002, economic growth in the major international areas – despite the recovery from the minimums registered in the second half of 2001 – was particularly vulnerable and, on the whole, more modest than expected at the beginning of the year.

 

The dynamics of the cycle were negatively affected by endogenous factors, especially the decline in expenditure for fixed investment in the main industrialized economies, and by exogenous factors, such as the financial scandals involving leading US companies and the possible developments of the military and political tension in Iraq. Both factors had a considerable effect on the confidence and the decisions of operators regarding expenditure, compounding existing uncertainties on the future direction of the major economies and financial markets. The development of international commerce was penalized, revealing itself to be incapable of sustaining the expected relaunch of international manufacturing activity.

 

In 2002, in the United States GDP recovered globally, with a growth rate of 2.4% compared with 0.3% in 2001. Manufacturing activity was supported by private consumption and public expenditure, while the change in fixed investment remained negative. In the last part of the year however, the major indicators of the cycle showed new deterioration of the market situation. The industrial production index fell again. GDP slowed considerably, taking the rate of unemployment to 6%. Simultaneously, there was a dramatic reversal in consumer confidence indexes.

 

In this context, in November, about a year after the last intervention, the Fed dropped interest rates again, taking the rate on Federal Funds to 1.25%. Uncertainties regarding the prospects of the economy and the modest performance of capital flows which, in the years characterized by expansion, had made it easy to finance the growing deficit of the current amounts, reflected negatively on the US currency. The dollar fell during the year in comparison with the euro and the yen.

 

In Japan, according to preliminary estimates, GDP grew by 0.3% over the year. The manufacturing dynamics were sustained by net exports, while the contribution of domestic demand remained negative, especially because of the decline in private investments. Structural problems linked with the vulnerability of the banking system and the manufacturing sector on the one hand, and the limited possibility for intervention with monetary and tax policies on the other, represent considerable restrictions to the possibility of recovery by the Japanese economy in the short term.

 

During the year emerging countries showed greater dynamism than in 2001, yet with evident differences between the various areas. The Asian economies performed better thanks to lively domestic demand and the intensification of intra area commercial exchanges. The situation remained critical in Latin America, especially in Argentina and Venezuela, owing to the economic and political difficulties in the two countries.

 

East European economies showed sustained growth as a whole, even though, especially during the second half of the year, they suffered the effects of the persistent weakness of economic activity in the European Union, the area’s main commercial partner. The dynamics of the bond spreads of the candidate countries benefited from the prospects of joining the European Union in 2004, confirmed in Copenhagen at the end of 2002.

 

The euro-zone and Italy

 

In the euro-zone, the dynamics of GDP in 2002, despite the recovery of the market situation compared with the minimum point reached in the last quarter of 2001, was modest over the year (+0.8% compared with 1.5% in 2001). Development suffered the difficult recovery in domestic demand but benefited from the increase in exports. However, at the end of the year, in Europe as well, the cyclical indicators showed a new phase of deterioration in the market situation; the production index fell again and unemployment increased once more in various countries.

 

Within the area the weak market situation mainly regarded Germany and Italy, but recently began to affect France too, albeit in a minor way. In Germany the general drop in fixed investments (-6.5%) highlighted the severe recession in the manufacturing sector.

 

In Italy the growth of GDP (+0.4%) was higher only than that in Germany (+0.2%). Economic stagnation can be attributed to the persistent weakness of domestic demand (+0.7%), which recovered in terms of investments in the

 

21

 

second half of the year, and to export difficulties (-1%) caused by the recession in the main export markets.

 

The difficult market situation in the area had negative effects on the dynamics of public accounts, jeopardizing the respect of targets agreed to previously with the European Commission. In some cases, such as Portugal, France and Germany, the relationship between public deficit and GDP exceeded the upper limit of 3%. In Italy the net debt of the Public Administration was 2.3% of the GDP, well below the level indicated in the Maastricht Treaty, but 1.8 percentage points higher than the previously established convergence plan. The ratio between the public debt and the GDP fell once more (from 109.5 in 2001 to 106.7 in 2002), continuing the reduction phase which started in 1995.

