Relazione finanziaria semestrale al 30.06.2020 EN Definitivo · 2020. 9. 14. · &2162/,'$7(' +,+/,+76 $1' $/7(51$7,9( 3(5)250$1&( ,1',&$7256 $6 $7 -81( 67$7(0(17 2) ),1$1&,$/ 326,7,21

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Creval Società per Azioni Registered Offices in Piazza Quadrivio 8 - Sondrio, Italy Tax code and Sondrio Company Registration no. 00043260140 - Register of Banks no. 489 Parent of the Credito Valtellinese Banking Group - Register of Banking Groups no. 5216.7 Website: http://www.gruppocreval.com E-mail: [email protected] Data as at 30 June 2020: Share Capital EUR 1,643,508,053.06 Member of the Interbank Guarantee Fund and of the National Guarantee Fund

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COMPANY OFFICERS OF CREDITO VALTELLINESE in office as at 5 August 2020

BOARD OF DIRECTORS

Chairman Alessandro Trotter

Deputy Chairman Stefano Caselli

Chief Executive Officer and General Manager Luigi Lovaglio

Directors Livia Aliberti Amidani Elena Beccalli Paola Bruno Maria Giovanna Calloni Carlo Crosara Anna Doro Fausto Galmarini Serena Gatteschi Stefano Gatti Jacob F. Kalma Teresa Naddeo Massimiliano Scrocchi

BOARD OF STATUTORY AUDITORS

Chairman Francesca Michela Maurelli Standing Auditors Paolo Cevolani

Alessandro Stradi Substitute Auditors Simonetta Bissoli

Francesco Fallacara

HEADS OF THE MAIN CORPORATE FUNCTIONS

Substitute Deputy General Manager Umberto Colli Chief Risk Officer (CRO) Fabio Salis Chief Lending Officer (CLO) Vittorio Pellegatta Head of Compliance and Anti-money Laundering Department Enzo Rocca

Manager in charge of financial reporting Simona Orietti

Audit Company KPMG S.p.A.

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Contents COMPANY OFFICERS OF CREDITO VALTELLINESE ........................................................................... 2

CONSOLIDATED HIGHLIGHTS AND ALTERNATIVE PERFORMANCE INDICATORS AS AT 30 JUNE 2020 ..................................................................................................... 4

ORGANISATIONAL MODEL AND BREAKDOWN OF THE CREDITO VALTELLINESE BANKING GROUP .......................................................................................................... 6

REPORT ON OPERATIONS .................................................................................... 7 THE GENERAL ECONOMIC FRAMEWORK............................................................................................ 7 SHARE ........................................................................................................................................................................14 EVENTS AND STRATEGIC OPERATIONS OF THE YEAR ................................................................... 15 OPERATIONAL STRUCTURE AND COMPETITIVE POSITIONING .................................................... 22 COMMERCIAL ACTIVITIES ................................................................................................................... 24 INNOVATION AND IT ............................................................................................................................. 28 PERSONNEL ............................................................................................................................................. 30 INFORMATION ON THE MAIN STATEMENT OF FINANCIAL POSITION ITEMS AND ON CONSOLIDATED INCOME STATEMENT FIGURES ................................................................... ..............32 RELATED PARTY AND INTRA-GROUP TRANSACTIONS .................................................................. 43 RISK MANAGEMENT AND INFORMATION ON MAIN RISKS AND UNCERTAINTIES TO WHICH THE GROUP IS EXPOSED ..................................................... 45 EVENTS AFTER THE CLOSE OF THE HALF-YEAR ................................................................ 48 CURRENT-YEAR OUTLOOK ........................................................................................................... 48

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS .................................. 50 Condensed interim consolidated financial statements ............................................. 51 Notes to the condensed interim consolidated financial statements ......................... 57

CERTIFICATION OF THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO ARTICLE 81-TER OF CONSOB REGULATION NO. 11971/99 ................. 138

REPORT OF THE AUDIT COMPANY ...................................................................... 139

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CONSOLIDATED HIGHLIGHTS AND ALTERNATIVE PERFORMANCE

INDICATORS AS AT 30 JUNE 2020

STATEMENT OF FINANCIAL POSITION DATA 30/06/2020 31/12/2019 Change

(in thousands of EUR)

Loans and receivables with customers 19,594,042 19,523,742 0.36%

Financial assets and liabilities at fair value 977,887 1,013,801 -3.54%

Total assets 24,034,871 24,340,000 -1.25%

Direct funding from customers 17,740,105 18,968,871 -6.48%

Indirect funding from customers 10,089,351 10,365,993 -2.67%

of which:

- Managed funds 7,494,245 7,565,554 -0.94%

Total funding 27,829,456 29,334,864 -5.13%

Equity 1,700,031 1,656,269 2.64%

SOLVENCY RATIOS 30/06/2020 31/12/2019

Common Equity Tier 1 capital / Risk-weighted assets (CET1 capital ratio) 20.9% 20.1%

Tier 1 capital / Risk-weighted assets (Tier 1 capital ratio) 20.9% 20.1%

Total own funds / Risk-weighted assets (Total capital ratio) 22.8% 22.1%

FINANCIAL STATEMENT RATIOS 30/06/2020 31/12/2019

Indirect funding from customers / Total funding 36.3% 35.3%

Managed funds / Indirect funding from customers 74.3% 73.0%

Direct funding from customers / Total liabilities and equity 73.8% 77.9%

Customer loans* / Direct funding from customers 87.7% 81.6%

Customer loans* / Total assets 64.7% 63.6%

* Include the financial statement item "40. Financial assets at amortised cost: b) loans and receivables with customers" excluding government bonds for an amount of EUR 4,043,231 thousand

CREDIT RISK 30/06/2020 31/12/2019 Change

Net bad loans (in thousands of EUR) 110,360 143,992 -23.36%

Other net doubtful loans (in thousands of EUR) 464,602 588,458 -21.05%

Net non-performing loans (in thousands of EUR) 574,962 732,450 -21.50%

Net bad loans / Customer loans* 0.7% 0.9%

Other net doubtful loans / Customer loans* 3.0% 3.8%

Net non-performing loans / Customer loans* 3.7% 4.7%

Coverage ratio of bad loans 62.3% 74.2%

Coverage ratio of other doubtful loans 37.7% 39.8%

Coverage ratio of non-performing loans 44.6% 52.3%

* Include the financial statement item "40. Financial assets at amortised cost: b) loans and receivables with customers" excluding government bonds for an amount of EUR 4,043,231 thousand. Loans and receivables with customers classified under Non-current assets held for sale and disposal groups are not included.

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INCOME STATEMENT DATA 1st half of 2020

1st half of 2019 Change


Net interest income 161,512 178,573 -9.55%

Operating income 284,848 311,825 -8.65%

Operating costs (200,733) (222,749) -9.88%

Operating profit 84,115 89,076 -5.57%

Pre-tax profit (loss) from continuing operations 41,792 (3,700) n.s.

Post-tax profit from continuing operations 40,986 23,546 74.07%

Profit for the period 40,987 23,546 74.07%

ORGANISATIONAL DATA 30/06/2020 31/12/2019 Change

Number of employees 3,556 3,634 -2.15%

Number of branches 355 362 -1.93%

With reference to the financial highlights and alternative performance indicators represented above, the amounts used for their calculation, if not specified in the notes to the tables, are indicated in “Information on the main statement of financial position items and on consolidated income statement figures”. These indicators, prepared by the management, provide additional information to investors since they facilitate the understanding of statement of financial position and income statement, they should not be considered as a replacement of those required by IAS/IFRS, they are not always comparable with those provided by other banks and they are provided in accordance with the indications contained in Consob Communication no. 6064293 of 28 July 2006 and in ESMA's Recommendation on alternative performance indicators.

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ORGANISATIONAL MODEL AND BREAKDOWN OF THE CREDITO

VALTELLINESE BANKING GROUP

The current group structure is graphically represented below.

As at 30 June 2020, Credito Valtellinese - Parent of the Credito Valtellinese banking group - was present in eleven regions throughout Italy with a network of 355 branches. The main Group companies are as follows: - Creval PiùFactor S.p.A., company dedicated to activities granting loans to the public pursuant to Articles 106 et sequitur of Italian Legislative Decree no. 385 of 1 September 1993 (Consolidated Banking Act”);

- Stelline Real Estate S.p.A., R.E.o.Co. (Real Estate Owned company), company dedicated

to asset repossessing and management and surfacing of the Group's real estate assets. The company Creval Covered Bond S.r.l., set up on 4 October 2019, of which Credito Valtellinese holds 60%, also forms part of the Group's consolidation scope.

Credito Valtellinese

Creval PiùFactor

100% 100%

Stelline Real Estate

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REPORT ON OPERATIONS

THE GENERAL ECONOMIC FRAMEWORK1

The year 2020 got off to a positive start with the International Monetary Fund, which prudently forecast world growth of 3.3% for the current year after 2019 closed with +2.9%. These forecasts were deeply revised due to the outbreak of the Covid-19 (Coronavirus) epidemic from China at the end of January 2020, which quickly spread internationally and became a pandemic. Although with different timing, the various Countries, in order to limit the contagion, adopted containment measures based on social distancing that had serious repercussions on national economies. In March this year, the IMF, faced with the expected economic impact of the health emergency, drastically reduced its forecast for global GDP from +3.3% to -3%, further decreasing it in June to -4.9% for the whole of 2020. In the space of 5 months, the world has gone from a prospect of moderate growth to expectations of a deep recession induced by the asynchronous standstill in production systems starting from the most developed economies. The crisis, which began as a health crisis, had immediate economic, financial and social repercussions. Economic because of the collapse of production of both manufacturing and in tourism and transport-related services financial because there was a stock exchange crash and a surge in volatility; social because, in addition to reducing the availability of income with new underemployed people, it has led to an increase in unemployment. Governments and Central Banks all over the world reacted much more quickly than they had in previous crises, providing substantial resources and immediate and pervasive tax and monetary stimulus that promptly deployed their support. Europe is preparing to deploy the EU Next Gen with a capacity of EUR 750 billion to be raised through the Recovery Fund after the timely approval of the extraordinary measures of EUR 540 billion in April (Sure, ESM and EIB) and the expansion of the EU budget by EUR 1,100 billion under the Multiannual Financial Framework. After suffering the recession in China in the first quarter, the fall in demand in Europe and the US in the second quarter, the emerging countries are no longer the driving force behind world growth and have to deal with the direct and indirect effects of the pandemic. In addition to these elements, there is the slowdown in international trade and tourism flows, as well as the effect of structural changes such as the regionalisation of trade, which will take longer to extend but which will also have deeper effects in changing the current structure of the world value and production chains. In the United States, restrictions in April were less stringent than in Europe and the fall in industrial production was less severe, but the new outbreaks that emerged between June and July again tightened the containment measures, thus increasing the risk of strangling the timid signs of recovery (reduction in unemployment, recovery in retail sales in May). In China, the recovery of industrial production suggests that the low point has been exceeded, but the latent health uncertainty stops the momentum required to bring growth back to pre-crisis expansion rates. In the Eurozone, a large number of workers remained formally employed, albeit with the support of government programmes. However, despite this support, total employment in the main European countries is expected to fall. The European Commission's commitment to adopting a comprehensive European containment and recovery plan stems from the observation that, already in the first phase of the pandemic, within the Eurozone divergences between countries, and within them, different trends between sectors increased. Italy and Spain, the most affected by the pandemic in terms of contagion and

1 Sources: Forecast Report of Prometeia in July 2020; Bank of Italy Economic Bulletin no. 3/2020.

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deaths, appear to be more in difficulty partly because of the extension of the lockdown and partly because of the limitations in tax responses imposed by the reduced availability of intervention. In Italy, since mid-February, more and more restrictive social distancing measures were adopted to protect public health coinciding with the worsening of the health situation, leading to the closure of all non-essential activities. These measures, which lasted until mid-May, had a very heavy impact on the entire production system. The tourism industry (from air travel to cruises, hotels and restaurants) and entertainment (cinemas, theatres, museums, etc.) have been severely affected, as has all consumption of non-durables. The standstill in demand has in fact also led the industrial sector to close down not only because of health constraints. The fall in GDP in the first quarter of the year was 5.4% and preliminary estimates for the second quarter provided by ISTAT envisage a further 12.4% decrease compared to the previous quarter due to the full unfolding of the economic effects of the health emergency. The fall in GDP lies within an international context where the major economies are experiencing similarly large reductions due to the spread of the pandemic. The capacity of the economy to respond to national and European measures will be crucial. With the end of the lockdown and the relaxation of containment measures, production in Italy showed signs of recovery. In fact, in May, industrial production started to grow again on a monthly basis of 42% after the vertical collapses in March and April. Major European partners also experienced the same trend. Although these are positive signs that need further confirmation in the coming quarters, both the confidence indicators (forward looking manufacturing SME) and the real indicators (inherently delayed industrial production) suggest an improvement in the economic situation that could point to a recovery of the economy with a V-shaped trend as shown in the following chart. The forecasts are unanimous in indicating that the exit from the recession will take place quickly but at a slower pace and below long-term potential. The EU Next Gen initiative aims to take a leap forward to overcome the crisis by improving conditions for prosperity rather than returning to the pre-pandemic paradigm.

Source: Bloomberg

To complete the global and national picture, the GDP forecasts made by Prometeia with the revisions made during 2020 following the worsening of the health and economic situation are shown below. Multiple downward revisions, as much as the IMF and the Bank of Italy, denote

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the extreme uncertainty caused by the pandemic in assessing its multiple impacts on human activities.

PROMETEIA 2020 GDP FORECASTS (rates of chg. y/y%)

2019 DEC'19 MAR'20 JUL'20

World 3.0 2.6 -1.6 -5.2

USA 2.3 1.5 -2.5 -5.7

EMU 1.2 1.1 -5.1 -8.1

ITALY 0.3 0.5 -6.5 -10.1

CHINA 6.2 5.1 3.2 0.6

Source: Prometeia – Forecast Report of March and July 2020

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The baseline scenario of Prometeia published in July is shown below.

GDP ITALY (main variables)

Rates of chg. y/y% 2019 2020 2021 2022

GDP 0.3% -10.1% 5.9% 1.8%

Amount -0.2% -13.8% 10.9% 5.2%

Household consumption 0.4% -9.0% 5.2% 1.9%

Fixed investments 1.4% -19.5% 8.3% 3.9%

- machinery 0.4% -21.7% 8.3% 4.6%

- building industry 2.6% -16.7% 8.3% 3.1%

Export 1.4% -18.9% 14.1% 3.9%

Consumer price index 0.6% -0.1% 0.8% 1.5%

Total employment 0.3% -10.1% 4.5% 1.5%

Industrial production index -1.1% -18.7% 11.2% 2.5%

Source: Prometeia – Forecast Report of July 2020

According to the analysis made earlier, the economic and social context in which the whole world is moving is strongly affected by the pandemic that caused the recession we are experiencing. The timing of the solution to this situation remains uncertain, although much confidence is placed in the medical and pharmaceutical research that is being spent to find effective treatments and one or more vaccines to eradicate the pandemic. The health crisis has taken precedence over many other "pejorative risks" that are still present in the international arena, starting with the geopolitical tensions between the United States and China, not only in the commercial sphere, in addition to the development of Brexit, which at the moment has not generated an agreement on future trade relations between the two sides of the Channel. These elements contribute to the uncertainty about future economic prospects. Italian and European measures

To handle the health, economic and social impacts of the pandemic, the Italian Government approved a series of measures aimed at protecting public health, supporting businesses and household income. In March, the "Cura Italia" Decree (Italian Law Decree 18/2020), which authorised, in agreement with the EU, the raising of public debt by EUR 20 billion was approved in order to adopt a series of measures aimed at protecting the health of citizens and supporting the production system, including: (i) the enhancement of the resources available to the National Healthcare Service; (ii) household income support with the introduction of ad-hoc social safety valves; (iii) aid for the sectors most affected by the health emergency and (iv) liquidity support for companies through an appropriation for public guarantees on loans granted by banks (through the Guarantee Fund managed by Mediocredito Centrale) and a moratorium on loans to micro-enterprises and SMEs. Tax innovations also include measures in favour of the sale of non-performing loans by 31 December 2020, which allow the transformation of deferred tax assets (DTA), referring to tax losses and ACE surpluses, into tax credits within the limits set by law. In April, a second measure called "Decreto Liquidità" (Liquidity Decree) (Italian Law Decree 23/2020) was approved, containing urgent measures regarding access to credit and tax fulfilments for companies, special powers in strategic sectors, as well as measures in terms of health and work and the extension of administrative and procedural deadlines. The main measures include the strengthening of state guarantees granted through SACE, a subsidiary of the Cassa Depositi e Prestiti Group, in favour of banks for the provision of loans to companies whose activities have been damaged by the Covid-19 emergency. These guarantees are subject

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to a number of conditions, including a prohibition on the payment of dividends by the recipients for the following twelve months and the compulsory use of the loan to support productive activities located in Italy. The decree also includes measures to postpone tax fulfilments and a strengthening of the Government's powers in the field of golden power by extending its scope of application to sectors hitherto excluded (including insurance, banking, finance, water, health, communications and media). In the first ten days of July, a third measure was approved, known as "Decreto Rilancio" (Relaunch Decree) (Decree Law 34/2020), which provides for a further EUR 55 billion. Most of the measures included draw on and extend the measures approved in previous Decrees to support the health system, workers, households and businesses. With special reference to the latter, the decree envisages non-repayable subsidies and tax credits for sectors and companies particularly affected by the crisis, the cancellation of IRAP payments (2019 balance and first instalment of the 2020 advance payment), capitalisation incentives, the strengthening of measures to support start-ups and innovative SMEs, the creation of instruments for direct State financial support to companies in the form of both loans and capital injections. The measures in terms of work include the extension of the social safety valve and allowances due to certain categories of workers, introduced following the suspension or reduction of work as a result of the epidemiological emergency. On the regulatory front, the European and Italian authorities have worked to alleviate the restrictive criteria and facilitate the credit system in this difficult situation. The main measures include: (i) the suspension of the Stability Pact in order to enable National governments to deal with the economic consequences of the pandemic; (ii) the amendment to the European Stability Mechanism (ESM) in a flexible way and with the one only condition that the funds be used for health care. The intervention capacity of this tool amounts to 2% of EU GDP, adding up to approximately EUR 240 billion; (iii) the setting up of an EIB-managed fund to support European businesses amounting to approximately EUR 200 billion; (iv) the creation of SURE (Support to mitigate unemployment risks in emergency), a European fund against unemployment that with EUR 100 billion of guarantees will financially support national "redundancy funds" or similar job protection provisions. The European Banking Authority (EBA), in order to allow banks to focus on their core operations, postponed the EU-wide Stress Test and prudentially revised the classifications of loans in default, forborne loans and their accounting treatment so as to make the practices and implications of moratoria adopted at national level consistent. As part of its monetary policy actions, the ECB temporarily implemented new long-term refinancing operations (LTROs) and improved the conditions for LTRO-III operations for the period from June 2020 to June 2021. A new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs) was introduced in order to support liquidity conditions in the financial system and preserve the smooth functioning of money markets. The PSPP programme for the purchase of public and private securities, active until the end of the year, was increased by EUR 120 billion. In March, the launch of the Pandemic Emergency Purchase Programme (PEPP) was announced, which involves the purchase of public and private securities worth EUR 750 billion. In June, the ECB considered it appropriate to extend it by a further EUR 600 billion by extending its duration at least until June 2021 in order to support the statutory inflation target and to ensure the fight against financial market fragmentation within the Eurozone to ensure the orderly transmission of monetary policy. A further feature of the PEPP is that purchases will be made in a flexible manner over time, between different asset classes and countries. The measure also provides for the reinvestment of maturing securities, which may last from 70 days to 30 years. As part of the measures to ensure liquidity for banks, the ECB adopted temporary collateral easing measures of eligible collateral for Eurosystem refinancing operations in order to extend

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the availability of collaterals by banks, which was further extended to securities rated below investment grade but which were so on 7 April 2020. The Italian banking system

The Italian and European banking sector is facing the new economic crisis caused by the Covid-19 pandemic, which affects asymmetrically activities, business size and territories. The crisis affects a system that for years has been characterised by a weak profitability lower than the remuneration required by shareholders, confirmed also in 2019 when the ROE was 5.2% on average in Europe and 4.9% for the major Italian banks. With an expected fall in Italian GDP of 10% and an increase in unemployment, the profitability of the sector will again come under pressure. The effects of the pandemic are part of a picture of weakness in traditional banking activity, although the Italian credit system has managed to considerably compress exposure to non-performing loans. Moreover, it should be borne in mind that banks are now more capitalised than they were during the Great Financial Crisis (2008-2009). In a context of exceptional gravity, Governments and Institutions, as already described, launched exceptional measures to support the economy and, through the banking system, the liquidity needs of households and businesses. The Bank of Italy points out in its July Bulletin that in the first quarter of 2020 the average level of capitalisation of significant groups improved slightly due to the allocation of that part of profits relating to 2019 whose distribution was suspended following the ECB's recommendation last March and, to a lesser extent, due to the reduction in risk-weighted assets. Also in the first three months of the year, the profitability of the significant banking groups decreased compared to the first quarter of 2019, mainly reflecting the increase in adjustments to loans attributable largely to the major groups and connected with the worsening of the macroeconomic scenario used to calculate expected losses under current accounting standards. The impact of the freeze on business activities, the fall in trade and households' disposable income has been limited by government interventions that will increase loan disbursements well beyond the forecasts made at the beginning of the year but that will lead to growing indebtedness of businesses. This mechanism will support the economic cycle at the expense of a growth in public debt. Moreover, measures to support the financial requirements of households and businesses will help to contain the generation of new non-performing loans in the current year. In the face of the crisis, the precautionary household savings component also increased, estimated at 12.5%, up 4.6 percentage points compared to the fourth quarter of 2019. As noted by the Bank of Italy in its July Economic Bulletin, lending to businesses increased significantly in May, coinciding with the increased liquidity requirements induced by the pandemic crisis. Since March, the growth in credit to non-financial companies increased significantly, rising to 11.5% over three months in May (from -0.3% in February y/y). The acceleration reflected net disbursements of EUR 23 billion over three months ending in May. The increase in loans to businesses was 1.9% year-on-year. In terms of sectors, there was a 3% and 3.4% growth in loans to manufacturing and services respectively, while the construction sector recorded a 3.2% drop in loans. On the other hand, loans to households fell by a total of -2.5% over three months ending in May (from +1.1% in February). Year-on-year, disbursements still show a positive trend of +1.3%, with mortgages up 2% and consumer credit up +1.3% from growth rates in previous years of between 7% and 8%. Lockdown and confinement inevitably led to a reduction in household spending and properties bought/sold. Lending policies to loans to households for purchasing homes remained generally stable. Banks have slightly eased the general terms and conditions applied on loans to businesses and households. The survey also sheds light on the outlook for the third quarter: intermediaries expect supply policies to show a further slight easing for businesses and remain unchanged for

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households. On the demand side, businesses expect that their liquidity requirements will be reduced but will not disappear despite the end of the lockdown. After the dramatic fall in confidence, households will return to apply for new loans. The financial market in Italy

The outbreak of the health crisis in the last ten days of February abruptly interrupted the rise of the world's financial markets, which had recovered in the aftermath of the first-level trade agreement between the US and China. The fall in share indices was sudden and deep with a consequent surge in volatility. A trend that characterised both Europe and America, while the Chinese authorities suspended trading at the same time as the lockdown. The very strong initial fears caused by uncertainty about the development and extent of the pandemic, first on the health front and then on the economic front, weighed on investor sentiment. Between April and May, following intervention by the monetary and tax authorities and the relaxation of the containment measures adopted to combat the pandemic, stock market prices were strengthened, albeit in a heterogeneous way. America recovered almost entirely the debacle with the Nasdaq, which rose to new records. Europe was characterised by smaller recoveries that place performance since the beginning of the year between -6% in Frankfurt and -18% in Milan. The Italian banking system has decreased

by 27% since the beginning of the year.2. Between the end of the first ten days of April and the beginning of July, the general index rose by 12% and the banking system index by 19%. Market evaluations benefited from a significant decrease in the equity risk premium, which fell below the levels at the beginning of the year in a context of lower volatility; investor confidence gradually improved with the deployment of central bank interventions and tax policy measures as well as, since May, with the phasing out of contagion control measures. Yields on Italian government bonds decreased as have the financing costs of companies and banks. Bond issuance activity resumed, also encouraged by Eurosystem purchases. The yields on Italian government bonds, after fluctuating on relatively high values, decreased on all maturities since mid-May, thanks to the announcement of the EU Commission's initiative related to the proposal of the EU Next Gen plan and the consequent activation of the Recovery Fund. The announcement was enough to control Italian rates, but not enough to squeeze them to the levels of the other European partners. Italy continues to incur a risk premium well above the EU average, leaving Italy's financial assets exposed to the risk of significant corrections.

