Banca Monte dei Paschi di Siena : Board approves results as at 30 June 2017

BOARD APPROVES RESULTS AS AT 30 JUNE 2017

• Solid post-precautionary recapitalisation capital position, with EUR 11.3 billion book value and transitional CET1 at 15.4%
• Net result of the quarter negative for c. EUR 3.1 billion, impacted by c. EUR 4 billion non-recurring provisions related to the c. EUR 26 billion securitisation transaction, by the impairment of the stake held in Atlante (EUR -30 million), by gains for EUR 523 million on the disposal of the merchant acquiring business and by EUR 530 million from the partial reassessment of deferred tax assets, not booked previously
• Net interest income (-2.5% Q/Q) affected by the reduced rates and volumes of interest-bearing assets, only partially offset by the reduced cost of funding; net commissions up (+1.1% Q/Q) thanks to wealth management; costs (+1.8% Q/Q) impacted by non-recurring components, in particular the impairment of intangible assets
• Net of loans subject to disposal, classified as assets held for sale, all main asset quality indicators improve, with a gross NPE ratio at 19.8% (35.7% in March 2017), net NPE ratio at 11.7% (19.7% in March 2017), Texas ratio at 98% (146% in March 2017) and stock of net impaired loans at EUR 10.5 billion (EUR 20.2 billion in March 2017)
• Gross impaired loans are down by approximately EUR 0.5 billion compared with March 2017, due to reduced inflows from performing to default and to the growth of recoveries on impaired loans
• Unencumbered Counterbalancing Capacity at c. EUR 20 billion, up by c. EUR +4 billion from March 2017 (EUR +13 billion vs. December 2016), thanks to the increase in commercial funding and to the further downsizing of loans to customers, partly linked to the typical maturities of the semester. Liquidity coverage ratio ~226%, vs. 164% in March 2017; Net Stable Funding Ratio at ~98% (~95% in March 2017)

  Milano, 11 August 2017 - The Board of Directors of Banca Monte dei Paschi di Siena S.p.A. has reviewed and approved the results as at 30 June 2017.

  Main consolidated Income Statement results for the first half:

• Net interest income for the semester equal to approximately EUR 903 million, down by 12.7% Y/Y, mainly due to the contraction in average volumes and the decline in yields on commercial loans, partly offset by the reduced cost of funding.

• Net fees and commissions at c. EUR 858 million, down 8.8% Y/Y, impacted by the booking of the cost of the guarantee on the EUR 11 billionState-guaranteed bond issues and by the lower income from the lending sector, affected by the decreased loan volumes.

• Other income1equal to c. EUR 92 million, vs. c. EUR 369 million in the first half 2016, which had been characterised by higher results from trading, securities sales/repurchases and capital gains on issued liabilities valued at fair value.

• Operating costs for approximately EUR 1,267 million, slightly improving from the first half of 2016, of which i) staff costs down by 2.6%, partly as a result of the headcount reduction, ii)other administrative expenses down by 4.6%, thanks to the structural improvement in real estate, IT and credit recovery sectors and iii) adjustments to tangible and intangible assets up 25.1% due to non-recurring write-downs.

• Net impairment losses on loans, financial assets and other operations at c. EUR 4,678 million, principally for i) provisions on loans subject to securitisation following the review of their realisable value, including further costs provided for in the agreement with Quaestio (overall about EUR -4 billion) and ii) the devaluation of the stake in Atlante (about EUR -30 million). Net of the effects of loans subject to disposal, the ratio between annualised net impairment losses on loans for the first semester of 2017 and loans to customers reflects a provisioning rate of 147 bps.

• Non-operating items, positive for EUR 353 million, are mainly affected by the c. EUR 523 mln gains on the disposal of the merchant acquiring business to CartaSi; the aggregate also includes the entire 2017 annual contribution to the SRF fund (booked in the first quarter) for EUR -63 million, the DTA fee of EUR -36 million and restructuring costs for EUR -18 million, connected with branch closures provided for in the restructuring plan2.

• Income taxes positive for about EUR 510 million, as a result of the partial reassessment of DTAs from tax losses (c. EUR 530 million) which matured but were not booked in previous years, brought about by the recent legislative measure which has reduced the ACE benefit.

• Net loss for the semester, equal to about EUR -3,243 million, impacted by the recording of non- recurring loan loss provisions (EUR -4 billion), only partially offset by the capital gains on disposals (EUR +523 million) and by the DTA reassessment (EUR +530 million).

  1 Net result from trading-valuation-repurchase of financial assets/liabilities, dividends, similar income and gains (losses) on investments, net profit (loss) from hedging, other operating expenses (income).

  2 The restructuring plan envisages the complete redesign of the distribution network, partly through the reduction of branches from 2,000 in 2016 to about 1,400 in 2021.

  Main consolidated Balance Sheet results:

• Loans to customers at about Euro 89.7 billion, decreasing by EUR 17.0 billion from the end of December 2016 mainly on impaired loans, an effect of the loan loss provisions and of the reclassification of loans subject to disposal as assets held for sale. Further downturn of PCTs with institutional counterparties (EUR -4.7 billion). In the first half of 2017, new medium and long-term loans granted to households and businesses alike amounted to approximately EUR

  2.7 billion; in the month of July alone, these amounted to about EUR 0.7 billion, recording a positive trend over the previous months.

