July 18TH, 2018

THE ITALIAN BANKING INDUSTRY:

KEY FIGURES, TRENDS, STATE OF HEALTH

Giovanni Sabatini

CEO - Italian Banking Association

2

Looking at the recent past: the economic crisis in Italy hasbeen deeper than other European countries

3

The crisis in the real economy has been reflected hard on Italianbanks, given their business mix traditionally oriented to lending,unlike other European banks more exposed to finance

Figures referred to a sample of 80 large EU banking groups(ABI on banks balance sheets and EBA trasparency exercize figures as at June 2017)

12% 14%

25% 26% 25%

10%13%

7%9%

7%22%

27%

32%35%

32%

ES IT FR UK DE

Financial assets/assets

60.8%55.8%

51.3%45.6% 42.7%

50.1%

ES IT DE FR UK EU4*

Loans/Assets

(Aggregate data; Dec ‘16)

58%56%

42% 41% 38%

45%

0%

10%

20%

30%

40%

50%

60%

70%

ES IT FR UK DE

Loans/assets

EU 4 average

22%

8%

of which: Government securitiesEU 4

average

30%

of which: Derivatives & other financial assets

(1) Loans do not include exsposure to banks.(2) Domestic exposure to sovereign plus foreign sovereign exposure (3) Note that banks and banking groups sovereign onassets ratios are not perfectly comparable for accounting reasons ((inter-bank assets between institutions belonging to the same group are eliminated at the consolidatedfinancial statements level))

1

2

As at May 2018 Italian banks exposure towards domestic sovereign was 361 bln € (about 60 bln less than 2 yearbefore), which is 9,6% of banks total assets3

4

In some limited cases, theselosses led to crisis situations

Banks crisis, unlike whathappened elsewhere inEurope, were managed andresolved :

▪ under a new framework ofEuropean rules, which didnot provide for gradualness

▪ without any significantpublic intervention

4,6 4,7 5,5

9,9 13,5 12,6 13,8

24,2

31,4 30,5

20,9

31,8

19,1

5,0

12,5

26,3

-

5,0

10,0

15,0

20,0

25,0

30,0

35,0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

average

average

average

Italian banks: loan loss provisions(ABI on Bank of Italy data, bln €)

The consequence was a sharp increase in loan lossprovisions (with obvious negative impact on profitability)

5

0

10

20

30

40

50

60

70

80

90

100

110

0

10

20

30

40

50

60

70

80

90

100

110

Despite the intensity of the crisis, public interventions in favorof the banking sector in Italy were much lower than in otherlarge European countries

Recapitalisation measures* to support banks(2008-2016 cumulated data, bln €)

Recapitalisation measures* to support banks(2008-2016 cumulated data, as a % of 2017 GDP)

(*) 2008-2016 cumulated data referred to State recapitalizations used

Source: ABI on European Commission «State Aid scoreboard 2017 – Aid in the context of the financial and econoimic crisis»

26

,3%

21

,2%

18

,1%

8,3

%

7,5

%

5,3

%

4,8

%

4,7

%

4,3

%

3,7

%

3,2

%

3,1

%

2,0

%

1,1

%

0,7

%

0,2

%

6

Looking ahead: macro environment has changed and theperformance of the Italian economy has been good last yearand should continue to be positive in the next years

Confindustria 1,3 1,1

Consensus 1,3 1,1

OCSE 1,4 1,1

Istat 1,4 n.a.

Prometeia 1,2 1,2

European Commission 1,3 1,1

IMF 1,5 1,1

ABI 1,5 1,4

Bank of Italy 1,4 1,2

Real Gross Domestic Product (% change)

Economic Forecasters 20192018

1,2 1,0

7

Raised €70 billions of additional private capital from 2007

CET1 ratio increased from 7% to 13.8%

Italian banks state of health is increasing: (1) 70 billion euroof new private capital injections from 2017 …

Source: ABI on Borsa Italiana and Italian Banks websiteSource: ABI on Bank of Italy

7,1%

11,5%

2207 2016

+6.7 pp

2) Core Tier1 ratio at 2008, CET1 ratio at December 2017

13.8%

7.1%

2007 2017

+70 bn €

1.8 5.8

5.8

5.7 11

.0

7.5 0.1

10

.8

3.8

3.8 13

.92 8

13 19

30 38 38

48 52 56 70

20

07

2008

20

09

20

10

20

11

20

12

2013

20

14

20

15

20

16

20

17

8

… (2) Capitalization increase: CET1 ratio of top 11 Italiansbanks has increased to 13.3%, close to the EU average; net ofweighting methodologies IT banks stand over the EU average

13,2%13,6%

14,5%

11,5%

10,4%

13,3%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

10,0%

11,0%

12,0%

13,0%

14,0%

15,0%

16,0%

2015 2016 2017

Europa Italia

5,9% 6,0%6,3%

7,1%6,7%

7,5%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

2015 2016 2017

Europa Italia

CET1 ratio (Dec. 2017; CET1/Risk Weighetd Assets)

EQUITY/ASSETS ratio (Dec. 2017)

Source: ABI on banks annual reports for 2015 & 2016 and banks press release (preliminary full year data) for 2017

14.5%13.6%

13.2%

13.3%

10.4%

11.5%

5.9% 6.0%6.3%

7.5%

6.7%7.1%

9

0

2

4

6

8

10

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20

07,1

20

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10,3

20

11,1

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11,3

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12,1

20

12,3

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13,1

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13,3

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14,1

20

14,3

20

15,1

20

15,3

20

16,1

20

16,3

20

17,1

20

17,3

20

18,1

Total Households Firms

(*) Annualized quarterly flow of adjusted NPLs (past-due by more than 90 days, other NPLs and bad loans) in relation to the stock of loans net of adjusted NPLs at the end of the previousquarter. Data seasonally adjusted where necessary.

.. (3) Credit risk has normalized

Loans risk evolution in Italy*

(New NPL/loans; referred to total loans to households & firms)

Source: Abi on Bank of Italy data

Total

Firms

Households

2,6%

1,7%

1,2%

10

40

50

60

70

80

90

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-45%

-43%

Italian net bad loans (sofferenze)(total Italian banks; July 2015 – May 2018; bln €)

88.8 (Pick; Nov 2015) 86.8

(Dec 2016)

49.3(May 2018)

… (4) NPL stock is declining quickly

Source: ABI on Bank of Italy data

In particular, bad loans (“sofferenze”) down to 49.3 bln € (about 2.8% as a percentage of

loans), 45% less than the pick touched at November 2015 (88.8 bln €)

11

10,7%

9,2%

7,9%

6,1%6,8%

18,1%17,3%

14,5%

9,9%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

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1

Abi (July 2018 forecast) Actual figures* Abi (June 2016 forecast)

NPL ratio of Italian banks Abi June 2016 forecast1 vs Abi July 2018 forecast2 vs actual data updated to December 20173

(referred to Italian Significant and Less Significant banks)

1) Abi baseline estimates released on June 2016, based on 2015 year-end figure; 2) further acceleration in NPL disposals not considered; 3) December figure estimated on ABI own data 4) December2017 figure adjusted to considered NPLs disposals of MPS (closed in 2018)

.. (5) NPL ratio is expected to speedily return to manageablevalue: under 10% in 2019 and at 6,1% at the end of 2021

❑ Our estimates (released on June 2016 and

based on 2015 year-end figure) forecasted a

fast reduction in the NPL ratio.

❑ Latest official figures (December 2017) show

an acceleration over our forecasts due to

massive sales of NPL portfolios

❑ NPL ratio as at December 2017 stood at

around 14.5%; it was 13,4% once included one

relevant deal in the pipeline4

❑ In 2019 NPL is expected under 10%

❑ At year end 2021 the NPL ratio to 6.1%

Source: ABI based on own calculation and Bank of Italy figures

13,4%4

December 2017 data

adjusted including pending deals

June ‘16 forecast

July ‘18 forecast

12

NPL disposals are growing exponentially speeding up thereduction of the NPL ratio

Source: Abi calculations and estimates on PWC data, Banca IFIS dataand banks’ statements.

(*) NPLs disposals of MPS, BPV & Veneto Banca (total of €42 bln) included in 2017 figures

Amount of disposals of NPLs in Italy(billions of euros; NPLs gross figures)

5 4

9

1917

75

24

2012 2013 2014 2015 2016 2017* June 2018

13

20 Mar 2017

Draft guidance to banks on

non-performing loans

(ECB/SSM)

Guidance on the

management of non-

performing loans

for Italy’s ‘less significant

institutions(Bank of Italy)

Calendar provisioning

(Proposal for a

REGULATION)

(EU Commission)

Addendum NPL

(Calendar provisioning)

(ECB/SSM)

Draft Guidelines

on management of non-

performing and forborne

exposures

(EBA)

EC proposal for a Directive on credit servicers,

credit purchasers and the recovery of collateral

(Proposal for a DIRECTIVE )

(EU Commission)

Launched

Status:

Implementation date

12 Sep 2016

In force

- 30 Jan 2018 -23 Mar 2018 - -

11 July 2017

Under development

29 Sep 2017

In force

04 Oct2017

In force

10 Oct2017

Consultation Closed26.05.2018

8 Mar 2018

Consultation Closed8.6.2018

14 Mar 2018 14 Mar 2018

Consultation Closed8.06.2018

-

Action Plan NPL

(EU Commission)

Blueprint on the set-up of national asset

management companies (AMCs)

(EU Commission)

-

The absence of an effective coordination in the regulationprocess doesn’t help

Overall, we recognize the need for:

• ensure consistency between primary regulations, secondary

regulations and guidelines on NPLs (Addendum SSM vs

Provisioning EC; EBA Guidelines vs SSM Guidance on NPL)

• protect consistency between supervisory and accounting rules

• ensure transparency choices (i.e. calendar provisioning thresholds)

• cost–benefit analysis to minimize economic costs

• Ensure a Level playing field (i.e EU vs USA)

NPL PACKAGE: MAIN REGULATORY AND SUPERVISORY MEASURES

11 July 2018

-

-

14

Adjusted* ROE of largest European banking groups**(Income net of extraordinary costs & revenues; FY data, 1q 2018 annualized)

(*) (profit & loss account result net of extraordinary costs & revenues)/Equity

(**) 100 EU banks, of which 11 Italian groups (corresponding to 14 groups untill 2015)

Despite this context, Italian banks’ profitability is increasing,close to pre-crisis level based on 1q 2018 annualized figure

Source: ABI on banks annual reports

11,8%

10,3%

2,2%3,0%

6,4%

1,4% 1,6%

3,4%

4,9%5,6%

5,0%

6,7% 6,7%

8,9%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20181Q*

Europe Italy

15

Percentage of banking capital held by foreign funds (main 4 banking groups by country*)

Market appreciation of Italian banks progresses are confirmed bythe increasing presence of foreign institutional investors inbanks’ capital (higher than in the rest of major European banks)…

Source: Abi calculation on Reuters data

19,6%21,7% 21,5%

13,7%

31,3%

27,7%26,4%

21,8%

12

6

5

8

-

2

4

6

8

10

12

14

0%

5%

10%

15%

20%

25%

30%

35%

Italy Germany Spain France

Percentage of banking capital held by foreign funds (main 4 banking groups by country)

2011 September 2017 Variation 2017/2011 (percentage points)pp%

(*) weighted average by banking groups for each country

31.3%

19.6%

27.7%

21.7% 21.5%

26.4%

21.8%

13.7%

16

AT; 3,2%

DE; 2,3%

FLN; 0,7%

FR; 1,6%

NL; 1,4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

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IT; 9,6%

GR; 3,7%

ES; 7,4%

IRL; 1,6%BE; 3,4%

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Banks’ holdings of domestic government bonds in the euro area(as a percentage of total assets; monthly data; Sep. 1997 – May 2018)

• The increase in banks’ holdings of government bonds during the crisis wasmainly a consequence, rather than a cause, of the crisis

• In stressed periods banks acted as shock absorbers

430

364

300

320

340

360

380

400

420

440

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Italian banks’ holdings of domesticgovernment bonds (bln €)

17

The maturity structure of public debt matters: In Italy theaverage residual life of outstanding government securitiesis of 7.4 years

Source: Will Rising Interest Rates Lead to Fiscal Crises? Olivier J. Blanchard and Jeromin Zettelmeyer July 2017; Peterson Institute for International Economics

Governments will have

time to adjust to risinginterest rates:

- because the rise in rates

is expected to be slow

- due to the maturity

structure of public debt

(In Italy the averageresidual life of

outstanding

government securities isof 7.4 years)

18

1. ITALIAN BANKING SECTOR ON A RECOVERY PATH. Following the precautionary recapitalisation of MPS and the

orderly liquidation of Banca Popolare di Vicenza and Veneto Banca, headline risks have been removed. Favourable macro environment is

supporting improvments in credit quality and banks soundness & profitability.

2.LENDING TO PRIVATE SECTOR GROWING AS OF 2016. In May 2018 loans to households and firms (net of repos

and taking into account securitisation of NPLs) grew at around 2.5% YoY (loans to firms +1.2% YoY)

3.CREDIT RISK BELOW THE PRE-CRISIS LEVEL. The flow of new non-performing loans (NPLs) has been decreasing

since 2014. It is now about 1.7% of total loans, below the pre-crisis average.

4.NPL STOCK DIMINISHING AT A REMARKABLE PACE. Banks are selling large amounts of NPLs in the market.

Including the sales that will be completed in the next months, by mid-2018 the volume of NPLs net of provisions will amount to around €120

billion (6,8% of total loans). The gross NPL ratio stands at 13.4%, against over 18% in 2016.

5.NPL RATIO EXPECTED TO DECLINE AT ACCELERATED PACE: in our June 2016 forecasts (based on 2015

year-end data) we expected NPL ratio at 2020 lower than 10%. Latest actual figures (Dec. 2017) show the ratio is declining more quickly

than we expected. In our updated forecasts (July 2018), gross NPL ratio is expected to fall below 10% by mid 2019 and at around 6% by

year end 2021.

6.COVERAGE RATIO INCREASING: it now stands at 54% for total NPLs and 65% for bad loans; the implict recovery rate on

bad loans is 35%, well above the effective recovery rates (about 43% in average for all the NPL position closed between 2006 and 2015).

7.PRUDENTIAL CAPITALIZATION LEVELS CONTINUE TO RISE: common equity tier 1 ratio standed at around

13.8% at year end 2017, up from 10.4% in 2016.

8. EXPOSURE TO THE DOMESTIC SOVEREIGN AROUND 9,5% OF TOTAL ASSETS

9.PROFITABILITY GROWING: ROE increased to 4% in 2017 net of extraordinary costs and revenues (reported ROE was over

7%). Annualized 1Q 2018 ROE increased at around 9%

10.RESTRUCTURING & CONSOLIDATION GOING ON: 300 cooperative banks will soon form 3 large banking groups.

The largest «banche popolari» were transformed into joint stock companies. All in all, the sector is less fragmented than often claimed:

around 110 groups and independent banks in total

Final remarks

19

Thank you for you attention