2Figures referring to 31 July 2020.

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SHARE

Credito Valtellinese shares are traded on the MTA market of Borsa Italiana and are part of the FTSE Italia Mid Cap index. On 1 June 2020, by virtue of the resolution passed by the Extraordinary Shareholders' Meeting of Creval held on 24 April 2020, the reverse share split was implemented at the rate of 1 new share for every 100 existing shares. Following the reverse split, the share capital of Creval remained unchanged at EUR 1,643.5 million, divided into 70,149,694 ordinary shares without nominal value. Therefore, the historical price and volume series have been adjusted to reflect this change. During 2020, the performance of the share was fluctuating and synchronised with the Italian and international market, which was subject to the shock of the pandemic. The price fluctuated between a maximum of EUR 9.4 on 19 February 2020 and a minimum of EUR 3.65 on 12 March 2020. Annual performance was negative by 26.1% compared to -17.5% for the FTSE Italia All-Share Index and -27.3% for the FTSE Italia All-Share Banks sector index. Creval share performed better than the banking index and Italian general index until the second ten days of February when the pandemic emergency was declared. As at 19 February, Creval share was up 32% since the beginning of the year compared to +10% for the banking index and +8% for the general index. The fall in the value of financial assets (between 40 and 50%) until mid-March, coinciding with the worldwide spread of the pandemic, cancelled out previous progresses. The massive intervention of central banks and the ECB in particular allowed Creval share, together with the rest of the market, to recover about half of what was lost between February and March. The prompt implementation of monetary and tax policies interrupted the negative spiral benefiting from the prospective improvement of both the epidemiological and economic situation thanks to the interventions of the Authorities. The Creval share closed the half-year at a price of EUR 5.26. Average daily trading volumes were around 378 thousand shares and the average capitalisation for the observation period was around EUR 404 million. Price and volume trends for Creval shares from 1/1/20 to 30/06/20

Source: Bloomberg

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Volumes Prices (right hand scale)

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EVENTS AND STRATEGIC OPERATIONS OF THE YEAR The most important events that characterised the management of Creval during the first half of 2020 and that, if necessary, were the subject-matter of specific disclosures to markets are mentioned below.

Health emergency related to the spread of the Covid-19 epidemic

Following the international spread of the coronavirus (Covid-19) outbreak initially originating in China, on 30 January 2020 the World Health Organisation declared Covid-19 a public health emergency of international importance and subsequently on 11 March due to the speed and scale of the contagion at global level, the same Organisation classified the coronavirus at pandemic level. The rapid spread of the pandemic forced the various governments to put in place measures to counter and contain the risk of contagion to protect public health. In particular, in Italy, one of the first countries to be affected in Europe, during the initial phase of the contagion, between February and April, a series of law decrees were issued with measures aimed, on the one hand, at limiting the freedom of movement of people, which also led to the closure of entire economic sectors and, on the other, at strengthening the national health system. In May and June, the measures to contain the emergency were followed by measures to progressively relax the restrictions and to resume economic, social and cultural activities. These measures were also accompanied by a series of measures launched by the Government aimed at limiting the economic impact of Covid-19 for citizens, professionals and businesses, including the "Cura Italia" Decree in March, followed by the "Liquidità" (Liquidity) Decree in April and the "Rilancio" (Relaunch) Decree in May, which laid the foundations for a new start for the Country. Interventions carried out by Creval

Since the first day of the emergency, the Bank put in place stringent preventive measures by adopting all the safety regulations indicated in the various legislative deeds issued by national and local Authorities and/or in the Protocols signed between the Government and the Trade Association (ABI) and Social Partners, as well as any other appropriate precautionary measures to protect the health of Employees and Customers while ensuring the proper functioning of the Bank. In order to ensure immediate and constant control of the emergency, the planned business continuity plan, a "no people" scenario, was activated as early as February 23, with the timely establishment of the resulting Crisis Operating Group, defining a specific Coronavirus Operating Unit (COU), as the first internal information reference for all employees on the issue. Therefore, all aspects of Business Continuity were assessed and the first initiatives for contingency mitigation were launched. In order to limit as much as possible the risk of spread of the virus, the following measures were taken:

Incentives to use the smart-working mode; Suspension of business trips for all Employees; Suspension of classroom training courses with implementation and enhancement of

online courses; Suspension of appointments with consultants or suppliers at company premises,

activating alternative channels of communication where possible; Reference to the new operating rules and recommendations for strict compliance with

ministerial, regional and/or local orders issued for this purpose, with regard to all suppliers, consultants and contractors who usually operate in the Bank's offices;

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Supply of masks, gloves, body temperature measuring instruments, separation screens and disinfectant gel to operating Personnel at Group facilities;

Arrangements for cleaning companies to use specific products for the hygiene of the company's premises and to intensify the related interventions on a daily basis;

Display to the public (inside and outside the Company) of specific posters with the instructions to be followed in terms of interpersonal distancing, restricted access and hygiene regulations;

Implementation on the company intranet of a specific section dedicated and constantly updated with the company information from time to time integrated by stating explicitly health and safety regulations adopted from time to time;

Issuing guidelines to be followed in case of contact with virus-positive subjects; Issuing guidelines on behaviour to be followed during the stay in the company spaces

(network and head office).

With specific reference to the territorial network, in the initial phase of the emergency (known as Phase 1) opening hours to the public were reduced with branches open only in the morning and on alternate days and providing for an adequate shift of branch staff. Within the branches, access to customers was immediately restricted, allowing them to enter only by appointment and only for strictly necessary operations. In May, coinciding with the relaxation of the restrictive measures issued by the Government (known as Phase 2), the ordinary opening hours to the public were reinstated, without prejudice to the access by appointment and the adoption of all regulations aimed at protecting the health and safety measures required. Business continuity was also guaranteed through a real acceleration of the smart-working mode used - at the date of preparation of this Report - by about 95% of the head office personnel and (in the period from March to April) up to 65% of the network employees (in the latter case thanks to applications that make it possible to replicate most of the branch's operations). The possibility of smart working was also extended to all figures involved in customer consulting. At the same time, all employees were provided with specific information on how to use smart-working tools efficiently and safely via the intranet channel. In order to facilitate the use of remote access channels to banking services, additional remote access modes were activated for Customers by accelerating the introduction of new online features such as the opening of current accounts, remote document exchange and the possibility of obtaining a personal loan. These initiatives met with the favour of customers, enabling us in particular to reach a record number of consumer credit disbursements by the Bank in the second quarter of 2020. Moreover, remote customer contact channels were enhanced to ensure adequate support and information on the use of digital channels. Important initiatives to communicate with Customers (both with regard to the changed operations of the branches and the different methods of access) have been activated by making full use of digital channels (email, SMS, social) and implementing the Bank's website. In response to the greater need for remote connections of Employees and use of the Bank's online services by customers, Creval continued to strengthen its IT network by expanding the number of users to allow a higher number of simultaneous accesses to the corporate network (Virtual Private Network - VPN), increasing the number of resources with remote access from about 300 to over 1,500. Anti-fraud control units and safety protocols were also strengthened and measures to prevent phishing attacks were implemented. Covid-19 also had an impact on the management of the Bank's lending practices. In fact, Creval in the face of the economic and social consequences of the health emergency, has not failed to support families and businesses in its territories, with initiatives of an extraordinary nature.

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In this regard, Creval took action from the very first moment of the emergency to make it possible for families and businesses to suspend for 12 months the instalments of loans falling due. This initiative was then added to those made available at Government and System level. At the end of the first half of the year, more than 34,000 moratoriums had been granted for a total of about EUR 760 million in suspended instalments and more than EUR 500 million in loans to companies backed by government guarantees for about 15,000 customers. With regard to credit risk, the Bank carried out an analysis of the loan portfolio, which involved in particular the most significant exposures, those with the lowest rating level and the exposures of companies operating in economic sectors considered most impacted by Covid-19 (Hospitality, Transport, Real Estate and Construction). Moreover, an intensive monitoring programme was launched, as well as a plan to accompany the companies benefiting from the moratorium in order to identify any intervention required to ensure a return to normal operations upon expiry. Moreover, Creval carried out some social initiatives to support the local population by donating 500 FFP3 masks to ASST Valtellina e Alto Lario for the protection of health personnel working in the front line in the care of the sick and over 20 personal computers to young people in financial difficulties in the province of Sondrio to offer them the opportunity to actively participate in distance learning. A fundraising was launched on "Insiemedoniamo" - Creval's crowd funding platform - through the Credito Valtellinese Group Foundation, in favour of the "ASST Valtellina e Alto Lario" Hospitals to support them in the care of patients affected by Covid-19, reaching EUR 173,120 for the purchase of Individual Protection Devices for Healthcare Professionals, saturometers, infrared thermometers and other specific equipment for the care of patients. Finally, Creval continued to support young students in a number of courses, including those at Università Cattolica and "Palestre Digitali" - a project led by Accenture with the participation of numerous partners, including Young Women Network, Assolombarda and the Lombardy Region - by transferring content delivery in digital mode to e-learning, following up on the commitments already made previously for the dissemination of sustainability issues.

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Sale of loans against pledges

On 30 January 2020, Creval completed the sale of the loan against pledge of the Bank to Custodia Valore - Credito su Pegno S.p.A., a company of the Viennese Dorotheum Group. The operation, authorised by the Competent Authorities, took effect from 3 February 2020 coinciding with the migration of the IT systems started earlier.

As part of the sale agreement, as already communicated, Creval undertook to (i) grant credit facilities to Custodia Valore to support ordinary activities and (ii) continue to provide information technology and support services to the company.

The consideration received by Creval for the transaction amounted to EUR 38 million, corresponding to a gross capital gain of approximately EUR 33 million, making a significant contribution to net profit in 2020.

The operation is consistent with the guidelines of the 2019-2023 Business Plan, which envisage a greater focus on strategic business for the development of Creval with the objective of strengthening commercial banking established in the territory at the service of households and SMEs.

Sale of bad loans and UTP portfolio

Since the beginning of the year, Creval finalised several sales of non-performing loan portfolios with a total gross book value (GBV) of over EUR 800 million. In detail:

- on 6 February 2020, a portfolio of unsecured non-performing loans for a GBV of EUR 357 million was sold to Hoist Finance, consisting of approximately 8,000 positions mostly relating to corporate customers, most of which were classified as bad loans before 2011;

- on 12 March 2020, a portfolio of secured bad loans for a GBV of EUR 177 million was sold to AMCO - Asset Management Company S.p.A., consisting of approximately 1,600 positions backed by real estate guarantees and largely relating to corporate customers.

- on 5 August 2020, agreements were signed with MBCredit Solutions S.p.A. (Mediobanca Group), AMCO - Asset Management Company S.p.A. and Italian NPL Opportunities Fund II, (whose advisor is Eidos Partners) for the sale without recourse of 3 portfolios of non-performing loans for a nominal value of approximately EUR 400 million. The portfolios are composed of both secured and unsecured bad loan positions with a gross book value of approximately EUR 160 million and UTP positions with a gross book value of approximately EUR 140 million. Overall, about 7,000 positions were sold, represented by loans and receivables mainly with corporate customers.

These operations enabled the Bank to largely reach the target for the sale of non-performing loans and ahead of schedule, thus accelerating the path of reducing non-performing exposures towards the objectives of the 2019-2023 Business Plan. The latter fell by 46% on an annual basis, resulting in a decrease in the gross NPE ratio from 11.4% as at 30 June 2019 to 6.4% as at 30 June 2020, compared with a target of <6.5% at 2023, while maintaining coverage in line with the main Italian banks.

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Supervisory Review and Evaluation Process (SREP)

Based on the final measure received by the Bank of Italy following the conclusion of the Supervisory Review and Evaluation Process (SREP) for the year 2020, Creval will have to comply with the following minimum capital requirements at consolidated level as from the reporting of own funds of 31 March 2020:

CET 1 ratio of 8.55%, consisting of the minimum regulatory requirement of 4.5%, the additional requirement of Pillar 2 ("P2R") determined as a result of the SREP of 1.55% and for the remaining part of the capital conservation buffer component;

Tier1 ratio of 10.05%, consisting of the minimum regulatory requirement of 6.0%, the additional requirement of Pillar 2 ("P2R") determined as a result of the SREP of 1.55% and for the remaining part of the capital conservation buffer component;

Total Capital ratio of 12.05%, consisting of the minimum regulatory requirement of 8.0%, the additional requirement of Pillar 2 ("P2R") determined as a result of the SREP of 1.55% and for the remaining part of the capital conservation buffer component.

As at 30 June 2020, the capital ratios of Creval on a consolidated basis are well above the aforesaid requirements and have one of the highest capital buffers in the Italian banking system, confirming the excellent soundness achieved by the bank:

CET 1 ratio: 20.9% phase-in and 16.7% fully phased; Total capital ratio: 22.8% phase-in and 18.9% fully phased.

Rating

The following are the ratings assigned to Creval on the date of approval of this Report:

DBRS

Type of rating Rating Trend

Long-Term Issuer Rating BB (high) Stable

Long-Term Senior Debt BB (high) Stable

Long-Term Deposits BBB (low) Stable

Short-Term Issuer Rating R-3 Stable

Short-Term Debt R-3 Stable

Short-Term Deposits R-2 (middle) Stable

Senior Long-Term Notes - EUR 5 billion EMTN Programme BB (high) Stable

Senior Short-Term Notes - EUR 5 billion EMTN Programme R-3 Stable

Mandatory Pay Subordinated Debt (Tier 2) - EUR 5 billion EMTN Programme BB (low) Stable

On 13 March 2020, the rating agency DBRS Morningstar confirmed all ratings assigned to Creval, including the long-term deposit rating at "BBB (low)" in investment grade and the long-term issuer rating at "BB (high)". The trend on all ratings was upgraded from positive to Stable.

On 2 April 2020, as part of a rating review to take account of the worsening health emergency, DBRS Morningstar reconfirmed all the ratings and related trends assigned to the Bank.

This confirmation, which took place despite the difficult external context, reflected the DBRS Morningstar Agency's view of the improvements in credit quality, with special reference to the reduction in the stock of non-performing loans, which benefited from the sale of two portfolios

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of bad loans finalised in February and March 2020 for a gross equivalent amount of over EUR 500 million.

DBRS Morningstar stressed that the Bank's high capital position with a large surplus over the minimum regulatory requirements combined with the regulatory flexibility announced by the Regulator will enable the Bank to mitigate potential negative impacts on the loan portfolio resulting from the worsening of the macroeconomic scenario.

Finally, DBRS Morningstar pointed out that the ratings are supported by the Bank's solid liquidity and funding position.

Moody’s

Type of rating Rating Outlook

Baseline Credit Assessment b1

Adjusted Baseline Credit Assessment b1

LT Bank Deposits Ba3 Negative

ST Bank Deposits NP

Senior Unsecured MTN (P)B2 Negative

Subordinate MTN (P)B2

LT Counterparty Risk Rating Ba2

ST Counterparty Risk Rating NP

LT Counterparty Risk Assessment Ba1(cr)

ST Counterparty Risk Assessment NP(cr)

On 26 March 2020, as part of a review of ratings on Italian banks due to the worsening operating environment caused by the Covid-19 outbreak, Moody's confirmed all the ratings assigned to Creval, including the standalone rating (BCA) at "b1".

The rating agency only changed the outlook of long-term unsecured debt from Stable to Negative.

Reverse share split

In order to bring benefits in terms of volatility and liquidity of the Creval share and to improve the market perception of the share, repositioning it in terms of price among comparable banking institutions, the Board of Directors in its meeting of 10 March 2020 resolved to submit the reverse split of the ordinary shares to the Extraordinary Shareholders' Meeting held on 24 April 2020. Following the favourable vote of the Shareholders' Meeting, on 1 June 2020, the reverse split was carried out in the ratio of 1 new ordinary share (ISIN code IT0005412025) for every 100 existing ordinary shares (ISIN code IT0005319444). Following the reverse split, the share capital of Creval remained unchanged at EUR 1,643,508,053.06, divided into 70,149,694 ordinary shares without nominal value.

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The liquidity position

The Bank's already strong liquidity position was further strengthened during the first half of the year. Assets eligible for refinancing with the ECB amounted to EUR 4.6 billion as at 30 June 2020, an increase compared to the end of 2019 (EUR 3.3 billion). Moreover, the Basel III liquidity regulatory requirements for short-term (Liquidity Coverage Ratio) and structural (Net Stable Funding Ratio) are well above 100% (minimum regulatory requirement). In particular, the LCR is 150% higher.

The ECB's funding component amounted to EUR 3.5 billion, entirely represented by TLTRO-III funds. In this regard, note that the Bank participated in the auction of TLTRO-III funds held last June for EUR 2.5 billion, at the same time reimbursing EUR 1.5 billion of TLTRO-II funds. Therefore, the maturities of the TLTRO funds are as follows:

- December 2022: EUR 1.0 billion;

- June 2023: EUR 2.5 billion.

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OPERATIONAL STRUCTURE AND COMPETITIVE POSITIONING The territorial network

As at 30 June 2020, the branches that make up the territorial network of Credito Valtellinese are 355, of which 27 branches of the "Bancaperta" format through which it is possible to carry out traditional banking operations by interacting with Creval professionals through video links.

Compared to 31 December 2019, there was a reduction of 7 branches due to sale of the loan against pledge of the Bank to Custodia Valore - Credito su Pegno S.p.A. (Viennese Group company Dorotheum) completed on 30 January 2020 and effective from 3 February 2020. The number of ATMs in the country is 487. The Creval branch networks are represented below.

158 branches

of which 11 Bancaperta

8 branches of which 5 Bancaperta

1 branch of which 1 Bancaperta

16 branches

of which 2 Bancaperta



12 branches



2 branches


Credito Valtellinese 355

of which

Bancaperta 27

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The other sales channels

Bancaperta's digital platform for access to Creval's online banking services is a fundamental and complementary channel to the sales network that, also following the Covid-19 health emergency, has become increasingly important in managing customer relations and offering services, representing a real added value. In this perspective, the Bank increased the number and type of transactions and documents that can be subscribed remotely with digital signatures, through the Document Exchange function, such as for example the contractualization of personal loans and documentation relating to investment proposals, as well as the possibility of sending requests for access to the recent financing measures envisaged in the Government decrees in support of businesses and households to deal with the Covid-19 emergency.

At the end of June, there were 267,440 customers with "active" users with operational features compared to 250,411 at the end of December 2019, up by 6.8%.

There are 287,725 active Apps, i.e. those that have recorded at least one access in the previous 180 days, up by 33.6% compared to the figure for June of the previous year of 215,376, also in view of the introduction of the strong authentication required by sector regulations (PSD2), carried out via logical token integrated into the App Bancaperta.

Competitive positioning

Based on the most recent available figures (Bank of Italy BASTRA1 database as at 31 March 2020), at the nationwide level the Group reached a market share of 1.5% in terms of number of branches, approximately 0.9% in deposits and 0.8% in loans and receivables with customers3. In the first quarter of 2020, Creval sold the pledge business to Custodia Valore and at the same time sold 7 branches specialised in this business. Regional market shares are higher in the areas where the Group operates traditionally. The most representative ones are in Lombardia, where they reach 3.4% in terms of number of branches, 2% and 1.7% for deposits and loans and receivables with customers, respectively. In Sicilia, where the Group operates with the Credito Siciliano brand, the market share is 7.6% by number of branches, 4.1% and 4.1% for deposits and loans and receivables with customers, respectively. In the Marche region, the Bank reached an overall market share of 3.2% by number of branches, 2.8% and 3% in terms of deposits and loans and receivables with customers, respectively.

3 The market shares used in the description refer to the recognition by “residence of customers”. Loans are calculated on the performing component only.

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COMMERCIAL ACTIVITIES The activities of the commercial network in the first half of the year were affected by the health emergency related to Covid-19 and the measures to contain contagion adopted by the Bank in implementation of the government measures issued from time to time. In this context, Creval implemented a series of interventions aimed at ensuring the business continuity of its services to customers.

In the initial phase of the crisis, opening hours to the public were reduced with branches open on alternate days and then gradually restored as the restrictive measures were relaxed. Moreover, entry to the branch was restricted to strictly necessary operations not feasible through Internet banking (Bancaperta) whose functions, as well as those of Casse Veloci (ATM Evoluti, advanced ATMs), were expanded to allow a greater number of operations. The commercial activity was carried out also through the extensive use of smart working, which were used by up to 65% of the network resources thanks to applications that make it possible to replicate most of the operations of the branch.

In terms of lending activity, the network's action focused primarily on supporting households and businesses by implementing the various liquidity measures envisaged by the decrees approved by the Government and through its own extraordinary initiatives. In particular, Creval was one of the first banks to make available the suspension, for 12 months, of the principal portions of existing loans, anticipating what was then defined by the "Cura Italia" Decree.

On its website, the Bank made available a section dedicated to all the commercial initiatives carried out for Covid-19 in favour of Households, SMEs and professionals. Base products

In the first half of 2020, the activities of the commercial network were characterised by a strong emphasis on the management of household savings, with a special focus on stabilising the existing funding deriving mainly from the maturities of bonds and restricted funding products. With the aim of expanding the range of products for asset management, stabilising funding and increasing the portion invested in asset management products, a bundle product has been made available to the commercial network since February 2020, intended for Customers who received amounts deriving from maturities of bonds and restricted funding products, which allows access to the Creval Deposito Protetto Special promotional lines at preferential rates, provided that at least 30% of the total amount invested in the bundle is allocated to asset management products.

With a view to continuously strengthening the Bank's digital strategy and pursuing the constant objective of expanding its customer base, the sale of Conto Creval has been the subject matter of an intense promotional campaign since the early months of the year, both online and through traditional sales channels, also thanks to a series of commercial actions aimed at specific customer targets.

With the entry into force of the social distancing measures following the Covid-19 emergency, not only the products that can be purchased online but also and above all the possibility of carrying out the main banking operations through Bancaperta Internet banking, which is constantly evolving, and the expansion of the functions of Casse Veloci (ATM Evoluti, advanced ATMs) and ATMs, gained particular importance. These include, in particular, the direct Withdrawal from account function available 24 hours a day, seven days a week on all ATMs, which allows you to withdraw directly from your current account without affecting the debit card limit.

Moreover, with the aim of promoting fundraising for the Covid-19 health emergency, Creval has made a zero expense current account available to Italian municipalities, promoting this initiative through the Bank's main communication channels.