• Direct funding at about EUR 106.5 billion, up by EUR 2.0 billion from 2016 year-end thanks to the commercial component, with a significant increase in current accounts and time deposits with commercial customers (EUR +9.4 billion from December 2016), which enabled repos with institutional counterparties to be strongly reduced (EUR -10.4 billion).

• Indirect funding is c. EUR 96.6 billion (-1.6% from the beginning of the year), for the most part affected by the c. EUR 1.3 billion negative net flows on assets under custody.

• Unencumbered counterbalancing capacity is equal to approximately EUR 19.8 billion, a sharp improvement (c. EUR +13 billion) compared with the values recorded at 31 December 2016, thanks to the resumption of commercial deposits, to the further contraction of loans, partly linked to end of June maturities, and to the government-guaranteed bonds issued in the first quarter.

• Gross non-performing exposures are EUR 45.5 billion (including loans subject to disposal), down both from December 2016 (EUR -0.3 billion) and from 31 March 2017 (EUR -0.5 billion). The positive quarterly evolution was driven by the decline in inflows from performing to default (-42.7%), and by the increased recoveries, especially on bad loans, and write-offs.

• Transitional Common Equity Tier 1, including the capital increase, is 15.4% (1.5% excluding the impact of recapitalisation).

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  Group profit and loss results for 1H17

  In the first half of 2017, the Group's total revenues stand at c. EUR 1.853 million, a -21.0% Y/Y decrease, due to a contraction in net interest income, in fees and commissions and in profit from trading and financial assets/liabilities. Compared to the previous quarter, in 2Q17 total revenues, standing at EUR 920 million, decrease by c. EUR 14 million, mainly in net interest income and profit from trading and financial assets/liabilities, partially offset by a positive trend in fees and commission and in dividends, similar income and gains (losses) on equity investments.

  Net interest income for the first half of 2017 is approximatelyEUR 903 million, down 12.7% Y/Y, mainly as a result of the negative trend of interest-bearing assets and in particular of commercial loans (decreased average volumes and related yields). This trend is partially countered by the lessening of negative interests resulting from the decreased cost of commercial funding and the maturity of more expensive bonds. The result of the second quarter of 2017, at EUR 446 million, is down by about EUR 11 million (-2.5%) compared to the previous quarter, mainly due to the decline in yields/volumes on commercial loans, partially offset by the decreased cost of bonds. Net fees and commissions are approximatelyEUR 858 million, down 8.8% Y/Y, impacted by the accounting of the cost of the guarantee on the State-guaranteed bonds issued in the first quarter and by fewer commissions coming from the credit sector (for the lower volumes compared to the previous year). The quarterly trend is +1.1%, mainly thanks to wealth management placement fees, which show a significant acceleration vs. the previous quarter. Dividends, similar income and profit (loss) on investments amount to approximatelyEUR 46 million, increasing vs. 30 June 2017 thanks to the contribution of AXA-MPS (consolidated at net equity). The second quarter includes the accounting of dividends from the stake in Bank of Italy (EUR 9 million). Net profit/loss from trading/valuation/repurchase of financial assets/liabilities for the first half of 2017 is positive for approximatelyEUR 43 million, sharply down compared to the same period of last year, which had been characterised by higher results from trading, from disposals/repurchases of securities and from gains on liabilities designated at fair value. Also down vs. 1Q17 (c. EUR -6 million, -25.3%). In detail:

  • positive trading results for about EUR 25 million, although decidedly down from 30 June 2016, due to a smaller contribution from the subsidiary MPS Capital Services. Slight decline also vs. the previous quarter (c. EUR -1 million);

  • results from financial assets and liabilities designated at fair value close to nil at 30 June 2017, due to the early adoption of the IFRS 9 accounting treatment of gains/losses

    related to the creditworthiness of fair value option liabilities. At 30 June 2016 the result, assessed according to IAS39, had been positive for about EUR 68 million;

  • disposal/repurchase proceeds positive for aboutEUR 19 million (essentially for gains from the disposal of AFS securities), lower than the same period of 2016 (-85.4% Y/Y),

    which included greater capital gains from the sale of the AFS securities portfolio and other extraordinary income (the sale of the stake held by the parent company in VISA Europe and the repurchase of financial liabilities). Compared to the first quarter of 2017, the aggregate is down by about EUR 6 million, for the reduced disposal of AFS securities.

    The following items also contribute to total revenues:

  • net income from hedging for EUR -2 million, in line with 30 June 2016 (EUR -1 million) and slightly down on the previous quarter;
  • other operating expenses/income, positive for aboutEUR 5 million (EUR +10 million in June 2016, mostly due to the VISA Europe operation).

  In the first half of 2017 operating expenses are approximately EUR 1,267 million, down vs. the same period of the previous year (-0.9% Y/Y) but up vs 1Q17 (+1.8% Q/Q) due to non-recurring items in the adjustments to tangible and intangible assets. In particular:

  • Administrative expenses stand at c.EUR 1,139 million, down by 3.2% Y/Y and -0.5% Q/Q. Within the aggregate: