Outlook

The outlook for Europe's economy remains uncertain and characterised by especially modest increases in production, although these have somewhat risen compared to 2015. Italy should grow between 1% and 2% in 2016: it would be a positive signal amid the uncertainty. The robust GDP growth rates registered in other historical periods now appear to be a thing of the past, in Europe as well as maybe all industrialised countries. This is due to several factors, of which only some are economic. This situation has led some experts to argue that advanced economies may be facing a “secular stagnation”, with extremely long periods of weak growth, low or no returns on risk-free investments, and low or zero inflation.

Against this backdrop, there are several factors of global instability and risk: the concerns over a slowdown in China, which would negatively affect other countries; the challenges facing Emerging Markets, which are grappling with extremely low oil and commodity prices as well as unfavourable exchange rate movements; the instability in the Middle East, which does not want to lose its share of oil output. This is pushing prices down even further, and thus government budgets in oil-producing countries into deficit, forcing them to sell assets to bolster their balance sheets. Seen from a different perspective, the slump in commodity prices, and especially oil, represents an extraordinary opportunity for a country such as Italy, which is essentially a processor of raw materials.

In the reference European markets, the cost of money is still at record lows due to the ECB's monetary policy and extremely limited price increases. The low or zero inflation rate is the result of the trend in commodity prices and, more generally, the relatively modest use of the factors of production. The market expects monetary policy measures – not welcomed by everyone in Europe – to bring inflation near the central bank's target rates, even though price increases of just below 2% appear a distant prospect. A positive collateral effect of the ECB's monetary policy is the weak euro, which represents a boon for exporters in other currencies, and especially US dollars; an indirect barrier protecting domestic producers from imports denominated in foreign currencies; and a way to “import inflation” or mitigate the deflationary effect of the commodity slump.

It does not appear possible to steadily and sustainably grow our way out of the crisis without restarting the flow of credit to the real economy. Against this backdrop, Banca IFIS's ability to provide support to small- and medium-sized businesses – also thanks to strengthening capital adequacy ratios and increasing liquidity – continues representing a competitive advantage, enabling it to acquire new customers and loans. The market is still characterised by the limited and selective, albeit rising, supply of credit, and the demand for appropriate solutions — especially for companies that are small in size and have less measurable or low credit standing.

In 2015, the Bank overhauled its distribution network, increasing its headcount and reimagining it to better meet the needs of tomorrow. This is expected to generate results in terms of additional growth in the number of companies served, loans, and overall profitability in the second half of 2016.

The market scenarios for lending to businesses are influenced by the abundant liquidity, which is exerting downward pressure on interest rates for new loans. It is hard for banks to pass on this decrease to funding rates, because of the yield curve, which remains near zero, and the European Central Bank's monetary policy. Therefore, margins are declining across the board, and especially on loans to customers with a higher credit standing. Thus, the Bank will increasingly focus on smaller entities: given the need to pay close attention during the lending process to mitigate risks, using factoring, the profitability of this segment appears less compromised, if at all.

Banca IFIS launched other initiatives to promote customer loyalty on the one hand, and on the other, to boost volumes and profits in absolute terms. An example are the operations with multi-utilities selling receivables due from Italy's local administrations. These initiatives will start contributing to results during 2016The Bank will continue expanding its presence in the international markets where it operates; in the pharmaceutical industry and pharmacy segments; and in the sector of receivables due from Italy's Public Administration.

Banca IFIS looks forward to continued strong performance by all business areas in 2016.

The Bank can play an increasingly important role in the Distressed Retail Loans segment, providing solutions in demand at lenders and financial institutions across Italy to manage non-performing loans. We will continue monitoring and bidding for the portfolios of receivables due from households that originators are expected to place on the market. Banca IFIS is making progress in managing NPLs in terms of organisational and operating solutions, which allows to expect increasing collection rates. As in 2015, considering the abundant liquidity of the market; the Bank's ability to turn the quality of the portfolios into a strength in dealings with debtors; and the opportunity to scale up operating volumes, benefiting the bank and the debtors involved in its initiatives, Banca IFIS will consider trading in the secondary market. Specifically, it may sell already processed portfolios with the goal of freeing up resources, using them to further expand the business, or buy portfolios that other players already started processing.

As for tax receivables, the Bank is consolidating its leadership in this segment, given the good medium-term profitability of these investments.

The Governance and Services sector registered a slight increase in funding costs, attributable to both the bank's policy to extend maturities as well as the planned and achieved increase in funding, following the recent introduction of 3-, 4- and 5-year maturities.

As for government bonds in the portfolio, based on the evidence and the current monetary policy, the Bank believes it will continue refinancing said portfolio at negative interest rates, at least for the next few quarters. Against this backdrop, and considering the current dynamics in terms of potential margins from investments in government bonds, the Bank deems its position as appropriate. As in the final quarter of 2015, Banca IFIS will look at potential opportunities in the event market conditions turn favourable.

Finally, the Bank will continue considering further opportunities in the segments it operates in as well as new related markets or those potentially interesting in light of its growth strategies.

In light of the above, the Group can reasonably expect to remain profitable also in 2016.