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Finally, in compliance with the provisions of the "Liquidità" (Liquidity) Decree Law, temporary processes that comply with the regulations in force have been defined for some products to allow the conclusion of contracts through the use of remote communication techniques based on the use of IT or electronic tools, thus limiting Customers' movements to a minimum. Methods of Payment

In May, the P.O.S. portfolio was integrated with the introduction of two new commercial offers - the Welcome offer and the Start offer - developed in collaboration with Nexi to support small Shopkeepers also in relation to the new requirements that emerged in the Covid-19 context, including the focus on fixed costs and the need for a digital payment instrument capable of satisfying the new purchasing trends that are increasingly alternative to cash. By means of the Welcome offer, the customer can accept digital payments in complete mobility, also managing home deliveries, without incurring the cost of the P.O.S. terminal. The Start offer allows customers with a low transaction to have at their disposal a simple and convenient solution that envisages a single monthly fee including both the P.O.S. terminal component and the portion of the negotiation/month. Lending products

Creval has made available since the end of February the suspension for 12 months of the principal of existing loans (moratorium). This type of suspension was immediately available to all customer segments, from households to SMEs, from professionals to Corporate businesses. Creval also allowed customer companies to request the suspension of the payment of instalments/lease fees (principal and interest or only principal), the extension of non-instalment loans and the non-revocability of credit facilities good till cancelled granted by the Bank until 30 September 2020. For households, it also made it possible to suspend not only the instalment of the first home loan through Fondo Gasparrini but also the principals of unsecured loans and personal loans by extending the scope of application of the aforementioned Decree.

Moreover, by opting for the Convention on social advances for workers receiving income support treatment (CIG), Creval made it possible to advance ordinary and exceptional wage support payments due to the Covid-19 emergency, to employees of employers who suspended them from work at zero hours and submitted a request for direct payment by INPS. Creval has also thought of companies that have advanced their employees the amounts relating to the redundancy fund, allowing them to apply for a specific 6-month loan with repayment of the capital in a lump sum and an amount proportional to total advances paid to employees.

Finally, with the issuance of the Liquidity Decree and the subsequent conversion into law, Creval has made available to all companies different solutions to support the company as a going concern. In particular, it is possible to apply, even without going to the branch - thanks to a new process that involves sending the application remotely and signing contracts through the Document Exchange function in Bancaperta, for:

- loans of up to EUR 30,000 and up to 10 years, 100% secured by the Central Fund, for SMEs and natural persons engaged in business, arts or professions;

- loans of up to EUR 5 million for SMEs and MID Caps up to 499 employees, with a maximum duration of up to 72 months and 90% secured by the Central Fund;

- rescheduling of existing loans, both MCC secured and unsecured (in the latter case with an increase in the credit line to be consolidated by at least 25%).

Moreover, the Bank, thanks to a specific agreement with the European Investment Fund, offers its SME and Small/Mid Cap customers the possibility of taking out loans 80% secured by InnovFin to support working capital expenses related to the Covid-19 emergency.

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In order to support the business world in this difficult economic moment, the first half of 2020 was also characterised by the signing of agreements aimed at guaranteeing regional and local subsidised loans. These initiatives include:

- Credito Adesso Evolution, which envisages the granting of an interest contribution of the Lombardy Region against loans to support the financial requirements of SMEs, Midcaps and professionals in the context of the economic emergency caused by Covid-19;

- Misura Straordinaria di Liquidità - MSL (Extraordinary Liquidity Measure) thanks to which the Region of Sicily recognises a non-repayable grant against the disbursement to SMEs of a bank loan with a minimum duration of 15 months and an amount not exceeding EUR 100,000.

Moreover, with regard to loans and, in particular, personal loans to consumers, during this first half of the year, Creval was strongly committed to quickly find solutions to meet customers' needs even during the difficult lockdown period that restricted access to traditional branches even at a time when customers needed more support from their bank.

The solution was created thanks to the finalisation of a new process called "Fast Lending", which on the one hand significantly reduced the time needed to apply for and obtain a personal loan, and on the other hand made it possible to apply for and issue it completely remotely. In particular, the manager collects by phone the information required to support the loan origination; the customer, by accessing his/her Internet banking, can view his/her personalised proposal, apply for the loan, sign the contract and obtain the loan directly in current account, safely and quickly.

This process, finalised in an emergency period, made it possible to create a "hybrid" offer, something between the pure online channel, where the user makes his/her requests and often talks with a "chatbot" and an innovative form of access to services, always remotely and from one's own Internet banking, but also relying on the support and trust of one's own manager, who is personally interested in the requests, taking advantage of a personalised service with high added value.

Also for the initiatives of suspension and disbursement of new loan indicated above, remote ad-hoc processes were structured in order to allow households and businesses to send requests to Creval and sign the relevant contracts without the physical presence, using not only the aforementioned Internet banking service, but also interaction through PEC or, to the extent permitted by the Liquidity Decree, simply email.

Asset Management and bancassurance

During the first half of 2020, work continued to enrich the offer through the selection of investment solutions for the management of household savings, in line with the objectives set out in the 2019 - 2023 Business Plan and the investment requirements of customers.

During the year, Creval expanded the number of collaborations in the asset management sector through the finalisation of distribution agreements with an international big player.

Moreover, during the half-year, the Bank started up the remote Consulting service, i.e. the provision of investment advisory services, and related carrying-out of the instructions given by customers as a result of the advice provided, using remote communication techniques, exploiting the potential allowed by the App Bancaperta with the use of the Document Exchange Area present in it.

Mutual funds and SICAVs

The development of customers' needs and investment objectives involves the search for innovative solutions and, consequently, the need to maintain the offer catalogue in order to

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guarantee customers access to a diversified set of products that can best meet their needs. As happened in 2019, the adjustment and updating of the catalogue of investment products (new OEICs offered by the SGRs with which distribution agreements are in place) continue in 2020. A further driver for the development of the product catalogue was the signing of new distribution agreements with product companies of absolute professionalism, with a recognised brand, skills of excellence and sharing the same values of attention and customer service with Creval.

With the spread of the use of digital technology among customers, the number of instruments available in the "Mutual Funds and SICAVs" section of Bancaperta - Creval's Internet banking - which can be subscribed using remote communication techniques continues to grow; during the half-year, operations in mutual funds and SICAVs were also possible from Apps on smartphones.

Asset management

The distribution of Anima SGR's portfolio management service, a flagship product in Creval's offer catalogue, continues. Initiatives are being studied to update the catalogue with the introduction of ESG criteria in management choices, in line with the development of customer requirements.

Bancassurance

In the constant process of product innovation, initiatives were undertaken to enhance the strategic partnership with Crédit Agricole Assurances SA - the leading European insurance operator - aimed at the placement of savings and protection insurance products of Crédit Agricole Vita.

Exclusively for the Creval network, in May the placement of the ViviPiù Opportunity policy began, a unit-linked, life-long life insurance contract that completes the set of insurance investment solutions available to Customers to plan the generational change.

Already available from the previous year, the ViviPiù MultiFlex and ViviPiù Securevalue products complete the range by offering a multi-branch investment solution that combines the typical advantages of separate management and the dynamism of flexible investment of its internal funds and a low-risk investment with the guarantee of the capital invested and the consolidation of the interest accrued in separate management, respectively.

In the non-life sector, the long-term partnership between Creval and Gruppo Assicurativo Ri-Fin continued, aimed at developing and offering non-life and motor insurance policies of leading insurance companies. Foreign service

During the first half of 2020, a series of initiatives were launched to support micro-enterprises and SMEs belonging to all those sectors that have suffered "liquidity shortages" as a direct and temporary consequence of the current Covid-19 epidemic.

With a view to providing assistance to customers in the areas served and in application of the "Cura Italia" Decree - Art. 56 LD 18/2020 - the possibility of extending "under the same conditions" credit facilities good till cancelled and loans granted on expiry until 30 September 2020 is granted to companies that request it and meet certain requirements.

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INNOVATION AND IT During the first half of 2020, Creval's ICT, Operations and Services area was able to respond to the multiple requests of the Business and, at the same time, to explore new paradigms of efficiency improvement of IT processes and procedures.

Initiatives were further developed, already launched in previous years related to the Digital Transformation path of the banking world.

The Bank has always attached great importance to the digital transformation process, but the complexity of the period has also led to greater attention being paid to responsiveness, timing and response methods, so as to be close to the customers, to be able to listen, advise and serve them in an even smarter way, guaranteeing them the digital shopping experience to which they are now accustomed in many other sectors.

During this period, characterised by the Covid-19 pandemic, the ICT, Operations and Services area quickly implemented new solutions and processes, which made it possible to offer the bank's customers, even remotely, a series of services that previously could only be provided by "traditional" branches.

A new "Fast Lending" process, integrated with Bancaperta Internet banking, was implemented on personal loans, thanks to which it is possible to meet customers' requests quickly, with maximum safety, even remotely, without the need to go to a branch. The loan proposal can be made by email or via chat with your manager.

The entire assessment and granting process of the loan is then finalised through a simple document exchange, with the customer affixing a digital signature within Bancaperta.

In the same period, Creval also started a new way of subscribing to the current account completely online. Through a simple and fast user experience, customers have the possibility to activate a current account from the comfort of their home with the possibility to choose the branch of reference they prefer. This new process offers customers the opportunity to manage the current account in the way they deem most appropriate to their needs, whether totally online or traditionally with an appointment at the branch.

In terms of technology, the main Innovation and IT trendlines, such as document dematerialisation, Data Governance and Data analytics, renewal of operational processes and branch platform, artificial intelligence and/or cognitive solutions, that were the subject matter of implementation projects that have enabled significant operational efficiencies were confirmed.

In parallel to these trends, the world of vendors, as well as the Fintech ecosystem, entered the operational phase of the PSD2, i.e. the provision of IT services in Open Banking logic, as well as the offering of cloud services more and more complete and responsive to the needs of the banking world.

The ICT, Operations and Services area of Creval further consolidated these issues, in particular on enabling technologies for process digitalisation, through a specific competence centre on Process Automation, which uses technologies such as workflow engines, rule engines, RPA and Data Management tools.

Note that the solutions implemented by the bank in the field of digitalisation and Process Automation continue to be indicated by IBM as its worldwide reference. The reason for this lies in Creval's particularly advanced use of the technological components owned by the IT giant.

With regard to the Open Banking and PSD2 scenario, Creval successfully completed the project, promoted by the CBI consortium, aimed at PSD2 compliance. Therefore, the Bank is fully compliant with PSD2 regulations and exposes the main core services of its information system to certified third parties, known as PPT.

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Finally, it is worth mentioning the collaborations on the tables of ABILab, a consortium promoted by ABI between the associated banks and IT companies, which led Creval to participate in important system projects. These include the Spunta Interbancaria project, led by ABILab, which has enabled the application of Blockchain and DLT technologies to banking processes. This project received a special mention in the Innovation ABI Award for 2020 Innovation.

Integrated Quality, Environment, Information Security Management System - certifications In 2019, Creval renewed the Integrated Quality, Environment and Information Security Management System certifications according to UNI EN ISO 9001:2015, UNI EN ISO 14001:2015 and ISO/IEC 27001:2013 (http://www.gruppocreval.com/Pagine/qualita/qualita-ambiente-sicurezza.aspx#content).

These standards constitute important guidelines, tools through which to keep company processes under control with a view to continuous improvement and in accordance with compliance obligations and all applicable legal, statutory and regulatory requirements. The objectives are:

the development of a business model capable of continuous innovation, customer-oriented renewal and growth of its human capital;

the enhancement of environmental and information protection issues to which Creval is particularly sensitive.

The quality objectives are complementary to the organisation's other objectives such as growth, profitability, environment and information security.

In terms of Total Quality, Creval integrated the Quality Management System with the Environmental and Information Security Management Systems. This facilitates planning, allocation of resources, identification of complementary objectives and assessment of the organisation's overall effectiveness.

The Integrated Management System of Creval is constantly monitored by the various departments in charge and Top Management is personally involved in the compliance and implementation of these principles, ensuring and periodically checking that the Policy adopted is documented, made operative, kept active and disseminated to all personnel.

In October and November 2020, the RINA Certification Authority, a leading Entity active in Italy and internationally, will carry out audits aimed at maintaining certifications.

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PERSONNEL

At the end of June 2020, the registered workforce of the companies included in the consolidation scope of the Group consisted of 3,565 collaborators (compared to 3,677 resources at the end of June 2019). These include 9 collaborators employed by entities outside the Group (Foundation and Pension Fund).

In terms of professional categories, the total workforce of 3,565 can be broken down as follows:

- 34 executives;

- 1,375 middle managers;

- 2,156 workers in other professional categories.

Workforce by contract category as at 30/06/2020

Covid-19 Emergency

The health emergency still in place and the related containment measures have led to a necessary different way of managing company personnel. The protection of the health of Employees, their families and Customers required the adoption of specific extraordinary measures.

The operating Personnel in the head offices were immediately placed in smart working, in accordance with the provisions laid down by the National Authority, and this made it possible to make more than 90% of the resources involved operational in full mobility mode (and consequently without the need for interruptions/shifts); the remaining part of the head office Personnel, whose work is substantially characterised by materiality and presence requirements, went to the usual operating office, but the Company ensured full compliance with the health and safety regulations in force from time to time.

In order to meet Customer requirements and thus ensure business continuity, specific hours were adopted for network Personnel, mainly characterised by uniformity throughout the Bank's premises and closing time (initially completely and then only to the public) on Tuesdays and Thursdays; the required interpersonal distancing in the Branches with a workforce of more than

EXECUTIVES1%

MIDDLE MANAGERS39%

PROFESSIONAL CATEGORIES

60%

DIRIGENTI

QUADRI DIRETTIVI

AREE PROFESSIONALI

EXECUTIVES

MIDDLE MANAGERS

PROFESSIONAL CATEGORIES

31

10 Resources was ensured through the shifting of operators with the simultaneous presence of no more than 50% of the workforce. At times of particular contagion upsurge (March-April), the branches operating in the provinces of Bergamo, Brescia, Piacenza and Rimini remained open only one day a week (Wednesday) in relation to the essential nature of banking services.

With the aim of minimising operational slowdowns resulting from the closing of network units, over 2,200 resources belonging to the network have been enabled to work in smart working.

The positive development of the health emergency allowed in Phase 2 the progressive relaxation of the measures initially adopted (with reopening from Monday to Friday, and gradual restoration of the physical presence of the entire network workforce, Customer access by appointment and in any case the one-to-one relation between bank operator and customer), always in line with the provisions adopted by national and local authorities.

Finally, with regard to training, since it was impossible to hold sessions in person, the training interventions, especially related to the maintenance of the qualifications required by the regulations in force and in the regulatory/commercial field but also extended to issues of behaviour, were provided remotely, in synchronous mode (webinar) or asynchronous mode (traditional distance training and video lectures) by splitting the commitments into appointments of shorter duration.

During the half year:

asynchronous training for 22,625 hours was carried out by 2,948 Resources; synchronous distance learning for a total of 14,350 hours took place via 115 webinars

and involved about 1,675 participants (since March); training in person (January and February) took place for a total duration of 5,170 hours,

relating to 25 editions of classroom courses and involving 540 participants.

32

INFORMATION ON THE MAIN STATEMENT OF FINANCIAL POSITION ITEMS AND ON CONSOLIDATED INCOME STATEMENT FIGURES

The first half of the year was characterised by the health emergency related to the spread of Covid-19 at international level, which caused strong economic, financial and social repercussions. The required containment measures implemented at national level during the months of the lockdown led to the closing of non-essential activities with very heavy impacts on the entire production system. These measures inevitably affected the Bank's activity, which immediately put in place initiatives aimed at ensuring business continuity by protecting Employees and Customers and implementing financial support measures for households and businesses in its territories. Despite the difficult external context that has arisen, Creval, one year after the launch of the Business Plan, has already achieved important strategic objectives in terms of reducing credit risks, rationalising the cost base and capital soundness. In terms of credit quality, the target for the sale of non-performing loans planned for 2020 was largely met, thanks to the sale since the beginning of the year of several portfolios with a total gross book value of over EUR 800 million. Thanks to these sales and the improvement in internal work-out activity, which led to a fall in the default rate from 2.1% to less than 1.4%, total gross non-performing loans fell by 46.3% year-on-year (-66.3% in the stock of bad loans), resulting in a fall in their incidence on total loans from 11.4% as at 30 June 2019 to 6.4%, while maintaining coverage in line with the main Italian banks. With regard to costs, the effectiveness and speed of the actions implemented in terms of cost containment and simplification of processes made it possible to achieve a significant reduction in operating costs (-10% y/y) ahead of the timing set out in the Plan, following, in particular, the rationalisation of 'other administrative expenses', which fell by 14% y/y. With regard to capitalisation, Creval now has a further strengthened level of solidity and is at the top of the Italian banking system. The CET1 ratio is equal to 16.7%, up by 270 b.p. from 14% on 30 June 2019 with a capital buffer above the minimum SREP of over 800 b.p. that allows to face the uncertainties related to the development of the economic situation. During this emergency phase, Creval did not fail to support households and businesses. In the second quarter of 2020, and in particular during the months of lockdown, commercial activities focused on implementing the liquidity measures provided at System level and the specific initiatives planned by the Bank for its customers, as evidenced by the increase in retail lending (+3.0% compared to the previous quarter and +3.6% year-on-year). The placement of personal loans also contributed to this growth (+36% compared to the previous quarter and +74% on an annual basis) thanks to the Bank's acceleration in consumer credit, also making available to customers the possibility of finalising this product online through remote document exchange.

*** The interim results are commented upon in summary format, drawn up on a consolidated basis, reclassified according to the presentation criteria considered most appropriate for presenting a fair view of the Group's operating performance. The aggregates and reclassifications regarding items of the financial statements as envisaged in Bank of Italy Circular no. 262/05 as amended are detailed in the Notes to the financial statements.

33

The reclassified consolidated statement of financial position is shown below. (in thousands of EUR)

ASSETS 30/06/2020 31/12/2019 Change

Cash and cash equivalents 158,666 190,434 -16.68%

Financial assets at fair value through profit or loss 184,749 195,113 -5.31%

Financial assets at fair value through other comprehensive income 956,314 971,765 -1.59%

Loans and receivables with banks 1,530,064 1,835,844 -16.66%

Loans and receivables with customers 19,594,042 19,523,742 0.36%

Equity investments 19,070 19,074 -0.02%

Property, equipment and investment property and intangible assets (1) 576,378 595,775 -3.26%

Non-current assets held for sale and disposal groups 91,011 93,196 -2.34%

Other assets (2) 924,577 915,057 1.04%

Total assets 24,034,871 24,340,000 -1.25%

(1) Includes items "90. Property, equipment and investment property" and "100. Intangible assets" (2) Includes items "110. Tax assets” and “130. Other assets" LIABILITIES AND EQUITY 30/06/2020 31/12/2019 Change

Due to banks 3,586,074 2,896,993 23.79%

Direct funding from customers (1) 17,740,105 18,968,871 -6.48%

Financial liabilities held for trading 79 26 n.s.

Hedging derivatives 163,097 153,051 6.56%

Liabilities included in disposal groups classified as held for sale - 3,581 n.s.

Other liabilities 642,243 438,267 46.54%

Provisions for specific purpose (2) 203,220 222,919 -8.84%

Equity attributable to non-controlling interests 22 23 -4.35%

Equity (3) 1,700,031 1,656,269 2.64%

Total liabilities and equity 24,034,871 24,340,000 -1.25%

(1) Includes items "10. Financial liabilities at amortised cost: b) due to customers; c) securities issued" (2) Includes items "60. Tax liabilities, “90. Post-employment benefits" and "100. Provisions for risks and charges" (3) Includes items "120. Valuation reserves”, “150. Reserves", "160. Share premium reserve", "170. Capital", "180. Treasury shares", and "200. Profit for the period".

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Loans and receivables with customers

Loans and receivables with customers, excluding loans represented by debt securities (EUR 5.0 billion), amounted to EUR 14.6 billion, in line with the figure for the same period last year (EUR 14.6 billion) and 31 December 2019 (EUR 14.5 billion). During the development of loans and receivables in the first half of this year, the Bank committed since the first days of the Covid-19 emergency to putting in place extraordinary initiatives in favour of its customers and to implementing the liquidity support measures made available at System level for households and businesses.

As part of loans and receivables with customers, the retail component (households and SMEs) amounted to EUR 6.2 billion, up by 3.6% year on year and of 3.0% compared to the previous quarter, supported also by loans disbursed on the territory against liquidity support measures made available by the Government for the Covid-19 emergency. Loans to corporate customers amounted to EUR 7.3 billion, down year-on-year by 5.2% mainly as a result of the strategy to reduce non-core exposures carried out in the second half of 2019 in line with the guidelines of the Plan. On a quarterly basis, the figure is slightly up by 0.8%.

If loans represented by debt instruments (mainly government bonds) are included in the aggregate, total net loans amounted to EUR 19.6 billion, down from EUR 19.8 billion in the same period last year and EUR 19.5 billion at the end of 2019.

(in thousands of EUR) 30/06/2020 31/12/2019 Change

Current accounts 1,679,047 1,914,996 -12.32%

Reverse repurchase agreements 415,457 103,225 302.48%

Mortgages 9,997,472 9,724,152 2.81%

Credit cards, personal loans and salary-backed loans 213,678 143,919 48.47%

Finance leases 270,096 289,745 -6.78%

Factoring 184,004 237,653 -22.57%

Other loans 1,292,935 1,339,017 -3.44%

Total net performing trade receivables 14,052,689 13,752,707 2.18%

Debt instruments 4,966,391 5,038,585 -1.43%

Total net performing loans and receivables 19,019,080 18,791,292 1.21%

Bad loans 110,360 143,992 -23.36%

Unlikely to pay 427,229 546,628 -21.84%

Past due non-performing loans 37,373 41,830 -10.66%

Total net non-performing loans and receivables 574,962 732,450 -21.50%

Total net loans and receivables 19,594,042 19,523,742 0.36%

With regard to credit quality, gross non-performing loans, net of loans reclassified as assets held for sale, amounted to EUR 1,038 million, down by 46.3% compared to the same period of last year (-24.2% compared to the figure at the end of March 2020), mainly due to the actions envisaged in the Plan that, on the one hand, made it possible to improve the work-out activity and, on the other, to carry out sales of non-performing loans for over EUR 800 million, since the beginning of the year, despite the difficult external economic context.

Net non-performing loans totalled EUR 575 million, down 27.6% compared to 30 June 2019 and 21.5% since the beginning of the year.

35

Non-performing loans as a percentage of total loans and receivables with customers excluding government bonds (EUR 4.0 billion), amounted to 6.4% on a gross basis and 3.7% on a net basis, down from 11.4% and 5.1%, respectively, as at 30 June 2019.

Net bad loans amounted to EUR 110 million, down by 32% compared to 30 June 2019 (EUR 161 million) mainly as a result of sales finalised in 2020; net unlikely to pay totalled EUR 427 million, down by 26% compared to 30 June 2019 (EUR 576 million); net past due non-performing loans totalled EUR 37 million, compared with EUR 56 million on 30 June 2019.

The coverage ratio of bad loans stood at 62.3% in line with the sector average, albeit it was affected by the mentioned sales of bad loans.

The coverage ratio of unlikely to pay was 39.2% and that of past due was 12.0%.

The coverage ratio of non-performing loans stood at 44.6%, slightly down compared to the figure of end of March 2020 (49.4%) following the sales made.

The coverage ratio of performing loans and receivables with customers (excluding government bonds) was 0.6%, in line with the figure as at 31 December 2019.


CREDIT QUALITY

30/06/2020 31/12/2019

Gross amount

Impairment

losses

Carrying amount

% coverage

Gross amount

Impairment losses

Carrying amount

% coverage

Non-performing loans

Bad loans 292,870 -182,510 110,360 62.3% 557,165 -413,173 143,992 74.2%

Unlikely to pay 702,992 -275,763 427,229 39.2% 930,651 -384,023 546,628 41.3%

Past due non-performing loans 42,451 -5,078 37,373 12.0% 46,839 -5,009 41,830 10.7%

Total non-performing loans 1,038,313 -463,351 574,962 44.6% 1,534,655 -802,205 732,450 52.3%

Performing loans excluding government bonds 15,065,933 -90,084 14,975,849 0.60% 14,833,449 -82,488 14,750,961 0.56%

The coverage ratio is calculated as the ratio between impairment losses and the gross amount Loans and receivables with customers classified under Non-current assets held for sale and disposal groups are not included

Funding from customers


Current accounts and sight deposits 13,418,678 13,329,069 0.67%

Repurchase agreements 742,946 1,292,846 -42.53%

Term deposits 2,026,849 2,474,079 -18.08%

Other 548,304 610,914 -10.25%

Due to customers 16,736,777 17,706,908 -5.48%

Securities issued 1,003,328 1,261,963 -20.49%

Total direct funding from customers 17,740,105 18,968,871 -6.48%

Direct funding stood at EUR 17.7 billion compared to EUR 19.2 billion in the same period last year and EUR 19.0 billion on 31 December 2019. Within the aggregate, funding from retail customers (households and SMEs) amounted to EUR 11.2 billion, up 6.3% year-on-year and 2.3% compared to the previous quarter. Funding from corporate customers amounted to EUR 4.5 billion, down compared to the figure for the same period last year (EUR 5.3 billion) and up by 4.2% compared to the figure at the end of March 2020 (EUR 4.3 billion). Institutional funding and bond issues amounted to EUR 2.0 billion, down compared to EUR 3.4 billion of 30 June 2019

36

and to EUR 3.2 billion in the previous quarter, as a result of a fall in repurchase agreements that amounted to EUR 742.9 million (-58.6% on a quarterly basis and -60.7% year on year). (in thousands of EUR) 30/06/2020 31/12/2019 Change

Asset management 999,158 1,079,177 -7.41%

Mutual funds 3,371,179 3,454,300 -2.41%

Insurance funds 3,123,908 3,032,077 3.03%

Total Managed funds 7,494,245 7,565,554 -0.94%

Assets under administration 2,595,106 2,800,439 -7.33%

Total indirect funding 10,089,351 10,365,993 -2.67%

Indirect funding amounted to EUR 10.1 billion, up by 5.2% compared to the end of March (EUR 10.3 billion as at 30 June 2019). Within the aggregate, asset management inflows amounted to EUR 7.5 billion, up 4.7% compared to the previous quarter, also thanks to the positive performance of the markets. In the year-on-year comparison, the aggregate increased by 2.4%. Assets under administration amounted to EUR 2.6 billion, up by 6.5% compared to the previous quarter (EUR 3.0 billion as at 30 June 2019).

Financial assets and liabilities at fair value

Financial assets represented by securities stood at EUR 6.1 billion, down 1.6% compared to 31 December 2019. In detail, EUR 5 billion are securities measured at amortised cost among loans and receivables with customers, EUR 1 billion are securities measured at fair value through other comprehensive income (FVTOCI) and EUR 0.2 billion are securities measured at fair value through profit or loss (FVTPL). Within the aggregate, government debt instruments amounted to EUR 4.7 billion (including EUR 4.25 billion of Italian securities), an increase of 3.9% compared to the figure as at 31 December 2019. The reserve for Italian Government bonds classified as FVTOCI (net of the tax effect) was positive by EUR 1.5 million, down compared to 31 December 2019 (EUR 2.1 million).


Financial assets and liabilities at fair value through profit or loss

Debt instruments 3,553 3,768 -5.71%

Equity instruments and OEIC units 181,168 191,281 -5.29%

Derivative financial instruments with positive fair value 28 64 -56.25%

Total assets 184,749 195,113 -5.31%

Derivative financial instruments with negative fair value -79 -26 203.85%

Total assets and liabilities 184,670 195,087 -5.34%

Financial assets at fair value through other comprehensive income

Debt instruments 896,334 911,186 -1.63%

Equity instruments 59,980 60,579 -0.99%

Total 956,314 971,765 -1.59%

Hedging derivatives -163,097 -153,051 6.56%

Financial assets and liabilities at fair value 977,887 1,013,801 -3.54%

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Equity investments

The equity investments held as at 30 June 2020, measured using the equity method, are recognised in the relevant item for a total amount of EUR 19 million.

The main equity investments are summarised below.

% equity investment

30/06/2020 31/12/2019

Carrying amount (in thousands of EUR)

Generalfinance S.p.A. 46.81% 18,213 17,957

Global Broker S.p.A. 30.00% 481 704

Other 376 413

Total 19,070 19,074

Property, equipment and investment property and intangible assets

Property, equipment and investment property amounted to EUR 557 million compared to EUR 576 million in December 2019. The details of owned property, equipment and investment property are as follows. (in thousands of EUR) 30/06/2020 31/12/2019 Change

Property and equipment used in the business

Land 43,787 43,335 1.04%

Buildings 185,133 193,655 -4.40%

Furniture 27,854 28,280 -1.51%

Electronic systems 5,896 3,717 58.62%

Other 2,741 2,876 -4.69%

Total property and equipment used in the business 265,411 271,863 -2.37%

Investment property

Land 15,385 16,026 -4.00%

Buildings 86,830 83,887 3.51%

Total investment property 102,215 99,913 2.30%

Inventories 49,450 48,387 2.20%

Overall total 417,076 420,163 -0.73%

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The details of the rights of use acquired through the lease to which IFRS 16 applies are set out below. (in thousands of EUR) 30/06/2020 31/12/2019 Change

Property and equipment used in the business

Buildings 124,654 129,905 4.04%

Electronic systems 7,717 8,866 -12.96%

Other 1,153 1,535 -24.89%

Total property and equipment used in the business 133,524 140,306 -4.83%

Investment property

Buildings 6,117 15,603 -60.80%

Total investment property 6,117 15,603 -60.80%

Overall total 139,641 155,909 -10.43%

Intangible assets, represented by Software, recorded in the financial statements as at 30 June 2020 amounted to EUR 19.7 million unchanged with respect to 31 December 2019.

Equity attributable to the owners of the parent The equity attributable to the owners of the parent as at 30 June 2020 amounted to EUR 1,700 million compared to EUR 1,656 million as at 31 December 2019.

The statement of reconciliation between the Parent's equity and profit (loss) for the period and the corresponding amounts resulting from the consolidated financial statements at the same date, is illustrated below.


30/06/2020 31/12/2019

Equity

of which: profit

(loss) for the period

Equity of which:

profit (loss) for the year

Balances as per parent financial statements 1,682,220 41,485 1,637,924 59,233

Investee results as per Separate financial statements:

- consolidated on a line-by-line basis (364) (364) (4,853) (4,853)

- equity accounted - - 2,179 2,179

Differences compared to carrying amounts for:

- companies consolidated on a line-by-line basis 15,400 - 20,084 -

- equity-accounted companies 2,327 - 1,538 -

Adjustment to dividends collected during the period:

- on retained earnings - (1,184) - (853)

Other consolidation adjustments:

- elimination of intra-group profit and loss 117 (138) 255 412

- other adjustments (867) (10) (858) 122

Balances as per Consolidated financial statements 1,700,031 40,987 1,656,269 56,240

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Own funds and capital ratios

Phased-in CET1 capital as at 30 June 2020 amounted to EUR 1,845 million against risk-weighted assets of EUR 8,829 million. Total own funds amounted to EUR 2,011 million.

The capital ratios applying the transitional regime show the following values:

- 20.9% for CET1 ratio;

- 20.9% for Tier 1 ratio;

- 22.8% for Total capital ratio.

The ratios are well above the minimum SREP requirements that Creval must meet on the basis of the final measure received from the Bank of Italy at the end of the supervisory review process for the year 2020. These requirements must be met as from the reporting of own funds on 31 March 2020 and are equal to:

- 8.55% for CET1 ratio;

- 10.05% for Tier 1 ratio;

- 12.05% for Total Capital ratio.

(in thousands of EUR) 30/06/2020 31/12/2019

Common Equity Tier 1 capital (CET1) 1,844,546 1,896,619

Tier 1 Capital 1,844,546 1,896,619

Total Own Funds 2,010,549 2,078,493

Credit risk and counterparty risk 619,213 666,361

Credit valuation adjustment risk 878 908

Settlement risks - -

Market risks 125 410

Operational risk 86,129 86,129

Other calculation elements - -

Total capital requirements 706,345 753,808

Risk-weighted assets 8,829,322 9,422,606




40

Income statement The reclassified consolidated income statement is shown below.


ITEMS 1st half of

2020 1st half of

2019 Change

Net interest income 161,512 178,573 -9.55%

Net fee and commission income 111,645 123,807 -9.82%

Dividends and similar income 759 924 -17.86%

Profit of equity-accounted investments (1) 1,203 817 47.25%

Net trading, hedging income (expense) and profit (loss) on sales/repurchases of assets at FVOCI (2) 1,139 3,378 -66.28%

Other operating net income (3) 8,590 4,326 98.57%

Operating income 284,848 311,825 -8.65%

Personnel expenses (124,328) (136,811) -9.12%

Other administrative expenses (4) (54,975) (64,083) -14.21%

Depreciations/amortisations and net impairment losses on property, equipment and investment property and intangible assets (5) (21,430) (21,855) -1.94%

Operating costs (200,733) (222,749) -9.88%

Net operating profit 84,115 89,076 -5.57%

Impairment or reversal of impairment and modification gains (losses) (6) (58,728) (101,862) -42.35%

Net profit on derecognition of assets at the amortised cost and net profits on other assets at fair value through profit or loss (7) (888) 25,689 n.s.

Net accruals to provisions for risks and charges (2,709) (10,551) -74.32%

Net gains on sales of investments and valuation differences on property and equipment at fair value (8) 33,357 5,211 n.s.

Banking system charges (13,355) (11,263) 18.57%

Pre-tax profit (loss) from continuing operations 41,792 (3,700) n.s.

Income taxes (806) 27,246 n.s.

Post-tax profit from continuing operations 40,986 23,546 74.07%

Loss for the period attributable to non-controlling interests 1 - -

Profit for the period 40,987 23,546 74.07%

(1) Profit of equity-accounted investments include profits (losses) of equity-accounted investments included in item "250. “Net gains (losses) on equity investments”; the residual amount of that item is included in gains on sales of investments (2) Includes item “80. Profits (Losses) on trading”, “90. Net hedging income (expense)”, “100. Profits (losses) on derecognition of: b) financial assets measured at fair value through other comprehensive income" (3) Other income and costs correspond to item “230. Other operating net income” net of the following reclassifications (4) Other administrative expenses, net of banking system expenses, include recoveries of taxes and other recoveries recognised in item "230. Other operating net income" (EUR 19,570 thousand in the first half of 2020 and EUR 18,782 thousand in the first half of 2019) (5) Depreciation/amortisation and net impairment losses on property, equipment and investment property and intangible assets include items "210. Depreciation and net impairment losses on property, equipment and investment property", "220. Amortisation and net impairment losses on intangible assets" and the accumulated depreciation of costs incurred for leasehold improvements included in item "230. Other operating net income" (EUR 320 thousand in the first half of 2020 and EUR 441 thousand in the first half of 2019) (6) Include items “130. Net impairment losses for credit risk relating to: a) financial assets at amortised cost; b) financial assets at fair value through other comprehensive income” and “140. Modification gains (losses) without derecognition” (7) Includes item “100. Profit (Loss) on derecognition of: a) financial assets at amortised cost" and “110. Profits (Losses) on other assets and liabilities at fair value through profit or loss: b) other financial assets mandatorily measured at fair value” (8) Include the residual amount of item "250. Net gains (losses) on sales of investments" not included among profits (losses) of equity-accounted investments together with item "260. Net result of property, equipment and investment property and intangible assets at fair value" and item "280. Net gains (losses) on sales of investments"

The consolidated results as at 30 June 2020 show a net profit of EUR 41 million, up 74% compared with a profit of EUR 23.5 million in the first half of 2019. The comments on the key income statement items are provided below. Net interest income totalled EUR 161.5 million, compared to EUR 178.6 million of the same period last year. The performance in the first half of the year was affected by the sale of non-performing loans in the first quarter of this year and the absence of the contribution of the loans

41

against pledges sold last January. In the second quarter of 2020, the figure stood at EUR 80.8 million, up slightly compared to the previous quarter (EUR 80.7 million), albeit it was affected by these sales and benefiting in part from the contribution from the TLTRO-III funds.

Net fee and commission income amounted to EUR 111.6 million, down from EUR 123.8 million last year due to the health emergency related to the Covid-19 that had an impact on Customers' operations. In the second quarter of 2020, the figure was EUR 53.3 million compared with EUR 58.3 million in the previous quarter. Within the aggregate, fee and commission income relating to traditional banking activities amounted to EUR 38.3 million, a decrease compared to the first quarter of 2020 (EUR 42.3 million) due to the lower contribution from fee and commission income related to decreased transactions with customers in the months of the lockdown. Fee and commission income from the asset management segment amounted to EUR 15.1 million, down slightly from EUR 15.9 million in the previous quarter.

Net trading and hedging income and profit on derecognition of assets at FVOCI stood at EUR 1.1 million, compared to EUR 3.4 million of the first half of 2019.

Operating income amounted to EUR 284.8 million, compared to EUR 311.8 million in the first half of 2019.

Personnel expenses amounted to EUR 124.3 million, down 9.1% compared to the figure of the first half of 2019 (EUR 136.8 million), while including costs related to the renewal of the national labour contract. The decrease is mainly due to the reduction in the workforce, also following the sale of the credit business of the loans against pledges in the first quarter of the year. In the second quarter of 2020, the figure stood at EUR 60.8 million, down 4.3% on the previous quarter (EUR 63.5 million).

Other administrative expenses amounted to EUR 55.0 million, down 14.2% compared with the same period of last year (EUR 64.1 million) despite the costs due to the Covid-19 emergency, benefiting from the continuous optimisation of the cost base. In the second quarter of 2020, the figure stood at EUR 27.4 million, slightly down (-0.5%) on the previous quarter (EUR 27.6 million).

Depreciation/amortisation and net impairment losses on property, equipment and investment property and intangible assets amounted to EUR 21.4 million compared to EUR 21.9 million in the first half of 2019.

Total operating costs stood at EUR 200.7 million down 10% year on year.

The operating profit reached EUR 84.1 million, compared to EUR 89.1 million in the same period of last year.

System charges amounted to EUR 13.4 million (EUR 11.3 million in the first half of 2019) and are represented by contributions to the Resolution Fund.

Impairment or reversal of impairment amounted to EUR 58.7 million compared to EUR 101.9 million of the first half of 2019, and include an update of the macroeconomic assumptions related to the calculation of adjustments to loans in accordance with IFRS9. In the second quarter, the figure stood at EUR 29.2 million, in line with the previous quarter (EUR 29.6 million).

Accruals to provisions for risks and charges totalled EUR 2.7 million, down from EUR 10.6 million in the same period last year.

Net gains on sales of investments amounted to EUR 33.4 million compared with a figure of EUR 5.2 million recorded in the first half of 2019. The increase is due to the capital gain from the sale of the line of business of the loan against pledge, amounting to approximately gross EUR 33 million, finalised last January.

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Pre-tax profit from continuing operations amounted to EUR 41.8 million, compared to a negative result of EUR 3.7 million in the same period of last year.

Income taxes totalled EUR 806 thousand, benefiting from the conversion of DTAs from tax losses into tax credits envisaged by the "Cura Italia" Decree in relation to the sale of non-performing loans carried out at the end of the first quarter of 2020, which enabled further DTAs of the same amount and of the same nature to be recorded in the financial statements.

The net profit for the year reached EUR 41.0 million, up from EUR 23.5 million in the first half of 2019.

ROA stood at 0.34%.

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RELATED PARTY AND INTRA-GROUP TRANSACTIONS

The matter is mainly regulated:

- by Article 2391-bis of the Italian Civil Code, whereby the governing bodies of companies resorting to the equity market adopt, according to general principles indicated by Consob, rules that assure “the transparency and substantial and procedural correctness of related party transactions” carried out directly or through subsidiaries;

- by the “Related Party Transaction Regulation” issued by Consob with resolution no. 17221 of 12 March 2010, as amended, (hereinafter also the “Consob Regulation”), implementing the delegation contained in Article 2391-bis of the Italian Civil Code, as well as, in relation to the specific business;

- by the provisions of Article 136 of the Consolidated Banking Act - as amended by Italian Legislative Decree no. 72 of 12 May 2015 - on obligations of banking representatives;

- by the supervisory provisions issued by the Bank of Italy (Circular 285/13) on risk assets and conflicts of interest with respect to “Associated Parties”, provisions that complement what is provided by the Consob regulation.

In compliance with the combined provision of the above-mentioned regulations, the Board of Directors approved the “Procedures concerning Related Party Transactions and Associated parties of Creval S.p.A.” (hereinafter also the “RPT Creval Procedures”), in the updated version, effective as from 4 December 2018. The RPT Creval Procedures establish the procedures and rules for ensuring transparency and substantive and procedural correctness in transactions with Associated Parties and "Other Members of the Single Perimeter" that together make up the Single Perimeter of the Credito Valtellinese Group, directly or by means of its subsidiaries and also define the cases, methods, conditions and circumstances in which, without prejudice to the obligations required, the partial or full exclusion of the application of the RPT Creval Procedures is allowed. They also comply with the applicable regulations of the Bank of Italy on risk assets and conflicts of interest towards associated parties.

In accordance with current regulations, the document is published on the Website, www.gruppocreval.com – Corporate Governance section – Corporate documents.

Furthermore, based on the aforementioned Supervisory Provisions, the Parent Creval approved the "Internal Policies regarding controls on risk assets and on conflicts of interest in relation to Associated Parties of the Credito Valtellinese Banking Group" (hereinafter also referred to as the "Policy”). This Policy, which was communicated to the shareholders' meeting of 27 April 2013 in compliance with the aforementioned regulations, was subsequently revised in December 2015 and March 2019.

In compliance with the aforementioned regulations, the document “Internal policies regarding controls on risk assets and conflicts of interest in relation to Associated Parties of the Credito Valtellinese Banking Group”, in its updated version, was made available to Shareholders prior to the Shareholders' Meeting held on April 2019, within the time required by current regulations.

The Policy identifies, in relation to the operational features and the strategies of the Bank and of the Group, the business segments and the types of business relations, also other than those implying the assumption of risk assets, in relation to which conflicts of interest may arise, as well as the safeguards inserted in the organisational structures and in the internal control system to ensure constant compliance with prudential limits and the above decision-making procedures. The document also summarises the principles and rules applicable to transactions with associated parties that were used for the preparation of the relevant Procedures.

44

With reference to intra-group transactions, relations with companies in the Credito Valtellinese Banking Group were established within an organisational model - as widely illustrated in this report – based on which each legal entity focuses only on its own core business, in an industrial framework that offers effective and efficient management of overall Group resources.

This approach aims to achieve any form of synergy among the companies of the Group, assures to all members the access to specialised high-quality services and makes it possible to achieve significant economies of scale to reduce operating costs relating to activities and common services.

The common focus of activities and specialist services is regulated on the basis of appropriate intra-group contractual agreements, which concern in particular the provision of services by the parent to the subsidiary companies in the sector of finance, insurance, legal and corporate affairs, administrative, accounting and management, internal auditing, risk management, compliance and management and administration of the Personnel.

The financial effects are regulated on the basis of specific contractual agreements that, with the main objective of optimising synergies and economies of scale and purpose at the Group level, refer to long-term objective and constant parameters, distinguished by material transparency and fairness. The quantification of the expected fees for services was defined and formalised according to tested parameters that take into account actual utilisation by each user company.

The Board of Directors is exclusively responsible for the definition of intra-group contractual agreements and approval and possible amendment of the related economic conditions.

No atypical or unusual transactions with Group companies or related parties that impacted significantly on the financial position or results of operations of the company have taken place during the first half of 2020.

Detailed information on intragroup and related party transactions, including information on the effects of transactions or existing positions with such counterparties on the statement of financial position and on the income statement, accompanied by summary tables of such effects, are contained in the chapter Information on related party transactions contained in the Notes to the condensed interim consolidated financial statements.

45

RISK MANAGEMENT AND INFORMATION ON MAIN RISKS AND UNCERTAINTIES TO WHICH THE GROUP IS EXPOSED

In accordance with the Supervisory provisions, the Credito Valtellinese Group adopted a detailed and strong internal control system (consisting of rules, functions, structures, resources, processes and procedures) the aims of which are reducing the risk within the limits indicated in the framework of reference for determining the risk appetite of the bank (Risk Appetite Framework, RAF), prevention of the risk that the bank is involved, even unintentionally, in illegal activities (such as money laundering, usury and terrorist financing) and compliance of the transactions with the law and supervisory regulations, as well as with policies, regulations and internal procedures. The internal control system is a fundamental element of the overall governance system of the Credito Valtellinese Group and ensures that operations comply with company strategies and policies. It takes on a substantial role in the prevention, identification, management and minimisation of risks, also contributing to the effective oversight of company risks, protection from losses and the safeguarding of asset value. As part of the internal control system, the Group developed and standardised specific controls, including in particular: - the RAF, which establishes the level of risk that the Group is willing to take in pursuing its

strategic objectives and business plan, taking account of the interests of its stakeholders (e.g. customers, regulatory and supervisory authorities, shareholders) as well as capital requirements and other regulatory and legal requirements;

- the risk management process, defined in compliance with RAF and intended as “all the rules, procedures, resources (human, technological and organisational) and control activities for identifying, measuring or assessing, monitoring, preventing or mitigating as well as notifying the suitable superiors of all risks assumed or which may be assumed in the various segments, at company and group portfolio level, applying integrated logic, also mutual inter-relations and the development of the external scenario”. The operational limits to the assumption of various types of risk and the related reporting processes are consistent with the risk appetite defined within the Risk Appetite Statement and with the development of the economic scenario;

- the Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP), the results of which are summarised in the ICAAP-ILAAP Report;

- the process of defining the Recovery Plan according to the indications of the supervisory bodies (Bank Recovery and Resolution Directive - BRRD, transposed into Italian Law by Italian Legislative Decree no. 180 of 16 November 2015), which establishes the methods and measures with which to intervene to restore the long-term economic sustainability of an institution in the event of a serious deterioration in its financial situation;

- the Contingency Funding and Recovery Plan (CFRP), which describes the procedures to be followed and the actions to be taken in the event of situations of severe stress or significant deterioration of the liquidity profile, or the possibility of such situations occurring.

In line with its focus on Retail banking, the Group is mainly exposed to credit risk. In terms of capital requirements, the exposure to operational risks is also significant: these risks are assumed in that they serve as a means for carrying out the banking business. The exposure to financial and market risks is limited. The risks related to the outsourcing of corporate functions, systems, processes or activities are not dealt with as a separate case but refer to the different types of risks identified. The risk profile at the end of the reporting period is consistent with the risk appetite defined by the Board of Directors.

For detailed information on the exposure of the Group to the risks, please refer to the section "Information on risks and related hedging policies" of this Report. The impacts on the Group's

46

risk profile resulting from the spread of the Covid-19 pandemic are illustrated in the dedicated chapter called "Impacts of the Covid-19 Epidemic" included in the Notes to the condensed interim consolidated financial statements.

Detailed information on the general characteristics of the control systems, the risk management, measurement and control policies are contained in PART E - Information on risks and related hedging policies of the Notes to the 2019 condensed interim consolidated financial statements and in the public disclosure on the Third Pillar as at 31 December 2019 made available on the website at www.gruppocreval.com.

GDPR

During the first half of 2020, Creval continued to carry out activities aimed at consolidating the components of the Group's Model for the Protection of Personal Data (hereinafter also referred to as the "Model for the Protection of Personal Data" or the "Model"), in compliance with the regulatory requirements of European Regulation 2016/679 (GDPR), in force since 25 May 2018 and relating to the protection of individuals with regard to the processing and free movement of personal data, by involving different company functions by area of competence, which led to the preparation of ad hoc methodological documentation to support the management system for the protection of personal data. Execution activities were carried out in relation to the management of obligations related to the application of and compliance with the provisions of the law. The specific initiatives launched in the second half of 2019 by the Data Protection Service in relation to the GDPR Action Plan IT project continued, the aim of which is to define and implement technical and organisational measures to meet the requirements of the General Data Protection Regulation (GDPR): - rules and operational criteria for the deletion of data at the end of the retention period; - deletion processes on the main areas of application; - completion of the personal data dictionary with references on all databases; - census of personal data protection measures and planning of any new requirements; - implementation of workflows related to operating processes. The GRC360 Tool, which represents an applicative solution for the management of the register of processing operations, the rights of data subjects and personal data breaches, is currently being released. The implementation of the processes and technical, organisational and architectural measures contained in the Model also continued. The first half of 2020 was marked by the Covid-19 emergency, for which the Data Protection Service was called upon to support the Crisis Unit in cases where this was required, mainly with regard to issues relating to access by colleagues to the bank's offices and the measurement of body temperature. These activities involved the drafting of specific company regulations and specific contracts with the external suppliers concerned. Another issue in which the Service was involved concerns initiatives in support of Creval Customers (contractual and consulting support activities). Further support activities were given to Creval employees with regard to the use of smart working and the related personal data protection profiles.

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Information on disputes

For detailed information on disputes, tax or otherwise, and on the main pending legal actions, please refer to the Notes to the financial statements.

Information on business outlook, with a special reference to going concern assumptions

With regard to the going concern assumption, the Board of Directors, in the light of the main economic and financial indicators and business outlook, believes it has a reasonable certainty that the Bank and the Group will remain a going concern in the foreseeable future while taking into account the changed macroeconomic scenario impacted by the Covid-19 emergency. Therefore, the condensed interim consolidated financial statements were prepared with a view to the company as a going concern. The assessment takes into account the Bank's high capital position, which shows a significant capital buffer with respect to the SREP minimum requirements, and the strong liquidity position with regulatory ratios well above the envisaged regulatory thresholds, as well as the significant improvement in the Bank's risk profile achieved through the implementation of the actions of the 2019-2023 Plan.

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EVENTS AFTER THE CLOSE OF THE HALF-YEAR

The significant events that occurred after the close of the first half of 2020 are described below.

Sale of non-performing loans

On 5 August 2020, agreements were signed with MBCredit Solutions S.p.A. (Mediobanca Group), AMCO - Asset Management Company S.p.A. and Italian NPL Opportunities Fund II, (whose advisor is Eidos Partners) for the sale without recourse of 3 portfolios of non-performing loans (the Transaction) for a nominal value of approximately EUR 400 million. The Transaction, with a gross book value of approximately EUR 300 million, will increase the NPE ratio to 6.4% with a reduction of 200 b.p. compared to 31 March 2020.

The portfolios are composed of both secured and unsecured bad loan positions with a gross book value of approximately EUR 160 million and UTP positions with a gross book value of approximately EUR 140 million. Overall, about 7,000 positions were sold, represented by loans and receivables mainly with corporate customers.

The Transaction follows on from those carried out in the first part of the 2020 financial year and makes it possible to achieve in advance the objectives of selling NPEs set out in the Business Plan.

CURRENT-YEAR OUTLOOK

The Covid-19 pandemic has had serious repercussions on the economies of all major Countries, causing a drastic worsening of world growth prospects. The containment measures put in place have had a significant impact on production activities and on most economic sectors. GDP in the Eurozone fell by 3.8% in the first quarter of this year, with significant repercussions on the labour market and consumer and investment spending. Against this unprecedented crisis, the various Governments adopted measures to limit its impact on the economic and social fabric, including the issue of public guarantees on loans to businesses, the disbursement of loans and tax and credit moratoria. On the monetary front, central banks have also taken action to contain the recessionary effects of the epidemic on national economies. In particular, the ECB intervened with measures to support the liquidity position of the Eurozone banking system, including the improvement of the conditions of the TLTRO-III transactions, the launch of a new set of long-term refinancing operations (PELTRO) and the increase in the amount and time horizon of the Pandemic Emergency Purchase Programme (PEPP). These measures are also complemented by the easing of prudential rules by the SSM (the European Banking Supervisory Authority).

In Italy, the constraints imposed on the movement of people and the strong restrictions on services and production aimed at curbing the spread of the epidemic at national level had a significant impact on the economy, resulting in a drop in GDP of 5.4% in the first quarter of the year and, based on preliminary estimates by ISTAT, of 12.4% in the second quarter. The most recent projections for the year 2020 published by the Bank of Italy indicate a GDP decrease of 9.5% in the baseline scenario (-13.5% in the adverse scenario) assuming that the spread of the pandemic remains under control at the global level and in Italy and that the gradual removal of the contagion containment measures and the mitigation of their economic impact continue. Moreover, the measures to support the production system and household income included in the "Cura Italia" and "Rilancio" law decrees should contribute to mitigate the negative impacts on the national economy.

In this context, the Bank continued successfully to implement the key actions of the Plan, achieving important objectives both in terms of improving the risk profile and the efficiency of

49

its operations. At the same time, it significantly strengthened its financial statement structure in terms of both capital and liquidity, creating the conditions to meet the challenges of a well-prepared and very solid economic environment.

The difficulties that have already impacted revenue generation in the second quarter of the year will continue to persist and we hope that they will decrease in subsequent quarters. We refer in particular to fees and commissions related to transactional operations with customers as well as those related to consulting activities, both of which were impacted by the lockdown. At the same time, revenue support will come from the interventions implemented by the ECB through the new TLTRO-III refinancing operations. This programme is of particular importance for the Bank, which until now has not benefited from the premium combined with the achievement of the benchmark on loans to companies and which it believes it can benefit from under the new rules.

The new operational reality introduced following the Covid-19 emergency and the acceleration of online operations offer opportunities for further improvement in business efficiency, simplification of processes and centralisation with positive repercussions on costs.

With regard to commercial activities, during the second half of the year Creval will continue its action aimed, on the one hand, at favouring credit to households and SMEs, also through the support measures made available at System level and, on the other hand, at becoming the bank of reference for the management of household savings.

Credit quality will continue to receive special attention, also taking into account the expected development of the macroeconomic scenario. The significant reduction in the NPE portfolio - almost halved in the last 12 months - puts the Bank in a position to face the coming months from a further strengthened position. The cost of credit, while affected by the continuation of the current emergency phase, continues to remain under control and at present shows no signs of impairment for the future. Obviously, its development will depend on whether the pandemic remains under control in Italy and globally and whether economic support measures are effective.

The Bank's equity position is expected to remain at high levels with one of the largest capital buffers among the main Italian banks able to cope with the possible further worsening of the macroeconomic scenario.

As part of these considerations, the strategic guidelines and actions set out in the 2019-2023 Plan are relevant. On the other hand, the picture of uncertainty makes it difficult to envisage the quantification of the impact of the Covid-19 emergency on the economy and the banking system in the medium to long term. The Bank will therefore continue to closely monitor developments in the situation and, once it has established a more precise picture of its possible development, will assess the relevance of the economic and financial objectives formulated in the Plan and will endeavour to take the necessary action.

Sondrio, 5 August 2020

The Board of Directors

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CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

51

Condensed interim consolidated financial statements

Consolidated statement of financial position


ASSETS 30/06/2020 31/12/2019

10. Cash and cash equivalents 158,666 190,434

20. Financial assets at fair value through profit or loss

184,749

195,113

a) financial assets held for trading 750 2,221

c) other financial assets mandatorily measured at fair value 183,999 192,892

30. Financial assets at fair value through other comprehensive income

956,314

971,765

40. Financial assets at amortised cost 21,124,106 21,359,586

a) loans and receivables with banks 1,530,064 1,835,844

b) loans and receivables with customers 19,594,042 19,523,742

70. Equity investments 19,070 19,074

90. Property, equipment and investment property 556,717 576,072

100. Intangible assets 19,661 19,703

110. Tax assets 758,356 764,493

a) current 75,941 67,993

b) deferred 682,415 696,500

120. Non-current assets held for sale and disposal groups 91,011 93,196

130. Other assets 166,221 150,564

Total assets 24,034,871 24,340,000

LIABILITIES AND EQUITY 30/06/2020 31/12/2019

10. Financial liabilities at amortised cost 21,326,179 21,865,864

a) due to banks 3,586,074 2,896,993

b) due to customers 16,736,777 17,706,908

c) securities issued 1,003,328 1,261,963

20. Financial liabilities held for trading 79 26

40. Hedging derivatives 163,097 153,051

60. Tax liabilities 4,614 9,920

a) current 1,736 6,773

b) deferred 2,878 3,147

70. Liabilities included in disposal groups classified as held for sale - 3,581

80. Other liabilities 642,243 438,267

90. Post-employment benefits 37,651 36,836

100. Provisions for risks and charges: 160,955 176,163

a) commitments and guarantees given 13,668 14,101

b) pension and similar obligations 27,623 36,064

c) other provisions for risks and charges 119,664 125,998

120. Valuation reserves -2,812 -5,621

150. Reserves 18,448 -949,700

160. Share premium reserve - 638,667

170. Share capital 1,643,508 1,916,783

180. Treasury shares (-) -100 -100

190. Equity attributable to non-controlling interests (+/-) 22 23

200. Profit for the period 40,987 56,240

Total liabilities and equity 24,034,871 24,340,000

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Consolidated Income Statement


ITEMS 1st half of 2020 1st half of 2019

10. Interest and similar income 206,168 224,202

of which: interest income calculated with the effective interest method 201,496 217,900

20. Interest and similar expense (44,656) (45,629)

30. Net interest income 161,512 178,573

40. Fee and commission income 123,790 139,333

50. Fee and commission expense (12,145) (15,526)

60. Net fee and commission income 111,645 123,807

70. Dividends and similar income 759 924

80. Profits (Losses) on trading 990 2,871

90. Net hedging income 93 16

100. Profit (loss) on derecognition of: 6,815 6,783

a) financial assets at amortised cost 6,759 6,292

b) financial assets at fair value through other comprehensive income

56 491

110. Profits (losses) on other assets and liabilities at fair value through profit or loss

(7,647) 19,397

b) other financial assets mandatorily measured at fair value (7,647) 19,397

120. Total income 274,167 332,371

130. Net impairment losses for credit risk on: (58,363) (101,213)

a) financial assets at amortised cost (58,608) (101,753)

b) financial assets at fair value through other comprehensive income

245 540

140. Modification gains (losses) without derecognition (365) (649)

150. Net financial income 215,439 230,509

190. Administrative expenses: (212,228) (230,939)

a) personnel expenses (124,328) (136,811)

b) other administrative expenses (87,900) (94,128)

200. Net accruals to provisions for risks and charges (2,709) (10,551)

a) commitments and guarantees given 433 (713)

b) other net accruals (3,142) (9,838)

210. Depreciation and net impairment losses on property, equipment and investment property (17,157) (18,029)

220. Amortisation and net impairment losses on intangible assets (3,953) (3,385)

230. Other operating net income 27,840 22,731

240. Operating costs (208,207) (240,173)

250. Net gains on equity investments 1,175 817

260. Net result of property, equipment and investment property and intangible assets at fair value

-

(137)

280. Net gains on sales of investments 33,385 5,284

290. Pre-tax profit (loss) from continuing operations 41,792 (3,700)

300. Income taxes (806) 27,246


340. Loss for the period attributable to non-controlling interests 1 -

350. Profit for the period attributable to the owners of the parent 40,987 23,546

Basic earnings per share - in EUR 0.584 0.336

Diluted earnings per share - in EUR 0.584 0.336

53

Consolidated statement of comprehensive income


Items 1st half of 2020 1st half of 2019


Other comprehensive income net of income taxes without reclassification to profit or loss

5,231 (2,630)

20. Equity instruments at fair value through other comprehensive income (930) 199

70. Defined-benefit plans 6,183 (2,834)

90. Portion of valuation reserves of equity-accounted investments

(22) 5

Other comprehensive income net of income taxes with reclassification to profit or loss

(2,422) 21,145

140. Financial assets (other than equity instruments) at fair value through other comprehensive income

(2,422) 21,243

160. Portion of valuation reserves of equity-accounted investments

- (98)

170. Total other comprehensive income net of income taxes 2,809 18,515

180. Comprehensive income (Item 10+170) 43,795 42,061

190. Consolidated comprehensive income attributable to non-controlling interests 1 -

200. Consolidated comprehensive income attributable to owners of the parent 43,796 42,061

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Statement of changes in consolidated equity (in thousands of EUR)

Equity Balance as at 31/12/2019

Change in opening balances

Balance at 01/01/2020

Allocation of prior year profit

Changes during the year

Equity attributable to owners of the parent as at 30/06/2020

Equity attributable to non-controlling interests as at 30/06/2020

Changes in reserves

Equity transactions

Comprehensive income 30/06/2020

Reserves

Dividends and other allocations

Issue of new shares

Purchase of treasury shares

Extraordinary dividend distribution

Change in equity instruments

Derivatives on treasury shares

Stock options

Changes in equity investments

Share capital:

a) ordinary shares 1,916,807 1,916,807 -273,275 1,643,508 24 b) other shares

Share premium reserve 638,667 638,667 -638,667 Reserves: a) income related 16,295 16,295 1,209 943 18,448 -1 b) other -965,994 -965,994 55,029 910,965

Valuation reserves -5,621 -5,621 2,809 -2,812

Equity instruments Treasury shares -100 -100 -100

Profit for the period 56,238 56,238 -56,238 40,986 40,987 -1

Equity attributable to owners of the parent 1,656,269 1,656,269 -34 43,796 1,700,031 Equity attributable to non-controlling interests 23 23 -1 22

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Equity Balance as at 31/12/2018

Change in opening balances

Balance at 01/01/2019

Allocation of prior year profit

Changes during the year

Equity attributable to owners of the parent as at 30/06/2019

Equity attributable to non-controlling interests as at 30/06/2019

Changes in reserves

Equity transactions

Comprehensive income 30/06/2019

Reserves

Dividends and other allocations

Issue of new shares

Purchase of treasury shares

Extraordinary dividend distribution

Change in equity instruments

Derivatives on treasury shares

Stock options

Changes in equity investments

Share capital:

a) ordinary shares 1,916,803 1,916,803 1,916,783 20 b) other shares

Share premium reserve 638,667 638,667 638,667

Reserves: a) income related -2,192 -2,192 17,987 502 16,297

b) other -988,303 -988,303 16,960 4,864 -966,479

Valuation reserves -33,560 -33,560 18,515 -15,045

Equity instruments Treasury shares -100 -100 -100

Profit for the period 34,947 34,947 -34,947 23,546 23,546

Equity attributable to owners of the parent 1,566,242 1,566,242 5,366 42,061 1,613,669 Equity attributable to non-controlling interests 20 20 20

The item "Reserves b) other" conventionally shows the value of the losses carried forward and the negative reserves deriving from the first application of IFRS 9.

56

Consolidated Statement of cash flows – Direct method (in thousands of EUR)

1st half of 2020 1st half of 2019

A. OPERATING ACTIVITIES

1. Cash flow from operating activities 121,590 160,334

- interest income received (+) 228,439 265,212

- interest expense paid (-) -53,253 -50,853

- dividends and similar income (+) 759 924

- net fee and commission income (+/-) 119,112 129,989

- personnel expenses (-) -132,764 -139,173

- other costs (-) -70,551 -81,540

- other revenue (+) 45,319 50,921

- taxes (-) -15,471 -15,146

2. Cash flow generated/used by financial assets 104,191 1,472,606

- financial assets held for trading 1,382 25,751

- financial assets mandatorily measured at fair value 1,184 12,073

- financial assets at fair value through other comprehensive income 10,354 91,658

- financial assets at amortised cost 111,169 1,445,496

- other assets -19,898 -102,372

3. Cash flow generated/used by financial liabilities -290,149 -1,659,335

- financial liabilities at amortised cost -463,323 -1,699,948

- financial liabilities held for trading 53 -1

- other liabilities 173,121 40,614

Cash flow generated/used by operating activities -64,368 -26,395

B. INVESTING ACTIVITIES

1. Cash flow generated by 43,715 11,837

- sales of equity investments 2,015 -

- dividends from equity investments 1,184 853

- sales of property, equipment and investment property 2,516 2,753

- sale of subsidiaries and business units 38,000 8,231

2. Cash flow used for -11,115 -17,392

- purchases of property, equipment and investment property -7,202 -10,686

- purchases of intangible assets -3,913 -6,706

Cash flow generated/used by investing activities 32,600 -5,555

C. FINANCING ACTIVITIES -

- issue/repurchase of treasury shares - -

- dividend distribution and other - -

Cash flow generated/used by financing activities - -

NET CASH FLOW GENERATED/USED DURING THE PERIOD -31,768 -31,950

Reconciliation

Financial statement items 1st half of 2020 1st half of

2019

Cash and cash equivalents at the beginning of the period 190,434 200,153

Net liquidity generated/used during the period -31,768 -31,950

Cash and cash equivalents at the end of the period 158,666 168,203

Key: (+) generated (-) used

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Notes to the condensed interim consolidated financial statements

Accounting Policies Basis of preparation

The condensed interim consolidated report of the Credito Valtellinese Group is prepared in consolidated format as prescribed by Article 154-ter, Italian Legislative Decree no. 58 of 24 February 1998 (the Consolidated Finance Act) and in compliance with IFRS issued by IASB (the International Accounting Standards Board) endorsed by the European Union, whose application was compulsory at the date of preparation of the condensed interim consolidated report according to IAS 34 – Interim Financial Reporting in condensed form.

The Group accounting policies used for preparing the condensed interim consolidated report, with reference to classification, recognition, measurement and derecognition criteria for each asset and liability item, as with the recognition methods for revenue and costs, have not changed with respect to those used for the Consolidated Financial Statements as at 31 December 2019, to which reference is made for a full description.

The condensed interim consolidated financial statements comprise the Statement of financial position, Income Statement, Statement of Comprehensive Income, Statement of changes in equity, Statement of cash flows (Financial Statements) and Notes to the condensed interim consolidated financial statements.

The financial statements were prepared in compliance with the “Instructions for the preparation of the separate financial statements and of the consolidated financial statements of banks and financial companies that are parents of banking groups” contained in Circular no. 262/2005 of Bank of Italy and following updates.

The amounts reported in the Financial Statements and in the Notes to the condensed interim consolidated financial statements are in thousands of EUR, unless indicated otherwise.

In the Statement of financial position, Income Statement and Statement of Comprehensive Income, any item equal to zero in the reporting period of reference or in the previous period is not shown. In the Income Statement and Statement of Comprehensive Income, negative amounts are shown in brackets.

The condensed interim consolidated financial statements as at 30 June 2020 are accompanied by the certification of the Managing Director and of the Manager in charge of financial reporting envisaged by Article 154-bis of the Consolidated Finance Act and is subject to a limited audit by KPMG S.p.A.

Amendments to international accounting standards

The following amendments to the international accounting standards were introduced effective as from 1 January 2020:

- Commission Regulation (EU) no. 2019/2075 of 29 November 2019 implementing certain amendments to the IFRS relating to references to the Conceptual Framework;

- Commission Regulation (EU) no. 2019/2104 of 29 November 2019 adopting certain amendments to IAS 1 - “Presentation of Financial Statements” and IAS 8 - “Accounting Policies, Changes in Accounting Estimates and Errors”;

58

- Commission Regulation (EU) no. 2020/34 of 15 January 2020 adopting the document issued by the IASB on "Reform of benchmark indexes for determining interest rates (amendments to IFRS 9 - Financial Instruments, IAS 39 - Financial Instruments: Recognition and Measurement and IFRS 7 - Financial Instruments: Disclosures)" and introducing some amendments on hedge accounting in order to avoid that uncertainties about the amount and timing of cash flows arising from the interest rate reform could lead to the discontinuation of existing hedges and difficulties in designating new hedging relationships;

- Commission Regulation (EU) no. 2020/551 of 21 April 2020 amending (EC) Regulation no. 1126/2008 that adopts some international financial reporting standards in compliance with (EC) Regulation no. 1606/2002 of the European Parliament and Council with respect to IFRS 3 – Business Combinations, which introduces amendments to clarify the definition of business activity in order to facilitate its practical implementation.

There were no significant impacts due to their application.

Going concern and uncertainties in the use of estimates

The Bank of Italy, Consob and Isvap Document no. 2 of 6 February 2009 as well as the following Document no. 4 of 3 March 2010 require providing information on business outlook in the financial statements with a special reference to going concern assumptions, financial risk, impairment testing and uncertainties in the use of estimates.

Specific guidance on the context following the Covid-19 pandemic and the specific actions taken were provided in the Report on operations and in the chapter bellow called "Impacts of the Covid-19 Epidemic".

In this context, the Group's liquidity remains high; assets eligible for refinancing with the ECB amounted to EUR 4.6 billion as at 1 July 2020, up compared to the end of 2019 (EUR 3.3 billion). Basel III liquidity regulatory requirements for short-term (Liquidity Coverage Ratio) and structural (Net Stable Funding Ratio) are well above 100% (the LCR is 150% higher).

With regard to funding, funding from retail customers remains a stable source. The refinancing operations with the ECB at the end of June amounted to EUR 3.5 billion, fully represented by TLTRO III.

The already high capital strength was further strengthened during the quarter. As at 30 June 2020, Own Funds, determined taking into account the transitional treatment in place, amounted to EUR 2,010 million, against a risk-weighted asset of EUR 8,829 million, mainly reflecting credit and counterparty risks and, to a lesser extent, operational and market risks. The Total capital ratio stands at 22.8% and the CET1 ratio at 20.9%, with a high capital buffer compared to the minimum capital requirements established by the Bank of Italy for the Bank following the conclusion of the Supervisory Review and Evaluation Process (SREP).

The Group's risk profile remains within the limits approved by the Risk Appetite Framework.

The Bank continued successfully to implement the key actions of the Plan, achieving important objectives both in terms of improving the risk profile and the efficiency of its operations. At the same time, it significantly strengthened its financial statement structure in terms of both capital and liquidity, creating the conditions to meet the challenges of a well-prepared and very solid economic environment.

Therefore, the Credito Valtellinese Directors believe they have a reasonable certainty that the Bank and the Group will remain a going concern in the foreseeable future. Therefore, the condensed interim consolidated financial statements were prepared with a view to the company as a going concern.

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As regards the requirements relating to the disclosure on macroeconomic and financial risks, impairment testing of assets and uncertainties in the use of estimates, please refer to the information provided below within the discussion of the related items. Information on risks is described in the Report on operations as well as in the chapter of the Notes to the condensed interim consolidated financial statements dedicated to risk management. Moreover, the Notes to the condensed interim consolidated financial statements provide the fair value of the financial instruments determined on the basis of the methods indicated in the financial statements as at 31 December 2019, document to which reference is made for detailed information.

Specific tests were carried out to ascertain any impairment, subject to the analysis of the presence of impairment indicators. These checks were also carried out by including the effects of the Covid-19 epidemic as indicators of impairment if the conditions were met.

In drawing up the financial report, estimates and assumptions were used that may affect the carrying amounts recorded in the Statement of financial position, Income Statement and the Notes to the financial statements. In order to formulate reasonable estimates and assumptions for the recording of business transactions, subjective evaluations are made also based on historical experience, which use all available information. By their nature, estimates and assumptions used can vary over the years and it cannot therefore be ruled out that in subsequent years the values recorded may vary following the change in the valuations used.

More specifically, subjective evaluations by company management were made in the following cases:

- to quantify the impairment of financial assets, especially loans and receivables, equity investments and property, equipment and investment property;

- to determine the fair value of financial instruments to be used for financial reporting and the use of valuation models to determine fair value of financial instruments that are not listed on active markets;

- to assess the reasonableness of other intangible assets;

- to quantify the fair value of properties and artistic assets;

- to quantify employees' provisions and provisions for risks and charges;

- the actuarial and financial assumptions used for determining liabilities associated with defined benefit plans for employees;

- estimates and assumptions made with regard to the recoverability of deferred tax assets.