 

In 2002 the current rate of inflation in the area alternated, rising to 2.5% in the first quarter due to increases in prices as a consequence of the changeover and, after a brief fall, rising again in the third quarter as a result of the increase in the price of oil. Towards the end of the year, the dynamics of prices suffered as a result of the slowing down of the market situation and of the considerable rise in the value of the euro. Therefore in 2002 the rate of inflation settled at 2.2% (2.5% in Italy).

 

The controversial performance of inflation restricted the action of the Central Bank. In December, with signs of a deterioration in the market situation and simultaneous deceleration towards the target rate of inflation, the ECB reduced the policy rate from 3.25% to 2.75%.

 

Banking industry

 

The tone of the real economy, below the expectations expressed at the beginning of the year, determined a consistent resizing in terms of growth of bank loans in Italy in 2002, up 5.9% compared with 7.8% in 2001.

 

The evolution of the total aggregate discounted the evident slowing down of the short-term component (+0.3% against +6.5% in 2001), partially because of the decline in loans linked with merger and acquisition transactions. Medium- and long-term loans on the other hand gave a strong impulse to the dynamics of loans, with an increase of 11.5% (+9.1% in 2001).

 

The low level of bank rates on disbursements stimulated the demand for loans by households (+9.4%), used as consumer credit (+19.2%) and domestic mortgage loans (+23.5%). Despite the delicate financial situation in the major industrial sectors, the dynamics of company loans were positive (+5%). However there was a decline in the volume of loans to Public Administration (-2.8%).

 

During 2002, direct banking deposits showed a moderate deceleration (+4.4%) compared with the previous year (+5.9%). The trend was conditioned by the considerable decline in funding from abroad (-6.8%). During the year the dynamics of the remaining funding components was influenced by the higher propensity for liquidity expressed by households in the face of uncertainties regarding the evolution of markets, as well as by the inflow of capital from abroad following Decree Law 350 dated 25/9/01. In December total deposits were up 7.4% as a result of the increase in the amounts of current accounts (+7.6%) and, after several years of decline, of savings accounts (+6.7). The dynamics of the inflow benefited by the considerable increase in the stock of bonds (+9.5%).

 

With the fall in money market rates (the 3-month Euribor fell by 39 basis points between December 2001 and December 2002), short-term banking rates also fell. During the year, because of the fall in the average rate on short-term loans by 26 basis points and a reduction of 13 basis points in the average rate of open accounts payable, the short-term banking spread was down by 13 basis points.

 

Securities brokerage

 

In 2002 the main international share indexes suffered substantial losses. In line with the dynamics of the real cycle, the negative trend of the stock markets suffered from endogenous factors linked with the reduced development of productive activity and the general decline in company earnings and from exogenous shocks attributable to the company scandals which occurred during the second quarter and the risks, which grew in the third quarter, regarding the developments of the military and political situation in Iraq.

 

In United States markets, the cut in costs following improvements to various companies offered support to the evolution of the company’s accounts; however, in the absence of an effective recovery of revenues, this was not sufficient to avoid a new drop in stock market prices. During the year the S&P500 fell by 23.4%. The Nikkei

 

22

 

225 index fell by 18.6% and the DJ Stoxx 50 index fell by 35%. In Italy the MIB30 was down by 26% and the Mibtel was down by 23.5%. All the major international sector indices registered declines, which were more evident in the technology, insurance, finance, telecommunications, automotive, media, pharmaceutical and utilities sectors.

 

As a result of the decline in the stock markets at the end of the year the total capitalization of the Italian companies quoted in domestic market fell by 458 billion euro, 36.6% of the GDP (from 592 billion, 48.7% of the GDP, in 2001). The number of new companies quoted fell to six (from 18 in 2001). The flow of investments into the Italian market, as channeled through a Public Offer amounted to 2.9 billion euro (in comparison with 7 billion in 2001), through nine transactions instead of the 20 transactions that were implemented during 2001. The total funds obtained by the quoted companies through capital increases were equivalent to 3.7 billion euro, as opposed to 7.6 billion in 2001, based on 18 transactions (25 in 2001). The average daily value of shares exchanged was 2.5 billion euro (2.6 billion in 2001).

