1.2 Banking group – market risks

Generally, as the Banca IFIS Group does not usually trade in financial instruments, its financial risk profile refers mainly to the banking portfolio. The activity of purchasing bonds, given that these bonds are classified under Available for Sale and Loans and Receivables, is included in the banking book and does not, therefore, constitute new market risks.

At the end of the second half of 2015, the Group recognised currency swaps under financial assets with a mark to market of about 259 thousand Euro. The classification of this derivative under financial assets held for trading does not reflect the aim of the transaction, which is to mitigate the impact of possible movements in the reference exchange rates.

1.2.1 Interest rate risk and price risk – supervisory trading book

Qualitative information

The Banca IFIS Group does not usually trade in financial instruments.

1.2.2 Interest rate risk and price risk – banking portfolio

Qualitative information

A. General aspects, management procedures and measurement methods concerning the interest rate risk and the price risk

In general, the Banca IFIS Group does not assume significant interest rate risks, as it obtains funds mainly from interbank deposits (either collateralised or not) and from retail customers through the rendimax current account. Interbank funding operations are generally at a fixed rate and very short-term. Customer deposits on the rendimax and contomax current accounts are at a fixed rate for the fixed-term part, while on demand and call deposits are at a non-indexed floating rate the Bank can unilaterally revise without prejudice to legal and contractual provisions. In the second half of 2015, Banca IFIS expanded its fixed-term offerings for retail customers by introducing new 3-, 4-, and 5-year maturities. Loans to customers are usually revocable and at floating rate. Interest rates applied to traditional customers for factoring relationships are normally indexed (mainly at the 3-month Euribor rate) with automatic adjustment to the trend in the cost of money. In some cases the interest rates are not indexed, but they can be unilaterally changed by the Bank without prejudice to legal and contractual provisions in this case, too.

As far as operations on Distressed Retail Loans are concerned, with a business model that focuses on acquiring receivables at prices lower than their book value, there is a potential interest rate risk connected to the uncertainty about when the receivables will be collected. The variability in the loan’s term, which to all intents and purposes can be considered at a fixed rate, is particularly important with reference to tax receivables, the overall par value of which is highly likely to be collected, although in the medium/long term. In this context, and in order to effectively mitigate interest rate risk, it is particularly important to correctly assess the operation during the initial acquisition stage. Taking into account the impact of purchases of distressed retail loans, the contribution in terms of interest rate risk to the Banca IFIS Group’s overall position, although positive, cannot be considered material.

At 31 December 2015, approximately sixty-six per cent of the bond portfolio consisted of bonds indexed to market rates and twenty-five per cent of inflation-indexed bonds. The remainder consisted of fixed-rate short-term bonds. The average duration of the overall portfolio is approximately five months.

The interest rate risk connected to funding operations carried out by the Parent Company’s Treasury Department is assumed according to the limits and policies set by the Board of Directors, with precise delegations of power limiting the autonomy of those authorised to operate within the Bank’s Treasury Department.

The business functions responsible for ensuring interest rate risk is managed correctly are: the Treasury Department, which directly manages funding operations and the bond portfolio; the Risk Management function, responsible for selecting the most appropriate risk indicators and monitoring assets and liabilities with reference to pre-set limits; and, lastly, the Top Management, which every year shall make proposals to the Board regarding policies on lending, funding and the management of the interest rate risk, as well as suggest appropriate actions during the year in order to ensure that operations are conducted consistently with the risk policies approved by the Bank.

As part of current operations and based on funding indications from the Treasury Department, as well as interest rate forecasts and assessments of lending trends, the Top Management provides the Treasury Department with guidelines on the use of available credit lines, with a view to taking advantage of changes in interest rates on very short-term maturities and monitoring interest rate-risk trends with reference to the physiological mismatching between assets and liabilities.

In order to monitor interest rate risk, the Top Management receives a daily summary on the overall cash position. Furthermore, the Risk Management function periodically reports to the Bank’s Board of Directors on the interest rate risk position by means of a quarterly Dashboard prepared for the Bank’s management. The Integrated Treasury and Risk Management System (SIT) provides further tools for assessing and monitoring the main interest rate-sensitive assets and liabilities.

The interest rate risk falls under the category of second-pillar risks. In the final document sent to the Supervisory Body, as per the relevant regulations (Circular 263 of 27 December 2006 – Title III, Chapter 1, Annex C), the Interest Rate Risk has been specifically measured in terms of capital absorption. In the face of the warning threshold of 20% of Regulatory Capital, the resulting risk indicator for the Group was 0,78% as at 30 September 2015.

Considering the extent of the risk assumed, the Banca IFIS Group does not usually hedge interest rate risk.

As for the price risk, the Group does not generally assume risks connected with price fluctuations on financial instruments, as its business focuses on financing SMEs’ working capital.

As for bonds held, virtually all of them are classified under Available for sale financial assets, giving rise to the risk that the Group’s capital reserves could fluctuate as a consequence of the change in the bonds’ fair value. Nonetheless, this risk is relatively low, given the high credit standing of the issuers and the short average duration of the portfolio.

The Risk Management function is responsible for monitoring the price risk that the Group assumes in carrying out its operations. Thanks to the Integrated Treasury System (SIT) and the contribution of the Risk Management Function, the Group can assess and monitor the operations of the treasury, providing appropriate tools for assessing price risks. Specifically, the SIT also allows to

  • manage the Treasury’s traditional operations (securities, exchange rates, money market and derivatives);
  • measure and control the exposure to specific types of market risk;
  • establish and constantly monitor limits set for the various operational functions.

B. Fair value hedging

There are no fair value hedges.

C. Cash flow hedging

There are no cash flow hedges.

Quantitative information

1. Banking portfolio: distribution by residual duration (re-pricing date) of financial assets and liabilities - Currency: Euro

Type/residual duration on demand up to 3 months over 3 months up to 6 months over 6 months up to 1 year over 1 year up to 5 years over 5 years up to 10 years over 10 years indefinite duration
1. Cash assets 2.906.082 350.246 3.024.610 31.274 429.826 40.588 2.339 -
1.1 Debt securities - 20.188 2.931.621 - 270.032 - - -
- with early redemption option - - - - - - - -
- other - 20.188 2.931.621 - 270.032 - - -
1.2 Loans to banks 75.897 14.446 - - - - - -
1.3 Loans to customers 2.830.185 315.612 92.989 31.274 159.794 40.588 2.339 -
- current accounts 135.958 88 211 759 14.258 3.218 12 -
- other loans 2.694.227 315.524 92.778 30.515 145.536 37.370 2.327 -
- with early redemption option 83.007 23 759 - - - - -
- other 2.611.220 315.501 92.019 30.515 145.536 37.370 2.327 -
2. Cash liabilities 813.883 4.527.362 212.321 266.608 327.145 998 2.142 -
2.1 Due to customers 752.996 3.925.265 212.321 266.608 327.145 998 2.142 -
- current accounts 752.918 1.646.248 212.284 259.776 324.864 - - -
- other payables 78 2.279.017 37 6.832 2.281 998 2.142 -
- with early redemption option - - - - - - - -
- other 78 2.279.017 37 6.832 2.281 998 2.142 -
2.2 Due to banks 60.887 602.097 - - - - - -
- current accounts 60.887 - - - - - - -
- other payables - 602.097 - - - - - -
2.3 Debt securities - - - - - - - -
- with early redemption option - - - - - - - -
- other - - - - - - - -
2.4 Other liabilities - - - - - - - -
- with early redemption option - - - - - - - -
- other - - - - - - - -
3. Financial derivatives - - - - - - - -
3.1 With underlying security - - - - - - - -
- Options - - - - - - - -
+ long positions - - - - - - - -
+ short positions - - - - - - - -
- Other - - - - - - - -
+ long positions - - - - - - - -
+ short positions - - - - - - - -
3.2 Without underlying security - - - - - - - -
- Options - - - - - - - -
+ long positions - - - - - - - -
+ short positions - - - - - - - -
- Other derivatives - - - - - - - -
+ long positions - - - - - - - -
+ short positions - - - - - - - -
4. Other off-balance sheet operations - 3.674 - - - - - -
+ long positions - 3.674 - - - - - -
+ short positions - - - - - - - -

1.2.3 Currency risk

Qualitative information

A. General aspects, management procedures and measurement methods concerning the currency risk

Assumption of the currency risk, intended as an operating element that could potentially improve treasury performance, represents a speculative instrument: in principle, therefore, it is not part of the Group’s policies. The Bank’s currency operations basically involve collections and payments associated with factoring operations. In this sense, the advances in foreign currency granted to customers are generally hedged with deposits and/or loans from other banks in the same currency, thus eliminating for the most part the risk of losses connected to exchange rate fluctuations. In some cases, synthetic instruments are used as hedging instruments.

A residual currency risk arises as a physiological consequence of the mismatch between the clients’ borrowings and the Treasury Department’s funding operations in foreign currency. Such mismatches are mainly a result of the difficulty in correctly anticipating financial trends connected with factoring operations, with particular reference to cash flows from account debtors vis-à-vis the maturities of loans granted to customers, as well as the effect of interest on them.

However, the Treasury Department strives to minimise such mismatches every day, constantly realigning the size and timing of foreign currency positions.

Currency risk related to the Bank’s business is assumed and managed according to the risk policies and limits set by the Parent Company’s Board of Directors, with precise delegations of power limiting the autonomy of those authorised to operate, as well as especially strict limits on the daily net currency position.

The business functions responsible for ensuring the currency risk is managed correctly are: the Treasury Department, which directly manages the bank’s funding operations and currency position; the Risk Management function, responsible for selecting the most appropriate risk indicators and monitoring them with reference to pre-set limits; and the Top Management, which every year shall make proposals to the Bank's Board of Directors regarding policies on funding and the management of the currency risk, as well as suggest appropriate actions during the year in order to ensure that operations are conducted consistently with the risk policies approved by the Group.

In order to monitor the currency risk, the Top Management receives a daily summary on the treasury’s general position, showing, among other things, the Group’s currency position broken down by currency. Furthermore, the Risk Management function periodically reports to the Bank’s Board of Directors on the currency risk position by means of a quarterly Dashboard prepared for the Bank’s management.

The Group's expanding operations in Poland, through the subsidiary IFIS Finance, are no exception to the above approach: assets denominated in Zloty are financed through funding in the same currency.

With the acquisition of the Polish subsidiary, Banca IFIS has assumed the currency risk represented by the initial investment in IFIS Finance’s share capital for an amount of 21,2 million Zloty and the subsequent share capital increase for an amount of 66 million Zloty.

Furthermore, Banca IFIS owns a 5,57% interest in India Factoring and Finance Solutions Private Limited, worth 20 million Indian rupees and with a market value of 3.044 thousand Euro at the historical exchange rate. As already mentioned, in the second quarter of 2015 the Bank tested said interest for impairment, recognising a 2,2 million Euro charge, and in the fourth quarter it recognised an additional 0,2 million Euro impairment charge, for a total impact of 4,4 million Euro.

Considering the size of this investment, the Bank did not deem it necessary to hedge the ensuing currency risk.

Quantitative information

1. Distribution of assets, liabilities and derivatives by currency

Items  Currency
  US DOLLAR POUND STERLING JAPANESE YEN CANADIAN DOLLAR SWISS FRANC OTHER CURRENCIES
A. Financial assets 27.443 1.168 - 36 - 59.801
A.1 Debts securities - - - - - -
A.2 Equity instruments - - - - - -
A.3 Loans to banks 1.500 430 - 36 - 10.251
A.4 Loans to customers 25.943 738 - - - 49.550
A.5 Other financial assets            
B. Other assets           132
C. Financial liabilities 23.436 4 19 - 82 5.491
C.1 Due to banks 23.422 - 19 - 82 5.305
C.2 Due to customers 14 4 - - - 186
C.3 Equity securities - - - - - -
C.4 Other financial liabilities - - - - - -
D. Other liabilities           590
E. Financial derivatives - - - - - 20.780
- Options - - - - - -
+ long positions - - - - -  
+ short positions - - - - -  
- Other - - - - - 20.780
+ long positions - - - - - 7.979
+ short positions - - - - - 28.759
Total assets 27.443 1.168 - 36 - 67.912
Total liabilities 23.436 4 19 - 82 34.840
Unbalance (+/-) 4.007 1.164 (19) 36 (82) 33.072

1.2.4 Derivative instruments

A. Financial derivatives

The Banca IFIS Group does not trade in financial derivatives on behalf of third parties and limits proprietary trading to instruments hedging against market risk.

Banca IFIS often uses financial derivatives to hedge currency exposures. At 31 December 2015, the Bank recognised foreign exchange derivatives with a positive fair value of 259 thousand euro and a negative fair value of 21 thousand euro. As for the transactions entered into, it should be noted that the Group never undertakes speculative transactions.

A.1 Supervisory trading book: year-end notional amounts

Underlying assets/Types of derivatives 31.12.2015 31.12.2014
  Over the counter Central counterparties Over the counter Central counterparties
1. Debt securities and interest rates   -   -
a) Options - - - -
b) Swap - - - -
c) Forward - - - -
d) Futures - - - -
e) Others - - - -
2. Equity instruments and share indexes - - - -
a) Options - - - -
b) Swap - - - -
c) Forward - - - -
d) Futures - - - -
e) Others - - - -
3. Currency and gold 36.500 - - -
a) Options - - - -
b) Swap 36.500 - - -
c) Forward - - - -
d) Futures - - - -
e) Others - - - -
4. Goods - - - -
5. Other underlying assets - - - -
Total 36.500 - - -

A.3 Financial derivatives: gross positive fair value - breakdown by product

Underlying assets/Types of derivatives Positive fair value
  31.12.2015 31.12.2014
  Over the counter Central counterparties Over the counter Central counterparties
A. Supervisory trading book 259 - - -
a) Options - - - -
b) Interest rate swap - - - -
c) Cross currency swap 259 - - -
c) Equity swap - - - -
d) Forward - - - -
e) Futures - - - -
e) Others - - - -
B. Banking book - hedging - - - -
a) Options - - - -
b) Interest rate swap - - - -
c) Cross currency swap - - - -
c) Equity swap - - - -
d) Forward - - - -
e) Futures - - - -
e) Others - - - -
C. Banking book – other derivatives - - - -
a) Options - - - -
b) Interest rate swap - - - -
c) Cross currency swap - - - -
c) Equity swap - - - -
d) Forward - - - -
e) Futures - - - -
e) Others - - - -
Total 259 - - -

A.4 Financial derivatives: gross negative fair value - breakdown by product

Underlying assets/Types of derivatives Negative fair value
  31.12.2015 31.12.2014
  Over the counter Central counterparties Over the counter Central counterparties
A. Supervisory trading book 21 - - -
a) Options - - - -
b) Interest rate swap - - - -
c) Cross currency swap 21 - - -
c) Equity swap - - - -
d) Forward - - - -
e) Futures - - - -
e) Others - - - -
B. Banking book - hedging - - - -
a) Options - - - -
b) Interest rate swap - - - -
c) Cross currency swap - - - -
c) Equity swap - - - -
d) Forward - - - -
e) Futures - - - -
e) Others - - - -
C. Banking book – other derivatives - - - -
a) Options - - - -
b) Interest rate swap - - - -
c) Cross currency swap - - - -
c) Equity swap - - - -
d) Forward - - - -
e) Futures - - - -
e) Others - - - -
Total 21 - - -

A.5 Financial derivatives: supervisory trading book: notional values, gross positive and negative fair value by counterparty - contracts not included in netting agreements

Contracts not included by netting agreement Governments and Central Banks Other public entities Banks Financial institutions Insurance companies Non-financial companies Other entities
1) Debt securities and interest rate indexes              
- notional amount - - - - - - -
- positive fair value - - - - - - -
- negative fair value - - - - - - -
- future exposure - - - - - - -
2) Equity instruments and stock indexes              
- notional amount - - - - - - -
- positive fair value - - - - - - -
- negative fair value - - - - - - -
- future exposure - - - - - - -
3) Gold and currencies              
- notional amount - - 36.500   - - -
- positive fair value - - 259 - - - -
- negative fair value - - 21 - - - -
- future exposure - - 281 - - - -
 4) Other instruments              
- notional amount - - - - - - -
- positive fair value - - - - - - -
- negative fair value - - - - - - -
- future exposure - - - - - - -

A.9 Residual life of OTC financial derivatives: notional amounts

Underlying/Residual life Up to 1 year 1 to 5 years Over 5 years Total
A. Supervisory trading book 36.500 - - 36.500
A.1 Financial derivatives on debt securities and interest rates - - - -
A.2 Financial derivatives on equity instruments and share indexes - - - -
A.3 Financial derivatives on exchange rates and gold 36.500 - - 36.500
A.4 Financial derivatives on other assets - - - -
B. Banking book - - - -
B.1 Financial derivatives on debt securities and interest rates - - - -
B.2 Financial derivatives on equity instruments and share indexes - - - -
B.3 Financial derivatives on exchange rates and gold - - - -
B.4 Financial derivatives on other value - - - -
Total 31.12.2015 36.500 - - 36.500
Total 31.12.2014 - - - -