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Impacts of the Covid-19 Epidemic

On 6 July 2020, Consob published Call for Attention No. 8/20 with the subject matter "Covid-19 - Call for Attention on Financial Reporting". In particular, Consob, referring to the ESMA public statement "Implications of the Covid-19 outbreak on the half-yearly financial Reports" of 20 May 2020, plans to provide information on the impact of the Covid-19 outbreak on the income statement.

As already stated in Report On Operations, following the international spread of the coronavirus (Covid-19) outbreak initially originating in China, on 30 January 2020 the World Health Organisation declared Covid-19 a public health emergency of international importance and subsequently on 11 March 2020 due to the speed and scale of the contagion at global level, the same Organisation classified it at pandemic level.

The effects of the pandemic affected production and aggregate demand in all economies. Although with different timing, the various Countries put in place strong expansionary measures to support household and business income, credit to the economy and liquidity in the markets.

On the monetary front, central banks have taken action to contain the recessionary effects of the epidemic on national economies. In particular, the ECB intervened with measures to support the liquidity position of the Eurozone banking system, including the improvement of the conditions of the TLTRO-III operations, the launch of a new set of long-term refinancing operations (PELTRO) and the increase in the amount and time horizon of the Pandemic Emergency Purchase Programme (PEPP). These measures are also complemented by the easing of prudential rules by the SSM (the European Banking Supervisory Authority).

In Italy, during the initial phase of the contagion, a series of law decrees were issued with measures aimed at limiting the freedom of movement of people, with the closure of entire economic sectors, and at strengthening the national health system. In May and June, measures to progressively relax the restrictions and to resume economic, social and cultural activities followed. These provisions were also accompanied by a series of measures launched by the Government aimed at limiting the economic impact of Covid-19 for citizens, professionals and businesses, including the issue of public guarantees on loans to businesses, the disbursement of loans and tax and credit moratoria ("Cura Italia" Decree, "Liquidità" (Liquidity) Decree and the "Rilancio" (Relaunch) Decree), which laid the foundations for a new start for the Country.

Since the first day of the emergency, the Bank put in place stringent preventive measures by adopting all the safety regulations indicated in the various legislative deeds issued by national and local Authorities and/or in the Protocols signed between the Government and the Trade Association (ABI) and Social Partners, as well as any other appropriate precautionary measures to protect the health of Employees and Customers while ensuring the proper functioning of the Bank.

With specific reference to the territorial network, in the initial phase of the emergency opening hours to the public were reduced with branches open only in the morning and on alternate days and providing for an adequate shift of branch staff. Within the branches, access to customers was immediately restricted, allowing them to enter only by appointment and only for strictly necessary operations. In May, coinciding with the relaxation of the restrictive measures issued by the Government, the ordinary opening hours to the public were reinstated, without prejudice to the access by appointment and the adoption of all regulations aimed at protecting the health and safety measures required.

As already mentioned, business continuity was guaranteed also through a real acceleration given to smart working. The possibility of smart working was also extended to all figures involved in

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customer consulting. At the same time, all employees were provided with specific information on how to use smart-working tools efficiently and safely via the intranet channel.

In order to facilitate the use of remote access channels to banking services, additional remote access modes were activated for Customers by accelerating the introduction of new online features such as the opening of current accounts, the possibility of obtaining a personal loan and remote document exchange. Moreover, remote customer contact channels were enhanced to ensure adequate support and information on the use of digital channels of the Bank.

The development of revenues was affected by the downsizing of commercial activity due to the Covid-19 emergency. In particular, there was an 8.4% reduction in fee and commissions (equal to approximately EUR 5 million) compared to the previous quarter, which was only partially affected by the closing of the activities. The main component refers to transactional activity with customers, in particular collection and payment services and current accounts, as well as that relating to consulting activities.

With reference to net interest income, the effects on commercial activity were mitigated by the activities implemented by the national authorities, by the bank's interventions also related to the introduction of new technological methods for the management of commercial activity and by the supporting measures implemented by the ECB (TLTRO-III). In particular, the improvement in the conditions of TLTRO-III transactions, together with the change in the observation period, led to the recognition of higher interest income amounting to EUR 3.2 million.

In response to the greater need for remote connections of Employees and use of the Bank's online services by customers, Creval continued to strengthen its IT network by expanding the number of users to allow a higher number of simultaneous accesses to the corporate network (Virtual Private Network - VPN), increasing the number of resources with remote access from about 300 to over 1,500. Anti-fraud control units and safety protocols were also strengthened and measures to prevent phishing attacks were implemented.

This, together with the adoption of safety regulations and all precautionary measures to protect the health of Employees and Customers, led to an increase in costs. In particular, higher expenses of EUR 1.3 million were incurred during the period. These disbursements were offset by savings related to remote operations (management costs of head office buildings and personnel costs) as well as further actions to optimise the cost base envisaged in the strategic guidelines included in the 2019-2023 Plan.

Covid-19 also had an impact on the management of the Bank's lending practices. In fact, Creval in the face of the economic and social consequences of the health emergency, has not failed to support families and businesses in its territories, with initiatives of an extraordinary nature.

In this regard, Creval took action from the very first moment of the emergency to make it possible for families and businesses to suspend for 12 months the instalments of loans falling due. This initiative was then added to those made available at Government and System level. At the end of the first half of the year, more than 34,000 moratoriums had been granted for a total of about EUR 760 million in suspended instalments and more than EUR 500 million in loans to companies backed by government guarantees for about 15,000 customers.

With regard to credit risk , the Bank carried out an analysis of the loan portfolio, which involved in particular the most significant exposures, those with the lowest rating level and the exposures of companies operating in economic sectors considered most impacted by Covid-19 (Hospitality, Transport, Real Estate and Construction). Moreover, an intensive monitoring programme was launched, as well as a plan to accompany the companies benefiting from the moratorium in order to identify any intervention required to ensure a return to normal operations upon expiry. In this context, the main economic effects are to be found on the portfolio of performing loans following

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the inclusion of the worsened macroeconomic scenario in the models for calculating collective impairment losses.

In the first half of the year, there was an increase in Stage 2 of about EUR 100 million in exposures and a net impact on the amount of impairment losses of about EUR 8 million.

With regard to the classification of receivables subject to a moratorium in the various risk classes, the analysis was carried out for each position in line with existing policies. In this regard, on 25 March 2020, the EBA addressed the issue of the management of loans subject to moratorium for aspects relating to (i) identification of the default (ii) forbearance measures and (iii) IFRS 9 staging. On the points in question, the EBA specifies that:

opting for a moratorium - both by law and granted by the bank - does not represent a default trigger and blocks the calculation of the past due amount for the purposes of identifying the default;

with regard to considering moratoria as forbearance measures, the EBA excludes that the positions concerned can be considered as forborne in that they aim at addressing systemic risks and mitigating potential future risks in the wider EU economy;

on the possible Stage 2 classification of positions subject to a moratorium, the EBA clarifies that the application of a public or private moratorium alone should not be considered as a trigger for identifying a significant increase in credit risk, thus excluding automatic Stage 2 classification.

With regard to taxes for the period, the Cura Italia Decree introduced the right of converting DTAs, recorded and not recorded in the financial statements, relating to tax losses and surplus of ACE deductions with reference to the sale of non-performing loans. The Credito Valtellinese Group has already completed a transaction for the sale of non-performing loans after the decree came into force, as a result of which about EUR 9.6 million of DTA on tax losses were converted into tax asset pursuant to Article 55 of Italian Legislative Decree 18/2020.

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Consolidation scope and methods

The condensed interim consolidated financial statements include Credito Valtellinese and the companies directly or indirectly controlled by it. The financial statements used for preparing the condensed interim consolidated financial statements have the same reporting date.

Investments in companies subject to exclusive control are those in respect of which Credito Valtellinese has the power over the investee, is subject to exposure or rights to variable returns from its involvement with the investee and can use its power over the investee to affect the amount of the investor's returns. Investments in companies subject to joint control are those in respect of which the Parent, together with other parties subject to the terms of an agreement, has the power of governing the decisions relating to the relevant activities of the agreement, with the unanimous consent of the parties sharing control.

The financial statements of subsidiaries are consolidated on a line-by-line basis from when the Parent starts to exercise control until the date on which this control ends. The carrying amount of the equity investments in these companies is offset against the corresponding shares of equity. The differences arising from this transaction, after recording the subsidiary’s assets and liabilities, are recognised, if positive under “Intangible assets” - Goodwill; if negative, they are directly recognised in the income statement. Non-controlling interests are assigned the corresponding shares of equity and profit (loss).

Assets, liabilities, income and expenses among consolidated companies are eliminated. The financial statements of subsidiaries are prepared at the same reporting date and adopting financial reporting standards consistent with the Parent. In case of discrepancy between the measurement criteria adopted by a subsidiary and those used in the consolidated financial statements, the subsidiary's financial statements are adjusted for consolidation purposes.

Associates are those under significant influence, i.e. the Parent has the power of participating in the determination of financial and management policies but has no control or joint control over those policies.

Investments in associates and subsidiaries subject to joint control have been accounted at equity. The investment is initially recognised at cost, the amount later being increased or decreased due to the effect of investee profits or losses, recorded according to the equity ratios under “Net gains (losses) on equity investments”, of dividends received and other changes in the equity of the investees. Other changes are booked to reserves. The differences between the carrying amount of the equity investment and the equity of the related investee are included in the carrying amount of the investee.

Dividends booked to the Parent's financial statements and concerning equity investments in companies included in the consolidation scope or equity-accounted have been cancelled. Taxes associated with consolidation adjustments have been accounted for, where applicable.

Commitments for the repurchase of own equity instruments, including commitments to purchase equity instruments of companies consolidated in full, give rise to a financial liability for the current amount payable. The initial recognition of the liability occurs by using the equity as an offsetting item.

A list of equity investments in fully consolidated subsidiaries is provided in the table below.

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Equity investments in companies subject to exclusive control 30/06/2020

Company name Operating

office

Registered

office

Type

of relationshi

p (1)

Type of equity investment

% Voting rights (2)

Investor company

% held

1. Credito Valtellinese S.p.A. Sondrio Sondrio

2. Stelline Real Estate S.p.A. Sondrio Sondrio 1 1 100.00

3. Creval PiùFactor S.p.A. Milan Milan 1 1 100.00

4. Creval Covered Bond S.r.l. Conegliano Veneto (TV)

Conegliano Veneto (TV) 1 1 60.00

5. Quadrivio Rmbs 2011 S.r.l. Conegliano Veneto (TV)

Conegliano Veneto (TV)

4

6. Quadrivio Sme 2018 S.r.l. Conegliano Veneto (TV)

Conegliano Veneto (TV) 4

Key: (1) Type of relationship:

1 = majority of voting rights at ordinary shareholders'/quotaholders' meeting; 2 = considerable influence in ordinary shareholders'/quotaholders' meeting; 3 = agreements with other shareholders; 4 = other forms of control; 5 = sole management pursuant to article 39, paragraph 1 of “Italian Legislative Decree no. 136/2015”; 6 = sole management pursuant to article 39, paragraph 2 of “Italian Legislative Decree no. 136/2015".

(2) Voting rights available at ordinary shareholders'/quotaholders' meetings, only if different from the % investment, distinguishing between actual and potential votes: 1 = actual; 2 = potential.

Events after the reporting period

On 5 August 2020, agreements were signed with MBCredit Solutions S.p.A. (Mediobanca Group), AMCO - Asset Management Company S.p.A. and Italian NPL Opportunities Fund II, (whose advisor is Eidos Partners) for the sale without recourse of 3 portfolios of non-performing loans for a gross book value of approximately EUR 300 million. These assets were reclassified as at 30 June 2020 under item “120. Non-current assets held for sale and disposal groups”. The portfolios are composed of both secured and unsecured bad loan positions with a gross book value of approximately EUR 160 million and unlikely to pay positions with a gross book value of approximately EUR 140 million.

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Fair value information

The fair value is the price at which an asset can be sold or a liability can be transferred in a regular transaction between market participants at a certain valuation date. The fair value represents a market measurement basis, not related to the individual company and must be measured by adopting assumptions that the market operators would use to determine the price of the asset or of the liability, assuming that they act to meet their economic interest in the best way possible.

In particular, the criteria applied to determine the fair value are as follows: - Mark to Market: valuation method that coincides with the Level 1 classification of the fair

value hierarchy; - Comparable Approach: valuation method based on the use of inputs observable on the

market the use of which implies a Level 2 classification of the fair value hierarchy; - Mark to Model: valuation method related to the application of pricing models whose inputs

determine the Level 3 classification (use of at least one significant input that cannot be observed) of the fair value hierarchy.

With regard to the criteria for determining the fair value, please refer to what is contained in the financial statements as at 31 December 2019. Assets and liabilities measured at fair value on a recurring basis: breakdown by level of fair value Financial assets/liabilities at fair value

30/06/2020 31/12/2019

L1 L2 L3 L1 L2 L3

1. Financial assets at fair value through profit or loss

268 485 183,996 562 1,662 192,889

a) financial assets held for trading 264 485 1 558 1,662 1

b) financial assets at fair value - - - - - -

c) other financial assets mandatorily measured at fair value 4 - 183,995 4 - 192,888

2. Financial assets at fair value through other comprehensive income 886,131 30,189 39,994 899,545 32,183 40,037

3. Hedging derivatives - - - - - -

4. Property, equipment and investment property - - 24,789 - - 24,789

5. Intangible assets - - - - - -

Total 886,399 30,674 248,779 900,107 33,845 257,715

1. Financial liabilities held for trading - 79 - - 26 -

2. Financial liabilities at fair value - - - - - -

3. Hedging derivatives - 163,097 - - 153,051 -

Total - 163,176 - - 153,077 -

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

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The transfers among different levels of fair value involve a limited number of positions referring to debt instruments. In particular, in the first half of 2020, transfers from level 1 to level 2 of financial assets were recorded for EUR 23 million and from level 2 to level 1 for EUR 24 million.

As at 30 June 2020, the overall data of the CVA/DVA that forms the fair value of derivatives was not significant.

The Group carried out a sensitivity analysis of unobservable market parameters in the valuation of instruments classified in Level 3 of the fair value hierarchy and measured at fair value on a recurring basis.

The portfolio of instruments measured at fair value on a recurring basis and classified within level 3 of the fair value hierarchy mainly consists of OEIC units and equity instruments.

Level 3 OEIC units classified in the portfolio of “Financial assets at fair value through profit or loss” mainly include shares of real estate funds and private equity. The Group also holds units in the Atlante Fund, whose assets mainly consist of units in the Italian Recovery Fund; its investment policy is aimed at non-performing loans of a number of Italian banks, by subscribing financial instruments (usually notes of different seniority originating from securitisation transactions, including junior tranches). In a particularly adverse simulative scenario, the zeroing of the value of EUR 12.0 million cannot be excluded.

The value of the real estate OEIC units totalling EUR 84.0 million is exposed to the trend of the domestic real estate market. The sensitivity is estimated on the basis of a historical simulation approach, assuming a reduction in the value of the units equal to the first percentile of the distribution of annual changes in prices of a residential real-estate market index (Italy ISI Property Price Residential) recorded over a 6-year period. The change in the parameter used in the valuation, together with the estimated sensitivity, is shown below.

Financial assets Non-observable parameter Parameter

change Sensitivity (in thousands of EUR)

Real estate OEIC Trend in prices of the real estate market

-129 b.p.

-1,081

Moreover, “Financial assets at fair value through profit or loss” also include OEIC units of private equity and private debt that hold financial instruments mainly issued by small and medium enterprises, for an amount of EUR 52.5 million, whose value is mainly affected by the economic situation of the domestic market and for which information is not sufficient to carry out a sensitivity analysis. The item also includes OEIC units of EUR 25.7 million that invest mainly in corporate loans known as “past due”; also in this case, on the basis of the information available, it was not possible to carry out a sensitivity analysis.

The Group holds a total of EUR 46.1 million of equity instruments classified within Level 3 of the fair value hierarchy, mainly included within "Financial assets at fair value through other comprehensive income". In an adverse simulative scenario that for some securities requires the application of a particularly severe haircut and for others a zeroing of the value, the overall sensitivity is estimated at EUR 16.5 million.

“Financial assets at fair value through profit or loss” also include the mezzanine and junior tranches coming from the disposal through a securitisation of portfolios of bad loans (Elrond and Aragorn), amounting to EUR 1.4 million and corresponding to 5% of the total amount placed with institutional investors. Moreover, the portfolio includes mezzanine and junior tranches of EUR 1.6 million, mainly from corporate loan restructuring transactions. In consideration of the peculiar characteristics of the operations described above, no fair value sensitivity analyses were

67

carried out; moreover, in a particularly adverse simulative scenario, the zeroing of the value cannot be excluded.

Annual changes of assets at fair value on a recurring basis (Level 3)

Financial assets at fair value through profit or loss

Financial assets at fair value through

other comprehensive

income

Hedging derivatives

Property, equipment and

investment property

Intangible assets Total

of which: a) financial

assets held for trading

of which: b) financial assets at fair value

of which: c) other

financial assets

mandatorily measured at

fair value

1. Opening balance 192,889 1 - 192,888 40,037 - 24,789 -

2. Increases 2,154 - - 2,154 - - - -

2.1. Purchases 1,542 - - 1,542 - - - -

2.2. Gains recognised in: 608 - - 608 - - - -

2.2.1. Profit or loss 608 - - 608 - - - -

- of which gains 608 - - 608 - - - -

2.2.2. Equity - X X X - - - -

2.3. Transfers from other levels - - - - - - - -

2.4. Other increases 4 - - 4 - - - -

3. Decreases -11,047 - - -11,047 -43 - - -

3.1. Sales -2,723 - - -2,723 -8 - - -

3.2. Redemptions -120 - - -120 -25 - - -

3.3. Losses recognised in: -8,204 - - -8,204 -10 - - -

3.3.1. Profit or loss -8,204 - - -8,204 - - - -

- of which losses -8,204 - - -8,204 - - - -

3.3.2. Equity - X X X -10 - - -

3.4. Transfers to other levels - - - - - - - -

3.5. Other decreases - - - - - - - -

4. Closing balance 183,996 1 - 183,995 39,994 - 24,789 -

Annual changes of liabilities at fair value on a recurring basis (Level 3)

There are no financial liabilities at fair value on a recurring basis (Level 3).

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Breakdown of the main statement of financial position items ASSETS AND LIABILITIES AT AMORTISED COST

FINANCIAL ASSETS AT AMORTISED COST - ITEM 40

Breakdown by type of item “40 a) Loans and receivables with banks”

Type of transaction/Amounts

30/06/2020

Carrying amount Fair Value

Stage 1 and 2 Stage 3

of which: acquired

or originated impaired

L1 L2 L3

A. Loans and Receivables with Central Banks 1,064,246 - - - - 1,064,246

1. Term deposits - - - X X X

2. Obligatory reserve 1,064,246 - - X X X

3. Repurchase agreements - - - X X X

4. Other - - - X X X

B. Loans and receivables with banks 465,818 - - 93,250 3,788 370,072

1. Loans 369,065 - - - 221 370,072

1.1 Current accounts and sight deposits 44,770 - - X X X

1.2 Term deposits 221 - - X X X

1.3 Other loans: 324,074 - - X X X

- Reverse repurchase agreements - - - X X X

- Finance leases - - - X X X

- Other 324,074 - - X X X

2. Debt instruments 96,753 - - 93,250 3,567 -

2.1 Structured instruments - - - X X X

2.2 Other debt instruments 96,753 - - X X X

Total 1,530,064 - - 93,250 3,788 1,434,318


The item “1.3 Other loans” mainly includes the items related to the Quadrivio RMBS 2011 and Quadrivio SME 2018 securitisation transactions and margin trading on existing derivatives.

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31/12/2019



of which: acquired


L1 L2 L3

A. Loans and Receivables with Central Banks 1,027,474 - - - - 1,027,474

1. Term deposits - - - X X X

2. Obligatory reserve 1,027,474 - - X X X

3. Repurchase agreements - - - X X X

4. Other - - - X X X

B. Loans and receivables with banks 808,370 - - 96,084 297,392 416,296

1. Loans 708,180 - - - 293,205 416,296

1.1 Current accounts and sight deposits 63,460 - - X X X

1.2 Term deposits 325 - - X X X

1.3 Other loans: 644,395 - - X X X

- Reverse repurchase agreements 292,698 - - X X X

- Finance leases - - - X X X

- Other 351,697 - - X X X

2. Debt instruments 100,190 - - 96,084 4,187 -


2.2 Other debt instruments 100,190 - - X X X

Total 1,835,844 - - 96,084 297,392 1,443,770


Breakdown by type of item “40 b) loans and receivables with customers”


30/06/2020


Stage 1 and 2

Stage 3

of which: acquired


L1 L2 L3

1. Loans 14,052,689 574,962 7,452 - 415,422 15,104,480

1.1 Current accounts 1,679,047 122,319 - X X X

1.2 Reverse repurchase agreements 415,457 - - X X X

1.3 Mortgages 9,997,472 361,282 - X X X

1.4 Credit cards, personal loans and salary-backed loans 213,678 8,892 - X X X

1.5 Finance leases 270,096 41,913 - X X X

1.6 Factoring 184,004 12,266 7,004 X X X

1.7 Other loans 1,292,935 28,290 448 X X X

2. Debt instruments 4,966,391 - - 3,963,195 14,010 847,329


2.2 Other debt instruments 4,966,391 - - X X X

Total 19,019,080 574,962 7,452 3,963,195 429,432 15,951,809


Item “1.7. Other loans” includes instalment and non-instalment sundry facilities of EUR 523,675 thousand, loans for advances on bills of EUR 272,576 thousand, loans and receivables to Cassa Compensazione other than repurchase agreements of EUR 115,753 thousand and import and export loans of EUR 275,277 thousand. Loans classified in the column "of which: acquired or

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originated impaired" mainly refer to non-performing loans purchased in the business combination carried out with Claris Factor S.p.A.


31/12/2019



of which: acquired or originated impaired

L1 L2 L3

1. Loans 13,752,707 732,450 10,429 - 103,224 15,067,958

1.1 Current accounts 1,914,996 174,087 - X X X

1.2 Reverse repurchase agreements 103,225 - - X X X

1.3 Mortgages 9,724,152 456,182 - X X X

1.4 Credit cards, personal loans and salary-backed loans 143,919 9,893 - X X X

1.5 Finance leases 289,745 41,028 - X X X

1.6 Factoring 237,653 12,781 9,962 X X X

1.7 Other loans 1,339,017 38,479 467 X X X

2. Debt instruments 5,038,585 - - 3,968,360 23,193 916,611


2.2 Other debt instruments 5,038,585 - - X X X

Total 18,791,292 732,450 10,429 3,968,360 126,417 15,984,569


The following table shows the breakdown by the stage of risk.