 

Asset management

 

The volatility of the financial markets and the decline in stock market prices, which was particularly evident in the second and third quarters of 2002, had considerable repercussions on the dynamics of mutual funds, leading to extensive devaluation of assets and high net outflows. Because of these trends, in December the amount of funds managed by Italian brokers fell to 466 billion euro, down 9.4% in comparison to 2001.

 

During the year net inflows registered a reduction of 6.4 billion, despite the slight recovery during the last quarter. Net disinvestments were high for the bond funds (-18.4 billion), balanced funds (-12 billion) and equity funds (-9.8 billion). The prudent attitude of investors helped the flow of capital into liquidity funds (+29.8 billion), but was not sufficient to offset the weak dynamics of the other categories.

 

The general dynamics of assets under management benefited from the strong growth of the life insurance area. On the basis of currently available figures an annual growth in life technical reserves is estimated at about 16%.

 

23

 

Action points and initiatives in the year

 

The merger between SANPAOLO IMI and Cardine Banca

 

The merger act between SANPAOLO IMI and Cardine Banca was signed on 24 May 2002, becoming legally effective on 1 June and effective for accounting and tax purposes starting on 1 January 2002. The transaction entailed the merger of Cardine into SANPAOLO IMI, following the conferral by Cardine of part of its business to a wholly controlled subsidiary, Cardine Finanziaria, whose headquarters are located in Padua.

 

The merger terms and impact on shareholder structure

 

The merger, based on an exchange ratio of 1.7950 SAN-PAOLO IMI shares for each Cardine share, led to an increase in the equity capital of SANPAOLO IMI from 3,932.4 to 5,144.1 million euro; the new equity capital is composed of 1,837.2 million shares of nominal unit value of 2.80 euro. To serve the exchange 432.7 million new SANPAOLO IMI shares, constituting the above mentioned capital increase were issued and 48 million own shares held by the Parent Bank were used. Of the 274.9 million of ordinary shares, of nominal unit value of 5.20 euro, representing the total capital of Cardine Banca, a total of 7.1 million shares held by the incorporating and the incorporated bank were cancelled without exchange.

 

Regarding the aspects relating to the shareholder structure of the Parent Bank upon completion of the merger, the Compagnia di San Paolo, which – prior to the integration – held 16.1% of the capital of SANPAOLO IMI, and the Fondazioni Cassa di Risparmio di Padova e Rovigo and Cassa di Risparmio in Bologna, which held 40.2% and 28.6%, respectively, of the capital of Cardine Banca, had agreed, pursuant to the provisions of D.Lgs. 153/1999, to request the post merger conversion of part of the respective ordinary shares into preference shares, so as to hold, after the conversion, a total of 15% of the ordinary capital.

 

The Fondazioni had further agreed to place these ordinary shares (subdivided into two equal stakes, one of which, in the amount of 7.5%, attributable to the Compagnia di San Paolo, and the other of which, in the same amount, attributable to the other two Fondazioni, in proportion to the shares held by each of them in Cardine Banca), in a company dedicated to this specific purpose, set up in January 2002 and named Fondaco SGR. Participation in the capital of Fondaco was divided equally between the Compagnia di San Paolo, on the one hand, and the two Fondazioni, on the other hand, with a 20% minority share reserved for Ersel Finanziaria, a qualified independent investment management advisor.

 

Pursuant to the above mentioned requests and as decided by the respective Shareholders’ Meetings, on 1 June 2002, as part of the merger effect, 388.3 million ordinary shares were converted into preference shares, each with a nominal unit value of 2.80 euro. These preference shares will in turn be converted into ordinary shares after a period of ten years or in case of alienation. The post merger shareholder structure of SANPAOLO IMI is presented in greater detail in a following chapter of this Report.

 

Reorganization of the Group

 

The increased dimensional complexity of the Group following the merger revealed the existence of certain needs relating to governance and coordination which allow to achieve maximal sharing of common objectives and close connections among the various operating areas, which are necessary conditions for the development of operational efficiency and for the provision of excellent service to all of the Group’s customers.

 

To place itself in the best position for achieving these goals, and in compliance with the instructions issued by the Regulatory Authorities, SANPAOLO IMI established its own Business Regulation Framework, approved by the Board of Directors on 26 March 2002, which defines the global organizational structure, the basic principles according to which the Group operates, its areas of competence and the responsibilities of the central structures, as well as the Group’s coordination mechanisms and instruments. The Regulation represents the regulatory frame of reference and is intended to characterize the Group through its common entrepreneurial design, its strong internal cohesiveness and its unified management, in a manner consistent with the directives issued by the Bank of Italy and in compliance with the requirements for sound and prudent management of the Group.

 

The basic underlying principles of the Regulation are represented by: the relevance and centrality of a system of shared values; central control of strategic decisions and

 

24

 

decisions involving the risks associated with loans, financing and operations, especially in view of the expected evolution of the Basel Capital Agreement; the exploitation of managerial resources and the assignment of responsibility to those personnel; coordinated and consistent action by all of the companies within the Group.

 

On 26 March 2002 the SANPAOLO IMI Board of Directors approved a new business model based on the exploitation of the customer relations and customer service capacities, on the specialization of the professional capabilities of the productive, distributive and service units and on the allocation of responsibility and the measurement of results.

 

Within the Group, Cardine Finanziaria, which holds the controlling shares in the seven bank networks of the Cardine Group and other shareholdings related to business, has been assigned responsibility for cooperating with the Parent Bank and assisting it with activities involving the direction, governance and control of the Cardine bank networks, especially with regard to operational planning for the target markets, monitoring of progress toward stated goals and risk management.

 

Integration actions

 

During the year, actions were undertaken to allow the synergies envisaged by the industrial plan and obtain the opportunities offered by the integration: high-priority operational approaches were implemented in accordance with the master plan developed at the start of the year.

 

In consideration of the extent of the synergies that could be achieved, maximum attention was given to:

•                  the activation of the Macchina Operativa Integrata, to serve the domestic banking networks: the necessary steps to satisfy the requirements of the merger have been taken, to achieve proper integration of management reporting systems and control at Parent Bank level and to allow the use of certain SANPAOLO IMI applications of particular importance for Cardine; the assessment of the target IT system was made, evaluating the impact of the adoption of the SANPAOLO IMI system for the Group’s banks, in terms of the effectiveness of its support to the business, efficiency of operating processes and sustainability of the technological infrastructure;

•                  initiatives to centralize operations at the Parent Bank SANPAOLO IMI in treasury, medium- and long-term funding and property portfolio management, on a centralized operational Group finance model. In particular, the Parent Bank has taken over the management of deposit and lending needs of the bank networks and the access to Forex and Money markets, and Banca IMI has assumed the securities management, the access to regulated and over the counter markets, as well as the structuring of derivative products for clients of the customer desks;

•                  actions to develop revenues from retail customers, also through the sharing with the Cardine networks of the products and know how of SANPAOLO IMI.

 

Acceleration of the integration with Cardine Finanziaria

 

In the context of a wider project for the rationalization of the Group’s distribution networks, in October 2002 provision was made for the acceleration of the integration between SANPAOLO IMI and Cardine Finanziaria, which provides for the merger of the latter by the end of 2003. From the operating point of view, provision has also been made for the centralization in the Parent Bank of the Cardine Finanziaria support functions (Macchina Operativa Integrata and Logistics). This initiative is aimed at achieving the planned benefits in terms of scale and scope economies.

 

The other commercial coordination and operating support functions performed for bank networks will be successively centralized in relation to the operating effectiveness of the individual banks. Accordingly, in terms of efficiency and rationalization, the activities to transfer to the Parent Bank and to the bank networks will be evaluated.

 

Integration between SANPAOLO IMI and Banco di Napoli

 

On 25 November 2002, the respective Extraordinary Meetings approved the merger by incorporation of Banco di Napoli into SANPAOLO IMI, becoming legally effective from 31 December 2002 and effective for accounting and tax purposes from 1 January 2002.

 

As SANPAOLO IMI held all the 1,864,097,491 ordinary shares of Banco di Napoli, no exchange of these took place, in accordance with art. 2504 ter of the Italian Civil Code. In relation to savings shares, the exchange ratio was set at one SANPAOLO IMI ordinary share to six Banco di Napoli savings shares. Considering that SANPAOLO IMI held 111,765,709 savings shares in the company to be incorporated and that the latter held no own shares, this ratio determined the assignment of 2,718,608 SANPAOLO

 

25

 

IMI ordinary shares in exchange and replacement of 16,311,650 Banco di Napoli savings shares not held by the incorporating company. The assignment took place without the issue of new shares, using own shares held in portfolio by the incorporating company and therefore without an increase in capital by the same.

 

The merger of Banco di Napoli into SANPAOLO IMI represents the first phase of a project which provides for, as the next step, the distribution and commercial integration of the Sanpaolo and Banco di Napoli networks.

 

The unification of the networks is an essential step to achieve the aims in terms of scale and scope economies of the merger and to enable the exchange of know how, products and marketing techniques needed to increase the levels of commercial effectiveness and operating efficiency of the two networks. The Southern Territorial Direction, made up of the Naples, Campania, Apulia and Calabro-Lucana Areas, based in Naples and directly supervised by the Sanpaolo Network Management, was established on 31 December 2002. The Southern Territorial Direction has a total of 738 operating points, 117 of which belong to the Sanpaolo Network and 621 belonging to the former Banco di Napoli.

 

The realization of the third phase is expected to take place in the second half of 2003 when, upon completion of the unification of the IT systems, the Southern Territorial Direction will be spun off into Sanpaolo Banco di Napoli, a company based in Naples and the only bank in the SAN-PAOLO IMI Group to operate in the regions of Campania, Apulia, Calabria and Basilicata. Sanpaolo Banco di Napoli will have a streamlined directional structure, to coordinate the territorial areas in which the reference branch network will be structured.

 

Integration of distribution networks

 

The integration of the Sanpaolo and Banco di Napoli networks is part of a major plan to develop and rationalize the distribution networks of the SANPAOLO IMI Group, which aims to take full advantage of the territorial expansion involving the acquisition of Banco di Napoli and the merger with Cardine Banca. The distribution model, presented at the end of the third quarter of 2002, is designed for an approach targeting macro customer segments, for an improved and more effective response to different needs of households and companies.

 

The project provides for articulation of the Group branch networks into operating structures aimed at three macro markets:

•                  Companies, which will mainly involve, in customer relations, the specialized areas of consulting and financial assistance, in the broad sense of the term, as well as the capacity to evaluate and manage the credit risk above certain levels or with particular characteristics.

•                  Private, which targets on the affluent customer segment requiring personalized and top of the range investment management services.

•                  Retail (households, small companies and small entrepreneurs), in which the capacity to supply a complete range of services, from credit to asset management services, will be flanked by special attention to the efficiency of basic banking services.

 

The aim of the project is gradually to introduce the distribution model already successfully adopted by the Sanpaolo Network, based upon the specialization of the operating points and better suited to satisfying the needs of the various types of customers, into all Group networks. This translates into the specialization of the branch networks and the distribution structures by macro customer segments, guaranteeing a unique strategy at national level and ensuring a more effective response to the varying service needs expressed by various types of customers and improving the efficiency of the structures and processes of investment in technologies and resources.

 

The new distribution model aims at achieving a correct balance between the specialization of the operating points by macro market segments and the territorial coordination that, through the Area Manager or the Branch Manager, to whom all the retail, business and private branches in the same territory report, must supervise and fulfill the needs for osmosis between the various customer segments.

 

At full capacity, the Group territorial presence in banking activity should cover a certain number of territorial areas and bank networks with light central structures, which will provide uniform and overall supervision of the respective territory.

 

Activity in the public works and infrastructure sector and in the tax collection sector

 

The public sector, which includes financing and advisory services for local bodies and former municipal companies for the realization of infrastructure and public works, offers interesting

 

26

 

development prospects for the years to come. The SAN-PAOLO IMI Group operates in this sector through Banca OPI, which has continued the tradition of IMI and San Paolo.

 

Following the merger of Banco di Napoli into SANPAOLO IMI and in line with the rationalization project, which provides for the concentration of professional abilities and know how, centralizing all medium/long-term operations performed by the different banks of the Group in this area, activity in the public works and infrastructure sector of the Neapolitan bank was transferred to Banca OPI on 1 January 2003.

 

The Group’s presence in the tax collection sector will be rationalized by concentrating tax collection activities in Esaban, with the aim of achieving the economies of scale and scope essential to sustain the profitability in this sector. On 1 October 2002, the activities previously performed by Banco di Napoli in the provinces of Naples and Caserta were concentrated in Esaban, which will also handle all the other tax collection activities performed by Group companies: Sanpaolo Riscossioni Genova, Sanpaolo Riscossioni Prato and GE.RI.CO. (licensee of the provinces of Bologna, Venice, Padua, Rovigo and Gorizia). The choice of location of the company office in Naples derives from the weight carried by the tax collection activity in the Neapolitan area.

 

The initiatives to rationalize the Group structure

 

The integration between Banca Fideuram and Banca Sanpaolo Invest

 

The acquisition of Banca Sanpaolo Invest by Banca Fideuram was completed on 8 October 2002 with conferral to the latter of the total shareholding held by SANPAOLO IMI in Banca Sanpaolo Invest. The shareholding has been valued at 603.8 million euro, net of the extraordinary dividend of 8.7 million euro that was distributed by the company at the end of July. To serve the conferral, Banca Fideuram made a capital increase (from 236.4 to 254.9 million euro) reserved to SANPAOLO IMI, through the issue of 71 million ordinary shares, integrated by a compensatory sum of 10 million euro. Following the integration, the SAN-PAOLO IMI Group’s stake in Banca Fideuram rose to 73.4%.

 

The transaction is among the actions further to strengthen the leadership position held in Personal Financial Services, to which SANPAOLO IMI attributes strategic priority, as well as to rationalize the Group operating structure.

 

The transaction will make possible the development and full exploitation of the potential of Banca Sanpaolo Invest, leveraging on the best practice of Banca Fideuram, and allow strategic coordination of the financial planner networks, through the adoption of consistent marketing and brand policies.

 

Rationalization of the Group’s presence in private equity

 

Among the initiatives aimed at a greater focus and specialization of the operations of the Business Areas in the various activity sectors, the redesign of the structure of NHS, the company in which SANPAOLOIMI held a 51% share and which fullfilled the role of merchant bank in the Group, should be noted. This restructuring led to the partial and proportional split of the subsidiary, with the allocation of the merchant banking and private equity activities into a new company (NHS S.p.A., renamed Sanpaolo IMI Private Equity S.p.A.) and the maintenance of the portfolio of substantial industrial investment inside the original company, which took the name of IMI Investimenti.

 

Sanpaolo IMI Private Equity, established with legal office in Bologna and initial capital of 245 million euro, has as its strategic objective the strengthening and consolidation of its position in private equity, becoming a preferred interlocutor for small- and medium-sized companies in the field of risk capital raising.

 

The activities of IMI Investimenti, which had a net shareholders’ equity, after the split, of 566 million euro, aim at the management of the shareholding portfolio, which contains the Group’s major industrial interests.

 

The shareholder structure of the two subsidiaries after the split was also revised, through shareholding exchanges with the Compagnia di San Paolo. Specifically, before the merger with Cardine, SANPAOLO IMI transferred to the Compagnia, at a price of 440 million euro, 8% of its 10.8% share in Cardine Banca, taking over in turn the shares held by the Compagnia in Compagnia di San Paolo Investimenti Patrimoniali (renamed FIN.OPI) (100%), Sanpaolo IMI Private Equity (27.02%), and IMI Investimenti (39.77%). SANPAOLO IMI completed its acquisition of all of the shares of IMI Investimenti and Sanpaolo IMI Private Equity by purchasing further minority shares. It also placed the shareholding in Compagnia di San Paolo Investimenti Patrimoniali with the subsidiary Banca OPI, thereby increasing the subsidiary’s own capital. The transaction was subject to a fairness opinion by a major investment bank.