30/06/2020 31/12/2019

Carrying amount Carrying amount


Bad loans 110,360 143,992

Unlikely to pay 427,229 546,628

Past due non-performing loans 37,373 41,830

Total non-performing loans 574,962 732,450

Performing loans - stage 1 17,588,514 17,463,556

Performing loans - stage 2 1,430,566 1,327,736

Total loans and receivables with customers 19,594,042 19,523,742

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Breakdown by debtor/issuer of item “40 b) Loans and receivables with customers”


30/06/2020 31/12/2019

Stage 1 and 2

Stage 3


assets

Stage 1 and 2

Stage 3


assets

1. Debt instruments 4,966,391 - - 5,038,585 - -

a) Public administrations 4,043,231 - - 4,040,331 - -

b) Other financial companies 861,402 - - 932,638 - -

of which: insurance companies 5,215 - - 5,072 - -

c) Non-financial companies 61,758 - - 65,616 - -

2. Loans to: 14,052,689 574,962 7,452 13,752,707 732,450 10,429

a) Public administrations 130,098 943 653 138,066 930 616

b) Other financial companies 1,591,764 23,424 - 1,237,238 27,388 -

of which: insurance companies 2,502 - - 2,971 - -

c) Non-financial companies 7,000,709 399,256 6,736 7,091,094 523,315 9,761

d) Households 5,330,118 151,339 63 5,286,309 180,817 52

Total 19,019,080 574,962 7,452 18,791,292 732,450 10,429

Breakdown of gross value and total value adjustments of item “40 b) loans and receivables with customers”

Gross value

Stage 1 Stage 2 Stage 3 Total

of which: instruments

with low credit risk

Debt instruments 5,065,314 95,239 - - 5,065,314

Loans 14,074,819 220,935 1,500,181 1,038,313 16,613,313

Total as at 30/06/2020 19,140,133 316,174 1,500,181 1,038,313 21,678,627

Total as at 31/12/2019 19,323,625 626,662 1,386,959 1,534,655 22,245,239

of which: acquired or originated impaired financial assets X X 8 15,153 15,161

Total impairment losses

Total partial write-offs*

Stage 1 Stage 2 Stage 3 Total Total

Debt instruments -2,170 - - -2,170 -

Loans -25,676 -63,324 -463,351 -552,351 20,757

Total as at 30/06/2020 -27,846 -63,324 -463,351 -554,521 20,757

Total as at 31/12/2019 -24,741 -58,707 -802,205 -885,653 69,743

of which: acquired or originated impaired financial assets X - -7,709 -7,709 1,638

*Value to be shown for information purposes

72

FINANCIAL LIABILITIES AT AMORTISED COST - ITEM 10

Financial liabilities at amortised cost: breakdown by type of due to banks


30/06/2020 31/12/2019

CA Fair Value

CA Fair Value

L1 L2 L3 L1 L2 L3

1. Due to central banks 3,497,330 X X X 2,500,394 X X X

2. Due to banks 88,744 X X X 396,599 X X X

2.1 Current accounts and sight deposits 55,611 X X X 61,946 X X X

2.2 Term deposits - X X X - X X X

2.3 Loans 30,620 X X X 330,961 X X X

2.3.1 Repurchase agreements - X X X 293,789 X X X

2.3.2 Other 30,620 X X X 37,172 X X X

2.4 Payables for commitments to repurchase own equity instruments

-

X X X - X X X

2.5 Lease payables - X X X - X X X

2.6 Other payables 2,513 X X X 3,692 X X X

Total 3,586,074 - 3,535,834 88,424 2,896,993 - 2,808,529 102,691

Key: CA = carrying amount L1 = Level 1 L2 = Level 2 L3 = Level 3

Item “1 – Due to central banks” consists of the exposure with regard to the European Central Bank for refinancing operations TLTRO III. Item “2.3.2 Loans – other” mainly includes loans received from the European Investment Bank.

Financial liabilities at amortised cost: breakdown by type of due to customers


30/06/2020 31/12/2019

CA Fair Value

CA Fair Value

L1 L2 L3 L1 L2 L3

1. Current accounts and sight deposits 13,418,678 X X X 13,329,069 X X X

2. Term deposits 2,026,849 X X X 2,474,079 X X X

3. Loans 1,087,544 X X X 1,676,337 X X X

3.1. Repurchase agreements 742,946 X X X 1,292,846 X X X

3.2. Other 344,598 X X X 383,491 X X X

4. Payables for commitments to repurchase own equity instruments

- X X X - X X X

5. Lease payables 149,762 X X X 156,711 X X X

6. Other payables 53,944 X X X 70,712 X X X

Total 16,736,777 - 2,793,911 13,968,267 17,706,908 - 3,806,934 13,941,456


Item “3.1 Repurchase agreements” mainly contains transactions with Cassa Compensazione e Garanzia. The item “3.2 Loans - other” refers mainly to medium to long-term loans received by Cassa Depositi e Prestiti following the agreement between ABI and Cassa Depositi e Prestiti in support of SMEs.

73

Financial liabilities at amortised cost: breakdown by type of securities issued

Type of instrument/Amounts

30/06/2020 31/12/2019

CA Fair Value

CA Fair Value

L1 L2 L3 L1 L2 L3

A. Securities

1. bonds 891,149 - 544,054 339,163 1,174,375 - 832,571 370,420

1.1 structured - - - - - - - -

1.2 other 891,149 - 544,054 339,163 1,174,375 - 832,571 370,420

2. other securities 112,179 - 112,179 - 87,588 - 87,588 -

2.1 structured - - - - - - - -

2.2 other 112,179 - 112,179 - 87,588 - 87,588 -

Total 1,003,328 - 656,233 339,163 1,261,963 - 920,159 370,420


Financial instruments indicated in level 3 refer to the securities sold in connection with the Quadrivio RMBS 2011 and Quadrivio SME 2018 securitisations.

74

THE FINANCIAL INSTRUMENTS

FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

Breakdown by type of item “20 a) Financial assets held for trading”

Item/Amounts 30/06/2020 31/12/2019

L1 L2 L3 L1 L2 L3

A. On-statement of financial position assets

1. Debt instruments 10 97 - 10 199 -

1.1 Structured instruments - - - - - -

1.2 Other debt instruments 10 97 - 10 199 -

2. Equity instruments 148 360 1 62 1,399 1

3. OEIC units 106 - - 486 - -

4. Loans - - - - - -

4.1 Reverse repurchase agreements - - - - - -

4.2 Other - - - - - -

Total (A) 264 457 1 558 1,598 1

B. Derivatives

1. Financial derivatives - 28 - - 64 -

1.1 trading - 28 - - 64 -

1.2 associated with fair value option - - - - - -

1.3 other - - - - - -

2. Credit derivatives - - - - - -

2.1 trading - - - - - -

2.2 associated with fair value option - - - - - -

2.3 other - - - - - -

Total (B) - 28 - - 64 -

Total (A+B) 264 485 1 558 1,662 1


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Breakdown by debtor/issuer/counterparties of item “20 a) Financial assets held for trading”

Item/Amounts 30/06/2020 31/12/2019

A. On-statement of financial position assets

1. Debt instruments 107 209 a) Central banks - - b) Public administrations 103 205 c) Banks 4 4 d) Other financial companies - - of which: insurance companies - - e) Non-financial companies - - 2. Equity instruments 509 1,462 a) Banks 14 20 b) Other financial companies - 975 of which: insurance companies - - c) Non-financial companies 495 467 d) Other issuers - - 3. OEIC units 106 486 4. Loans - - a) Central banks - - b) Public administrations - - c) Banks - - d) Other financial companies - - of which: insurance companies - - e) Non-financial companies - - f) Households - - Total (A) 722 2,157 B. Derivatives a) Central counterparties - - b) Other 28 64 Total (B) 28 64 Total (A+B) 750 2,221

Breakdown by type of item “20 c) Other financial assets mandatorily measured at fair value"

Item/Amounts 30/06/2020 31/12/2019

L1 L2 L3 L1 L2 L3

1. Debt instruments - - 3,446 - - 3,559


1.2 Other debt instruments - - 3,446 - - 3,559

2. Equity instruments 4 - 6,394 4 - 9,009

3. OEIC units - - 174,155 - - 180,320

4. Loans - - - - - -

4.1 Repurchase agreements - - - - - -

4.2 Other - - - - - -

Total 4 - 183,995 4 - 192,888


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Breakdown by debtor/issuer of item “20 c) Other financial assets mandatorily measured at fair value" Item/Amounts 30/06/2020 31/12/2019

1. Equity instruments 6,398 9,013

of which: banks 6,394 9,009

of which: other financial companies - -

of which: non-financial companies 4 4

2. Debt instruments 3,446 3,559

a) Central banks - -

b) Public administrations - -

c) Banks - -

d) Other financial companies 2,964 2,956

of which: insurance companies - -

e) Non-financial companies 482 603

3. OEIC units 174,155 180,320

4. Loans - -



c) Banks - -

d) Other financial companies - -


e) Non-financial companies - -

f) Households - -

Total 183,999 192,892

77

Financial liabilities held for trading: breakdown by type


30/06/2020

NV FV

FV* L1 L2 L3

A. On-statement of financial position liabilities

1. Due to banks - - - - -

2. Due to customers - - - - -

3. Debt instruments

3.1 Bonds

3.1.1 Structured - - - - X

3.1.2 Other bonds - - - - X

3.2 Other securities


3.2.2 Other - - - - X

Total (A) - - - - -

B. Derivatives

1. Financial derivatives -

1.1 Trading X - 79 - X

1.2 associated with fair value option X - - - X

1.3 Other X - - - X

2. Credit derivatives

2.1 Trading X - - - X


2.3 Other X - - - X

Total (B) X - 79 - X

Total (A+B) - - 79 - -

Key: FV = fair value FV* = fair value calculated by excluding changes in value due to change in creditworthiness of the issuer with respect to the issue date NV = nominal value L1 = Level 1 L2 = Level 2 L3 = Level 3

78


31/12/2019

NV FV

FV* L1 L2 L3

A. On-statement of financial position liabilities

1. Due to banks - - - - -

2. Due to customers - - - - -

3. Debt instruments

3.1 Bonds


3.1.2 Other bonds - - - - X

3.2 Other securities


3.2.2 Other - - - - X

Total (A) - - - - -

B. Derivatives

1. Financial derivatives

1.1 Trading X - 26 - X


1.3 Other X - - - X

2. Credit derivatives

2.1 Trading X - - - X


2.3 Other X - - - X

Total (B) X - 26 - X

Total (A+B) - - 26 - -

Key: FV = fair value FV* = fair value calculated by excluding changes in value due to change in creditworthiness of the issuer with respect to the issue date NV = nominal value L1 = Level 1 L2 = Level 2 L3 = Level 3

Hedging derivative liabilities: breakdown by type of hedge and level

30/06/2020 31/12/2019

Fair value NV

Fair value NV

L1 L2 L3 L1 L2 L3

A. Financial derivatives - 163,097 - 300,000 - 153,051 - 300,000

1) Fair value - 163,097 - 300,000 - 153,051 - 300,000

2) Cash flows - - - - - - - -

3) Investments in foreign operations - - - - - - - -

B. Credit derivatives - - - - - - - -

1) Fair value - - - - - - - -

2) Cash flows - - - - - - - -

Total - 163,097 - 300,000 - 153,051 - 300,000

Key: NV = notional value L1 = Level 1 L2 = Level 2 L3 = Level 3

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FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME - ITEM 30

Breakdown by type of item “30 Financial assets at fair value through other comprehensive income”

Item/Amounts 30/06/2020 31/12/2019

L 1 L 2 L 3 L 1 L 2 L 3

1. Debt instruments 886,122 10,212 - 899,455 11,731 -


1.2 Other debt instruments 886,122 10,212 - 899,455 11,731 -

2. Equity instruments 9 19,977 39,994 90 20,452 40,037

3. Loans - - - - - -

Total 886,131 30,189 39,994 899,545 32,183 40,037


Debt instruments are mainly represented by exposures towards the Italian Government.

Breakdown by debtor/issuer of item “30 Financial assets at fair value through other comprehensive income”

Item/Amounts 30/06/2020 31/12/2019

1. Debt instruments 896,334 911,186


b) Public administrations 706,606 713,425

c) Banks 162,175 168,091


of which: insurance companies 3,491 3,742

e) Non-financial companies 4,695 6,457

2. Equity instruments 59,980 60,579

a) Banks 22,501 22,985

b) Other issuers: 37,479 37,594

- other financial companies 35,226 35,235


- non-financial companies 2,253 2,359

- other - -

3. Loans - -



c) Banks - -

d) Other financial companies - -



f) Households - -

Total 956,314 971,765

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EQUITY INVESTMENTS - ITEM 70

Information on the investment shares

Name Registered office

Operating office Type of

relationship (1)

Type of equity investment

% Voting rights Investor company

% held

A. Companies subject to joint control

1. Rajna Immobiliare S.r.l. Sondrio Sondrio 1 Credito Valtellinese 50.00 -

B. Companies subject to significant influence

1. Sondrio Città Futura S.r.l. Milan Milan 2 Stelline Real Estate 49.00 -

2. Valtellina Golf Club S.p.A. Caiolo (SO) Caiolo (SO) 2 Credito Valtellinese 43.08 -

3. Generalfinance S.p.A. Milan Milan 2 Credito Valtellinese 46.81 -

4. Global Broker S.p.A. Milan Milan 2 Credito Valtellinese 30.00 -

(1) Type of relationship 1 = joint control 2 = significant influence The percentage of available votes is not indicated when it corresponds to the percentage of the equity investment.

No impairment adjustments were recorded on the equity investments indicated above during the half-year.

81

OTHER ASSET AND LIABILITY ITEMS

PROPERTY, EQUIPMENT AND INVESTMENT PROPERTY - ITEM 90

Breakdown of item “90. Property, equipment and investment property - operational property, equipment and investment property measured at cost”

Asset/Amounts 30/06/2020 31/12/2019

1. Owned 240,622 247,074

a) land 43,787 43,335

b) buildings 185,133 193,655

c) furniture 3,065 3,491

d) electronic systems 5,896 3,717

e) other 2,741 2,876

2. Rights of use acquired through the lease 133,524 140,306

a) land - -

b) buildings 124,654 129,905

c) furniture - -

d) electronic systems 7,717 8,866

e) other 1,153 1,535

Total 374,146 387,380

of which: obtained through the realisation of guarantees received - -

Breakdown of item “90. Property, equipment and investment property - property, equipment and investment property held for investment measured at cost”

Asset/Amounts

30/06/2020 31/12/2019

Carrying amount

Fair value Carrying

amount

Fair value

L1 L2 L3 L1 L2 L3

1. Owned 102,215 - - 124,295 99,913 - - 119,007

a) land 15,385 - - 18,823 16,026 - - 19,636

b) buildings 86,830 - - 105,472 83,887 - - 99,371

2. Rights of use acquired through the lease

6,117 - - 6,117 15,603 - - 15,603

a) land - - - - - - - -

b) buildings 6,117 - - 6,117 15,603 - - 15,603

Total 108,332 - - 130,412 115,516 - - 134,610

of which: obtained through the realisation of guarantees received

28,286

-

-

31,373 28,763 - - 31,364


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Breakdown of item “90. Property, equipment and investment property - revalued operational property, equipment and investment property”

Asset/Amounts 30/06/2020 31/12/2019

L1 L2 L3 L1 L2 L3

1. Owned - - 24,789 - - 24,789

a) land - - - - - -

b) buildings - - - - - -

c) furniture - - 24,789 - - 24,789

d) electronic systems - - - - - -

e) other - - - - - -

2. Rights of use acquired through the lease - - - - - -

a) land - - - - - -

b) buildings - - - - - -

c) furniture - - - - - -

d) electronic systems - - - - - -

e) other - - - - - -

Total - - 24,789 - - 24,789

of which: obtained through the realisation of guarantees received - - - - - - Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

Breakdown of item “90. Property, equipment and investment property - inventories of property, equipment and investment property regulated by IAS 2”

Asset/Amounts 30/06/2020 31/12/2019

1. Inventories of property, equipment and investment property obtained through the realisation of guarantees received

20,695

20,393

a) land - -

b) buildings 20,695 20,393

c) furniture - -

d) electronic systems - -

e) other - -

2. Other inventories of property, equipment and investment property 28,755 27,994

Total 49,450 48,387

of which: measured at fair value net of costs of sale - -

83

INTANGIBLE ASSETS - ITEM 100

Breakdown by type of asset of item "100. Intangible assets”

Asset/Amounts 30/06/2020 31/12/2019

Definite life Indefinite life Definite life Indefinite life

A.1 Goodwill X - X -

A.1.1 attributable to owners of the parent X - X -

A.1.2 attributable to non-controlling interests X - X -

A.2 Other intangible assets 19,661 - 19,703 -

A.2.1 Assets measured at cost: 19,661 - 19,703 -

a) Internally generated intangible assets 13,752 - 14,029 -

b) Other assets 5,909 - 5,674 -

A.2.2 Assets measured at fair value: - - - -

a) Internally generated intangible assets - - - -

b) Other assets - - - -

Total 19,661 - 19,703 -

TAX ASSETS Article 55 of Italian law Decree 18/2020 introduced the right of converting DTAs, recorded and not recorded in the financial statements, relating to tax losses and surplus of ACE deductions. Conversion is possible against the sale of non-performing loans (meaning loans past due by at least 90 days). The amount of the DTA converted into a tax asset is equal to 20% of the nominal value of sold non-performing loans, calculated with the applicable IRES rate (27.5% in case of banks and financial companies subject to the additional IRES of 3.5%). The tax asset can be used, without limit of amount, to offset other taxes, or it can be sold, or it can be claimed as a reimbursement. It does not contribute to the formation of the company income or the IRAP tax base. Exercising the option entails the inclusion of the amount of the converted tax asset in the basis for calculating the annual fee for the DTA, calculated at a rate of 1.5%, due until 2029. The Credito Valtellinese Group has already completed a transaction for the sale of non-performing loans after Italian Law Decree 18/2020 came into force, as a result of which about EUR 9.6 million of DTA on tax losses were converted into tax asset pursuant to Article 55 of Italian Legislative Decree no. 18 of 2020.

The recognition of deferred tax assets, other than those that can be transformed into tax asset, is strictly related to the Group's ability to generate large future taxable income. The probability test was carried out for recognition purposes. The test consists in simulating the ability to recover the deductible temporary differences and tax losses accrued at the end of the reporting period with future taxable income. The estimate of future tax revenues for the next ten years was made, compared to the December estimate, taking into account the worsening macroeconomic scenario due to the Covid-19 epidemic. The outcome of the test as at 30 June 2020 allowed the full recognition of deferred tax assets related to deductible temporary differences totalling EUR 237.6 million, of which EUR 166.3 million recognised on the amount of impairment losses recognised on first-time adoption of IFRS 9. Deferred tax assets depending on tax losses, equal to EUR 39.9 million (amount substantially unchanged compared to the balance as at 31 December 2019) were recorded for the amount that is justified by the possibility of their recovery with future taxable income. Deferred tax assets and IRAP tax assets from surplus of ACE deductions (Aid for Economic Growth, as per Article 1 of Italian Law Decree No. 201/2011) totalling EUR 37.5 million are also recognised. The outcome of the test does not allow the recognition of deferred tax assets on tax losses totalling approximately EUR 205 million and on

84

ACE surpluses for an amount of approximately EUR 2 million. In any case, the tax benefit may be recorded in subsequent financial years when and to the extent that the requirement of the probability of its recovery with future taxable income is verified following the passing of a new probability test.

OTHER ASSETS - ITEM 130

Other assets: breakdown

30/06/2020 31/12/2019

Amounts due from the tax authorities 41,697 34,293

Cheques drawn on the bank to be settled 22,325 23,729

Counterparts for securities and coupon payments to be received 198 1,621

Sundry items to be charged to customers and banks 50,271 30,371

Costs and advances pending financial allocation 501 3,792

Receivables related to the supply of goods and services 3,705 3,422

Leasehold improvements 942 4,464

Accruals not recorded separately 319 688

Other items 46,263 48,184

Total 166,221 150,564

OTHER LIABILITIES - ITEM 80

Other liabilities: breakdown

30/06/2020 31/12/2019

Amounts due to tax authorities for indirect taxes 2,448 750

Amounts due to social security and welfare institutions 7,247 10,895

Amounts due to government agencies on behalf of third parties 109,724 42,782

Sundry items to be credited to customers and banks 38,221 36,903

Amounts available to customers 44,002 36,141

Amounts payable to employees 19,029 12,610

Value date differences on portfolio transactions 199,815 114,755

Items in transit between branches 455 871

Accruals other than those capitalised 4,083 4,380

Payables related to the supply of goods and services 29,268 29,569

Share-based payment plans - IFRS 2 1,249 2,691

Sundry and residual items 186,702 145,920

Total 642,243 438,267

85

PROVISIONS FOR RISKS AND CHARGES - ITEM 100

Provisions for risks and charges: breakdown

Item/Amounts 30/06/2020 31/12/2019

1. Provisions for credit risk relating to commitments and guarantees given 6,759 5,689

2. Provisions on other commitments and other guarantees given 6,909 8,412

3. Company pension funds 27,623 36,064

4. Other provisions for risks and charges 119,664 125,998

4.1 legal and tax disputes 26,909 30,666

4.2 personnel expenses 74,076 80,969

4.3 other 18,679 14,363

Total 160,955 176,163

NON-CURRENT ASSETS HELD FOR SALE AND DISPOSAL GROUPS AND ASSOCIATED LIABILITIES - ITEM 120 UNDER ASSETS AND ITEM 70 UNDER LIABILITIES

Non-current assets held for sale and disposal groups: breakdown by type

30/06/2020 31/12/2019

A. Assets held for sale

A.1 Financial assets 87,852 85,447

A.2 Equity investments - 2,045

A.3 Property, equipment and investment property 3,159 4,517

of which: obtained through the realisation of guarantees received 2,548 2,716

A.4 Intangible assets - -

A.5 Other non-current assets - 1,187

Total (A) 91,011 93,196

of which measured at cost - 2,146

of which measured at Level 1 fair value - -


of which measured at Level 3 fair value 91,011 91,050

C. Liabilities included in disposal groups classified as held for sale

C.1 Payables - 1,226

C.2 Securities - -

C.3 Other liabilities - 2,355

Total (C) - 3,581

of which measured at cost - 3,581




The item “A.1 Financial assets” includes shares and loans and receivables with customers whose value will be recovered mainly with a sale no later than 12 months rather than with their continuous use. In particular, it includes loans and receivables with customers relating to the sale of non-performing loans reclassified following the agreement signed on 5 August 2020 with MBCredit Solutions S.p.A. (Mediobanca Group), AMCO - Asset Management Company S.p.A. and Italian NPL Opportunities Fund II for a gross book value of approximately EUR 300 million. Shares are included in the "Equity Investments and Other" segment of segment reporting, while loans and receivables are included in the "Commercial Bank" segment. Item “A.3 Property, equipment and investment property” includes investment properties for which preliminary sale agreements were signed.

86

GROUP EQUITY - ITEMS 120, 150, 160, 170 AND 180

Information on Group share capital and reserves

As at 30 June 2020, equity attributable to the owners of the parent amounted to EUR 1,700 million, compared to EUR 1,656 million at the end of December 2019.

The main changes during the year are mainly attributable, in addition to the recognition of the result for the period, to the positive change in valuation reserves of approximately EUR 3 million.

As at 30 June 2020, following the reduction operation approved by the Extraordinary Shareholders' Meeting held on 24 April 2020, the share capital of Credito Valtellinese amounted to EUR 1,643.5 million. The portfolio contained 6 treasury shares of EUR 100 thousand. No purchase or sale was put in place during the financial year.

Information on share capital - number of shares: annual changes

Items/Types 2020

Ordinary Other

A. Shares at the beginning of the year 7,014,969,446 -

- fully paid-up 7,014,969,446 -

- not fully paid-up - -

A.1 Treasury shares (-) -600 -

A.2 Outstanding shares: opening balance 7,014,968,846 -

B. Increases - -

B.1 New issues - -

- against payment: - -

- business combinations - -

- conversion of bonds - -

- exercising of warrants - -

- other - -

- free: - -

- on behalf of employees - -

- on behalf of directors - -

- other - -

B.2 Sale of treasury shares - -

B.3 Other increases - -

C. Decreases -6,944,819,752 -

C.1 Cancellation - -

C.2 Repurchase of treasury shares - -

C.3 Disposals of companies - -

C.4 Other decreases -6,944,819,752 -

D. Outstanding shares: final balance 70,149,688 -

D.1 Treasury shares (+) 6 -

D.2 Shares outstanding at the end of the year 70,149,694 -

- fully paid-up 70,149,694 -

- not fully paid-up - -

Item C.4. “Other decreases” represents the decrease in the reverse share split put in place on 1 January 2020 in the ratio of 1 new ordinary share - without any indication of a nominal value – for every 100 existing ordinary shares, after cancellation of 46 ordinary shares.