 

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Purchase by SANPAOLO IMI of the Cassa di Risparmio di Firenze stake in Eptaconsors

 

On 15 October 2002 SANPAOLO IMI and Cassa di Risparmio di Firenze reached an agreement which provides for the sale of the 20.24% stake of Eptaconsors, held by the Florentine group, to the SANPAOLO IMI Group, which already had a shareholding of 40.48%, thus becoming the majority shareholder of the Eptaconsors group. The transaction was completed on 29 January 2003, with authorization from the Antitrust.

 

Eptaconsors has been operating actively for almost twenty years in asset management (through the specialized companies Eptafund and EGI) and securities dealing (through Eptasim). At the end of February 2003, the Eptaconsors group, in the mutual funds sector, managed assets of approximately 13 billion euro, with a 2.7% market share.

 

The purchase of Eptaconsors is part of the rationalization of the equity investments that will enable SANPAOLO IMI to strengthen its position on the reference markets and, through the aggregation process, further to exploit the important competencies of the new subsidiary.

 

Other rationalization initiatives

 

On 3 March 2003 SANPAOLO IMI and Santander Central Hispano, which participate jointly in the capital of Finconsumo Banca, reached an agreement which provides for the sale of the shareholding of Banca Finconsumo held by the Italian group to Santander Central Hispano. The operation, which is part of the rationalization of the respective shareholdings, will determine for the Parent Bank a total gross capital gain of 123 million euro. The agreement provides for the sale of an initial share of 20% at a total price of 60 million euro, while on the remaining 30% it establishes the mutual concession of put options to SANPAOLO IMI and call options to Santander Central Hispano, which can be exercised from the end of 2003 for a period of 12 months, at a total price of 80 million euro. The completion of the transaction is subject to obtainment of the necessary authorizations.

 

On 17 December 2002, the SANPAOLO IMI Group reached an agreement with Centrobanca (Banca Popolare di Bergamo – Credito Varesino Group) for the sale to the latter of an 80% stake in IMIWeb Bank, specialized in online trading. The purchase of the shareholding by Centrobanca is conditional to the release of the necessary authorizations by Bank of Italy: it will probably be completed in the early months of 2003. The price, arranged at 80% of the free capital of IMIWeb Bank at 31 December 2002, will be increased by an amount proportionate to the company profits for the next three years. The SANPAOLO IMI Group will continue to hold 20% of the capital.

 

Development initiatives in foreign markets

 

In line with the development objectives mentioned in the plan for the merger with Cardine, SANPAOLO IMI has been taking steps to strengthen its operational capabilities in foreign countries with major opportunities for growth. Accordingly, Sanpaolo IMI Internazionale was formed in order to reinforce and control the Group’s presence in countries deemed to be of strategic interest through operations involving acquisitions and alliances.

 

A Public Offer for all of the shares of the Slovenian Bank, Banka Koper, which had been launched at the end of November 2001 after the acquisition of an initial tranche consisting of 15% of the capital of the bank, was completed on 25 February 2002. All shareholders who accepted the Offer were given a non transferable put option on the outstanding shares (at the same price as in the Offer, plus interest and net of dividends). This option may be exercised at any time between 31 December 2002 and 31 July 2006. 250,271 shares, corresponding to 47.1% of the capital of Banka Koper, were contributed to the offer, at an incurred cost equivalent to 116 million euro. SANPAOLO IMI, which as a result of the Offer holds a total share of 62.1% of Banka Koper, will temporarily limit the exercise of its voting rights to 32.99%, in compliance with authorization from Bank of Slovenia.

 

On 25 February 2003 Sanpaolo IMI Internazionale approved the launch of a Public Offer on the Hungarian bank Inter-Europa Bank, of which SANPAOLO IMI already owns a 32.5% share. The bank’s remaining capital is held by Santander Central Hispano, with a share of approximately 10%, Simest, 7.8%, other leading international institutional investors and free float (approximately 45% quoted on the Budapest Stock Exchange). The Public Offer, subject to approval by the relevant authorities, provides for a price of 2,000 Hungarian forints per share, at a premium of 2.1% on the last Stock Exchange price of 24 February 2003, and of 9.2% and 22.7% on the average prices for the past 30 and 180 days respectively before the approval. Assuming full acceptance, the total value of the transaction will be approximately 40 million euro.

 

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Commercial agreements and alliances abroad

 

Within the context of the strategic agreements defined in 2001 between SANPAOLO IMI and EULIA, the French holding company created by the Caisse des Dépôts et Consignations Group and by the Caisse d’Epargne Group, and following the Framework Agreement signed by the two Groups in February 2002, the collaboration project became operational, producing generally satisfactory results in the capital market and financing sectors and in the private equity activity.

 

In particular, in the context of private equity, a draft agreement dedicated to the development of a joint analysis of closed-end investment funds in the infrastructure sector and in public-private partnership initiatives was prepared in November. The project provides for the evaluation of joint investment opportunities in Italy, France and at European level, and aims to define a common strategy also in terms of other institutional investors and European institutions. In consideration of the subject of the agreement, the structures of the SANPAOLO IMI Group dedicated to intervention in the public works and infrastructure sector, particularly Banca OPI and its subsidiary FIN.OPI (the former Compagnia di San Paolo Investimenti Patrimoniali) will be involved in its implementation.

 

The project joins initiatives previously implemented by the two Groups, such as the agreement at the end of September between Sanpaolo IMI Private Equity, CDC Ixis Private Equity and Bayerische Landesbank Equity Management for the constitution of the EAGLE FUND, the first pan European private equity fund with the aim of investing in small and medium European companies, mainly in Italy, France and Germany.

 

Still in the context of private equity, Sanpaolo IMI Private Equity and CDC-Pme (a subsidiary of Caisse des Dépôts et Consignations) have signed an agreement with the French government for participation in a new investment fund, which aims to invest in French regional funds which, in turn, invest in small and medium local companies. The fund will have 70 million euro and the investors include the EIF (European Investment Fund), as well as those mentioned above.

 

Still on the European market, SANPAOLO IMI and Santander Central Hispano continued the industrial collaboration initiatives and, to this end, reached an agreement for the development of a pan European project in the wholesale distribution of third party mutual funds. At the base of the agreement there is the establishment of a pan European joint venture between the two banking groups, which provides for the acquisition by SANPAOLO IMI of a 50% shareholding of Allfunds Bank S.A., a company wholly owned by Santander Central Hispano and operating in the placement of third party funds with institutional customers. SANPAOLO IMI, which, with this transaction, would have the opportunity to enter a sector which is not yet covered, and Santander Central Hispano intend to develop the joint venture in order to consolidate their leadership at European level; for this purpose the two banking groups will aim at identifying potential strategic partners in the main European markets.

 

Agreements with FIAT and Italenergia

 

Finally, in May 2002 SANPAOLO IMI, together with Banca Intesa, Unicredito and Capitalia, subscribed a Framework Agreement concerning an articulated plan of financial operations regarding the FIAT Group.

 

In this context, in July 2002, the banks granted a “to be converted” financing for a three year period, for 3 billion euro (400 million of which provided by SANPAOLO IMI), which provides, upon expiry and in accordance with procedures and at a price agreed between the parties, for the conversion of their loans into ordinary FIAT shares through compensation between the aforementioned loans and the corresponding subscription obligation, while FIAT retains the faculty to proceed with cash reimbursement of the loan under set conditions. In September 2002 SANPAOLO IMI, through IMI Investimenti, purchased (along with the other two banking partners, Banca Intesa and Capitalia) a further 4.66% stake in Italenergia Bis (new leading holding company of the Italenergia group receiving the shares), in addition to the original share of 7.82%, from the FIAT Group, thus reaching a total share of 12.48% in this holding. SANPAOLO IMI made disbursements of approximately 183 million euro. With this transaction, the FIAT shareholding dropped from 38% to about 24%, with the consequent separation of the Italenergia/Edison debt from that of FIAT. Based on the subscribed agreements, the banking partners also obtained put options on the shareholding, that can be exercised starting in 2005, towards the industrial partner EDF – Electricité de France, at price conditions that guarantee the recovery of the original investments plus a financial profit, allowing for any upside.

 

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