87

OTHER INFORMATION

Commitments and financial guarantees given

30/06/2020 31/12/2019

Notional value on commitments and financial guarantees given Total Total

Stage 1 Stage 2 Stage 3

1. Commitments to disburse funds 4,666,501 143,908 37,741 4,848,150 4,778,184

a) Central banks - - - - -

b) Public administrations 366,460 - - 366,460 352,808

c) Banks 571 5,083 - 5,654 6,976

d) Other financial companies 190,927 706 1,406 193,039 200,367

e) Non-financial companies 3,490,693 87,390 35,432 3,613,515 3,594,429

f) Households 617,850 50,729 903 669,482 623,604

2. Financial guarantees given 192,690 5,030 3,989 201,709 205,178

a) Central banks - - - - -

b) Public administrations - - - - -

c) Banks 46,496 - - 46,496 44,820

d) Other financial companies 303 10 - 313 779

e) Non-financial companies 140,002 4,360 3,397 147,759 151,873

f) Households 5,889 660 592 7,141 7,706

Other commitments and other guarantees given

30/06/2020 31/12/2019

1. Other guarantees given 422,548 476,557

of which: non-performing loans 24,958 24,499



c) Banks 9,121 9,757


e) Non-financial companies 362,995 410,473

f) Households 32,272 39,876

2. Other commitments 20,248 17,582

of which: non-performing loans - -



c) Banks - -



f) Households - -

88

Assets pledged as guarantee for the Bank's liabilities and commitments

Portfolios 30/06/2020 31/12/2019

1. Financial assets at fair value through profit or loss - -

2. Financial assets at fair value through other comprehensive income 281,741 482,775

3. Financial assets at amortised cost 5,739,928 6,261,723

4. Property, equipment and investment property - -

of which: property, equipment and investment property that constitute inventories - -

The assets indicated above were used as a guarantee for funding repurchase agreements, issue of bank drafts, derivatives, securities issued during securitisation transactions as well as the loans from the European Central Bank (recognised among due to central banks in table "Financial liabilities at amortised cost: breakdown by type of due to banks"), of loans received from the European Investment Bank (recognised among due to banks – Loans in table "Financial liabilities at amortised cost: breakdown by type of due to banks") and from Cassa Depositi e Prestiti (recognised among due to customers – Loans in table "Financial liabilities at amortised cost: breakdown by type of due to customers”).

89

Breakdown of the main income statement items

INTEREST - ITEMS 10 AND 20

Interest and similar income: breakdown

Items/Technical forms Debt

instruments Loans Other

transactions 1st half of

2020 1st half of

2019 Change

1. Financial assets at fair value through profit or loss 200 - - 200 184 8.70%

1.1 Financial assets held for trading 3 - - 3 8 -62.50%

1.2 Financial assets at fair value - - - -

- -

1.3 Other financial assets

mandatorily measured at fair value 197 - - 197 176 11.93%

2. Financial assets at fair value through other comprehensive income 3,287 - X 3,287 4,520 -27.28%

3. Financial assets at amortised cost 31,775 171,189 202,964 220,394 -7.91%

3.1 Loans and receivables with banks 879 416 X 1,295 1,723 -24.84%

3.2 Loans and receivables with customers 30,896 170,773 X 201,669 218,671 -7.78%

4. Hedging derivatives X X (6,813) (6,813) (6,754) 0.87%

5. Other assets X X - - - -

6. Financial liabilities X X X 6,530 5,858 11.47%

Total 35,262 171,189 (6,813) 206,168 224,202 -8.04%

of which: interest income on impaired financial assets - 21,762 - 21,762 23,387 -6.95%

of which: interest income on finance leases X 3,207 X 3,207 3,342 -4.04%

Item “4. Hedging derivatives" shows the balance of hedging differentials as a function not of the sign of the differential itself but of the sign of the interest flow that the derivatives will change.

Interest and similar expense: breakdown

Items/Technical forms Payables Securities Other

transactions 1st half of 2020


1. Financial liabilities at amortised cost:

1.1 Due to central banks - X X - - -

1.2 Due to banks (921) X X (921) (3,278) -71.90%

1.3 Due to customers (28,752) X X (28,752) (25,951) 10.79%

1.4 Securities issued X (13,602) X (13,602) (14,355) -5.25%

2. Financial liabilities held for trading - - - - - -

3. Financial liabilities at fair value - - - - - -

4. Other liabilities and provisions X X - - - -

5. Hedging derivatives X X - - - -

6. Financial assets X X X (1,381) (2,045) -32.47%

Total (29,673) (13,602) - (44,656) (45,629) -2.13%

of which: interest expense related to lease payables (2,951) X X (2,951) (2,939) 0.41%

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FEES AND COMMISSIONS - ITEMS 40 AND 50

Fee and commission income: breakdown

Type of services/Amounts 1st half of 2020

1st half of 2019

Change

a) guarantees given 2,711 3,081 -12.01%

b) credit derivatives - - -

c) management, trading and consulting services: 35,941 41,684 -13.78%

1. trading of financial instruments - - -

2. currency trading 1,466 1,807 -18.87%

3. portfolio management - - -

3.1 individual - - -

3.2 collective - - -

4. custody and administration of securities 277 297 -6.73%

5. custodian bank - - -

6. placement of securities 14,905 16,357 -8.88%

7. order acceptance and transmission 2,082 2,015 3.33%

8. consulting services 107 1,539 -93.05%

8.1 on investments - - -

8.2 on financial structuring 107 1,539 -93.05%

9. distribution of third party services 17,104 19,669 -13.04%

9.1. portfolio management 4,056 4,453 -8.92%

9.1.1. individual 4,056 4,453 -8.92%

9.1.2. collective - - -

9.2. insurance products 10,152 11,464 -11.44%

9.3. other products 2,896 3,752 -22.81%

d) collection and payment services 31,788 38,327 -17.06%

e) servicing for securitisation transactions - - -

f) factoring transaction services 1,902 1,770 7.46%

g) tax collection services - - -

h) management of multilateral trading facilities - - -

i) current account management 24,858 26,428 -5.94%

j) other services 26,590 28,043 -5.18%

Total 123,790 139,333 -11.16%

Fee and commission income included under “j) other services” mainly refers to commissions on arranged overdraft of EUR 16,477 thousand, Internet banking commissions of EUR 3,440 thousand and commissions for loans origination deriving from financial assets not designated at fair value through profit or loss of EUR 3,423 thousand.

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Fee and commission expense: breakdown

Services/Amounts 1st half of 2020

1st half of 2019

Change

a) guarantees received (605) (1,236) -51.05%

b) credit derivatives - - -

c) management and trading services: (445) (466) -4.51%

1. trading of financial instruments (11) (1) n.s.

2. currency trading - - -

3. portfolio management - - -

3.1 own account - - -

3.2 for third parties - - -

4. custody and administration of securities (434) (465) -6.67%

5. placement of financial instruments - - -

6. off-premises provision of financial instruments, products and services - - -

d) collection and payment services (9,912) (12,924) -23.31%

e) other services (1,183) (900) 31.44%

Total (12,145) (15,526) -21.78%

DIVIDENDS AND SIMILAR INCOME - ITEM 70

Dividends and similar income: breakdown

Items/Income

1st half of 2020 1st half of 2019 Change

Dividends Similar income



A. Financial assets held for trading 1 1 17 152 -94.12% -99.34%

B. Other financial assets mandatorily measured at fair value - 642 - 381 - 68.50%

C. Financial assets at fair value through other comprehensive income 115 - 374 - -69.25% -

D. Equity investments - - - - - -

Total 116 643 391 533 -70.33% 20.64%

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PROFITS (LOSSES) ON TRADING - ITEM 80

Profits (Losses) on trading: breakdown

Transactions/Income components Gains (A) Trading income (B)

Losses (C) Trading losses (D)

Profits (Losses) on

trading [(A+B)-(C+D)]

1. Financial assets held for trading 2 139 (87) (136) (82)

1.1 Debt instruments - 3 (3) (11) (11)

1.2 Equity instruments 2 44 (83) (15) (52)

1.3 OEIC units - 92 (1) (110) (19)

1.4 Loans - - - - -

1.5 Other - - - - -

2. Financial liabilities held for trading - - - - -

2.1 Debt instruments - - - - -

2.2 Payables - - - - -

2.3 Other - - - - -

3. Financial assets and liabilities: exchange rate differences X X X X 105

4. Derivatives - - - (4) 967

4.1 Financial derivatives:

- On debt instruments and interest rates - - - - -

- On equity instruments and stock market share indices - - - (4) (4)

- On currencies and gold X X X X 971

- Other - - - - -

4.2 Credit derivatives - - - - -

of which: natural hedges associated with fair value option X X X X -

Total 2 139 (87) (140) 990

NET HEDGING INCOME (EXPENSE) – ITEM 90

Net hedging income (expense): breakdown

Income components/Amounts 1st half of

2020 1st half of

2019 Change

A. Gains on:

A.1 Fair value hedges - - -

A.2 Financial assets with fair value hedges 10,844 25,072 -56.75%

A.3 Financial liabilities with fair value hedges - - -

A.4 Financial derivatives for cash flow hedges - - -

A.5 Foreign currency assets and liabilities - - -

Total hedging income (A) 10,844 25,072 -56.75%

B. Losses on:

B.1 Fair value hedges (10,751) (25,056) -57.09%

B.2 Financial assets with fair value hedges - - -

B.3 Financial liabilities with fair value hedges - - -

B.4 Financial derivatives for cash flow hedges - - -

B.5 Foreign currency assets and liabilities - - -

Total hedging expense (B) (10,751) (25,056) -57.09%

C. Net hedging expense (A-B) 93 16 n.s.

of which: result of hedges on net positions - - -

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PROFIT (LOSS) ON DERECOGNITION - ITEM 100

Profit (loss) on derecognition: breakdown

Items/Income components 1st half of 2020 1st half of 2019

Profits Losses Net result Profits Losses Net result

A. Financial assets

1. Financial assets at amortised cost

1.1 Loans and receivables with banks - - - - - -

1.2 Loans and receivables with customers 7,218 (459) 6,759 9,731 (3,439) 6,292


2.1 Debt instruments 84 (28) 56 2,583 (2,092) 491

2.2 Loans - - - - - -

Total assets (A) 7,302 (487) 6,815 12,314 (5,531) 6,783

B. Financial liabilities at amortised cost

1. Due to banks - - - - - -

2. Due to customers - - - - - -

3. Securities issued - - - - - -

Total liabilities (B) - - - - - -

Profits on debt instruments mainly concern transactions of Italian Government bonds and are consistent with portfolio management models and policies.

PROFITS (LOSSES) ON OTHER ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS – ITEM 110

Net change in value of other financial assets and liabilities measured at fair value through profit or loss: breakdown of other financial assets and liabilities mandatorily at fair value

Transactions/Income components Gains (A)

Profits on sales (B)

Losses (C) Losses on sales (D)

Net result [(A+B)-(C+D)]

1. Financial assets 687 - (8,332) (2) (7,647)

1.1 Debt instruments - - - - -

1.2 Equity instruments - - (2,662) - (2,662)

1.3 OEIC units 687 - (5,670) (2) (4,985)

1.4 Loans - - - - -

2. Financial assets: exchange rate differences

X X X X -

Total 687 - (8,332) (2) (7,647)

Capital losses on equity instruments mainly refer to a shareholding measured using the estimated selling price, while capital losses on OEICs refer to updated valuations based on the latest available NAV.

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NET IMPAIRMENT LOSSES FOR CREDIT RISK - ITEM 130

Net impairment losses for credit risk relating to financial assets at amortised cost: breakdown

Transactions/ Income components

Impairment losses (1) Reversals of impairment losses (2) 1st half of

2020

1st half of 2019

Stage 1 and 2

Stage 3 Stage 1 and

2 Stage 3

Write-off Other

A. Loans and receivables with banks (158) - - 372 - 214 6,633

- Loans (153) - - 349 - 196 6,081

- Debt instruments (5) - - 23 - 18 552

of which: acquired or originated impaired loans - - - - - - -

B. Loans and receivables with customers (8,004) (3,280) (110,104) 10 62,556 (58,822) (108,386)

- Loans (7,250) (3,280) (110,104) 10 62,556 (58,068) (109,011)

- Debt instruments (754) - - - - (754) 625

of which: acquired or originated impaired loans

- - (643) - 1,066 423 (1,826)

Total (8,162) (3,280) (110,104) 382 62,556 (58,608) (101,753)

The decrease in impairment losses of Loans and receivables with customers classified in stage 3 compared to the first half of 2019 is related to the inclusion of sales scenarios in the valuation of non-performing loans as at 30 June 2019, while the increase in the stage 1 and 2 compared to the figure for the first half of 2019 is mainly related to the inclusion of the worsening of macroeconomic scenarios in the first half of 2020 due to the health emergency.

Net impairment losses for credit risk relating to financial assets at fair value through other comprehensive income: breakdown

Transactions/Income components

Impairment losses (1) Reversals of impairment losses (2) 1st

half of 2020

1st half of 2019

Stage 1 and 2

Stage 3 Stage 1 and

2

Stage 3 Write-

off Other

A. Debt instruments (404) - - 649 - 245 540

B. Loans - - - - - - -

- with customers - - - - - - -

- with banks - - - - - - -

of which: acquired or originated impaired financial assets - - - - - - -

Total (404) - - 649 - 245 540

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ADMINISTRATIVE EXPENSES - ITEM 190

Personnel expenses: breakdown

Type of expense/Amounts 1st half of 2020

1st half of 2019

Change

1) Employees (122,741) (135,235) -9.24%

a) wages and salaries (81,106) (82,655) -1.87%

b) social security charges (25,366) (25,639) -1.06%

c) post-employment benefits (5,182) (5,808) -10.78%

d) pension expenses - - -

e) accrual for post-employment benefits (136) (282) -51.77%

f) accrual for pension and similar provisions:

- defined contribution - - -

- defined benefit (138) (518) -73.36%

g) payments to external supplementary pension funds:

- defined contribution (2,910) (2,981) -2.38%

- defined benefit - - -

h) costs of share-based payment plans 1,442 (634) n.s.

i) other employee benefits (9,345) (16,718) -44.10%

2) Other personnel in service - (203) n.s.

3) Directors and statutory auditors (1,587) (1,373) 15.59%

4) Retired personnel - - -

Total (124,328) (136,811) -9.12%

Item "i) other employee benefits" mainly includes costs relating to variable components of remuneration.

Average number of employees by category

1st half of 2020 1st half of 2019

Employees: 3,354 3,443

a) executives 34 39

b) middle managers 1,352 1,351

c) other employees 1,968 2,053

Other personnel - 10

Total 3,354 3,453

“Other employees” includes atypical forms of contract other than subordinate employment contract, such as for example project and temporary work contracts.

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Other administrative expenses: breakdown

1st half of 2020


Fees for professional and consulting services (10,495) (13,632) -23.01%

Insurance premiums (1,507) (1,723) -12.54%

Advertising (116) (947) -87.75%

Postage, telephone and data transfer (3,399) (2,985) 13.87%

IT services (13,842) (15,369) -9.94%

Electricity, heating and shared property service charges (3,736) (3,863) -3.29%

Administrative and logistics costs (1,277) (2,503) -48.98%

Property management (3,686) (4,028) -8.49%

Transport and travel (816) (1,227) -33.50%

Security and transport of valuables (2,301) (2,815) -18.26%

Membership fees (1,055) (1,590) -33.65%

Audit fees (574) (545) 5.32%

Maintenance and lease of hardware and software (3,380) (3,329) 1.53%

Commercial and financial information (3,309) (2,721) 21.61%

Rent payable (369) (607) -39.21%

Indirect personnel expenses (440) (1,187) -62.93%

Taxes (20,218) (19,783) 2.20%

SRF, DGS and additional contributions (13,355) (11,263) 18.57%

Miscellaneous items (4,025) (4,011) 0.35%

Total (87,900) (94,128) -6.62%

NET ACCRUALS TO PROVISIONS FOR RISKS AND CHARGES - ITEM 200

Net accruals to provisions for risks and charges: breakdown

Items 1st half of 2020

1st half of 2019

Change

Provision for legal disputes and claims from liquidators 1,804 (2,814) n.s.

Provision for sundry risks and charges (4,946) (7,024) -29.58%

Total (3,142) (9,838) -68.06%

OTHER OPERATING NET INCOME - ITEM 230

Other operating expenses: breakdown

1st half of

2020 1st half of 2019 Change

Amortisation of leasehold improvements (320) (441) -27.44%

Other expenses (1,672) (1,491) 12.14%

Total (1,992) (1,932) 3.11%

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Other operating income: breakdown

1st half of 2020 1st half of 2019 Change

Rent receivable and subleases 1,652 1,062 55.56%

Recovery of loan setup fees 294 600 -51.00%

Income from IT services 3,060 3,445 -11.18%

Income from other services 232 241 -3.73%

Recovery of indirect taxes 18,095 17,268 4.79%

Recovery of insurance policy payments 432 396 9.09%

Recovery of legal and notarial costs 1,043 1,118 -6.71%

Other income 5,024 533 n.s.

Total 29,832 24,663 20.96%

Other income includes EUR 2.3 million relating to the purchase of Claris Factor S.p.A. and insurance reimbursements of EUR 0.7 million.

NET GAINS (LOSSES) ON EQUITY INVESTMENTS - ITEM 250

Net gains (losses) on equity investments: breakdown

Income components/Amounts 1st half of 2020 1st half of 2019 Change

1. Companies subject to joint control

A. Income 12 9 33.33%

1. Revaluations 12 9 33.33%

2. Gains on sale - - -

3. Reversals of impairment losses - - -

4. Other income - - -

B. Expense - - -

1. Impairment - - -

2. Impairment losses - - -

3. Losses on sale - - -

4. Other expenses - - -

Net gains (losses) 12 9 33.33%

2. Companies subject to significant influence -

A. Income 1,270 864 46.99%

1. Revaluations 1,259 864 45.72%

2. Gains on sale 11 - -

3. Reversals of impairment losses - - -

4. Other income - - -

B. Expense (107) (56) 91.07%

1. Impairment (68) (56) 21.43%

2. Impairment losses - - -

3. Losses on sale (39) - -

4. Other expenses - - -

Net gains (losses) 1,163 808 43.94%

Total 1,175 817 43.82%

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NET GAINS (LOSSES) ON SALES OF INVESTMENTS - ITEM 280

Net gains (losses) on sales of investments: breakdown

Income components/Amounts 1st half of 2020 1st half of 2019 Change

A. Property

- Gains on sale 258 724 -64.36%

- Losses on sale - - -

B. Other assets

- Gains on sale 33,127 4,561 n.s.

- Losses on sale - (1) n.s.

Net gains (losses) 33,385 5,284 n.s.

Gains on sale indicated under "B. Other assets" mainly refer to the sale of loans against pledges.

TAXES FOR THE PERIOD

Income taxes for the period were negative by just under EUR 1 million, net of the positive effect of approximately EUR 9.6 million from the reassessment of deferred tax assets on tax losses following their conversion into tax asset pursuant to Article 55 of Italian Law Decree No. 18 of 2020.

EARNINGS PER SHARE

The basic earnings per share and diluted earnings per share are calculated in accordance with the methods described in IAS 33 - Earnings per share. The basic earnings per share are defined as the profit or loss or the result from continuing operations attributable to the owners of the parent (therefore, excluding the post-tax result from discontinued operations) attributable to ordinary equity holders and the weighted average number of ordinary shares outstanding during the period.

The following table displays the basic earnings per share with the calculation details. 1st half of 2020 1st half of 2019

Profit attributable to holders of ordinary shares 40,986 23,546

Weighted average number of ordinary shares 70,149,688 70,149,688

Basic earnings per share 0.584 0.336

During the first half of 2020, the reverse split of Creval ordinary shares was carried out according to a ratio of 1 new ordinary share for every 100 existing ordinary shares. As established by IAS 33, the weighted average number of ordinary shares outstanding during the year and with reference to the first half of 2019 was adjusted to take account of this reverse split that changed the number of outstanding ordinary shares.

There are no outstanding instruments with potential dilutive effect; therefore, diluted earnings per share are equal to basic earnings per share.

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Information on risks and related hedging policies

Foreword

The Group adopted system of governance and measurement/control of risks broken down in the different Corporate bodies/functions involved in order to ensure the best monitoring of relevant risks to which it is or could be exposed and guarantee at the same time the consistency of operations to its risk appetite. In this context:

- the Board of Directors, in its role of strategic supervision, approves the internal control system and defines the strategic guidelines of the Risk Appetite Framework (RAF), ICAAP, ILAAP, Recovery Plan, the internal rating system (A-IRB approach) and the Progressive Extension Plan;

- the Board of Statutory Auditors supervises the risk governance and control system as defined by the RAF and the internal control system;

- the Risk Committee assists the Board of Directors by providing it with advisory and investigative functions with regard to the internal control system and risk governance;

- the Chief Executive Officer exercises the power to propose the adoption of resolutions concerning the internal control system and is responsible for the implementation of all resolutions of the Board of Directors, with a special reference to the implementation of the strategic guidelines, the RAF and the risk governance policies.

The Bodies also benefit from the action of certain Management Committees in order to achieve the maximum operational decisionality, the integration of policies at company level and the timeliness in the coordinated implementation of the strategies defined by the decision-making bodies.

Moreover, as part of the risk governance, the internal control system forms the set of rules, structures, processes and procedures that aim to ensure, in compliance with sound and prudent management, the achievement of the following goals:

- reducing the risk within the limits indicated in the framework of reference for determining the risk appetite of the bank (Risk Appetite Framework - “RAF”);

- prevention of the risk that the bank is involved, even unintentionally, in illegal activities (with a special reference to those related to money laundering, usury and terrorist financing);

- compliance of the transactions with the law and supervisory regulations, as well as with policies, regulations and internal procedures.

The design of the internal control system is divided into three levels:

- first level (known as "line controls"), aimed at ensuring that the transactions are carried out correctly. The "first line of defence" represented by subjects that assume risks in accordance with the structure of the delegated powers, the RAF and the risk limits acts in this context;

- second level (known as "controls on risks and on compliance"), which have the aim of ensuring - among other things - the correct implementation of the risk management process, the observance of the operating limits assigned to the various departments and the compliance of the business operations with standards;

- third level (known as "internal audit) aimed at identifying - based on a pre-established frequency in relation to the nature and intensity of the risks - violations of procedures and regulations as well as evaluating on a regular basis the completeness, adequacy, functions and reliability of the internal control system and of the IT system.

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Detailed information on the general characteristics of the control systems, the risk management, measurement and control policies are contained in the Notes to the 2019 Consolidated Financial Statements (Part E – Information on risks and hedging policies) and in the informative report on the third pillar as at 31 December 2019 made available on the Group's website at www.gruppocreval.com.

The risk perimeter

In line with the regulatory provisions, with its operational and organisational characteristics, the risk perimeter subject to measurement (using qualitative-quantitative techniques) and control is broken down as follows:

Pillar I Risks

- credit and counterparty risks;

- market risk for the trading book;

- operational risk (including conduct risk);

Pillar II Risks

- sovereign risk;

- interest rate risk for the banking book;

- liquidity risk;

- risk related to the portion of encumbered assets (asset encumbrance)

- concentration risk of the loans and receivables with customers portfolio;

- residual risk from CRM;

- real estate risk;

- risk of excessive leverage;

- risk deriving from securitisations;

- strategic risk;

- IT risk;

- reputational risk;

- model risk;

- compliance risk;

- money-laundering risk;

- risk towards related parties.

1.1 CREDIT RISK

In line with its focus on retail banking, the Group is mainly exposed to credit risks. The credit risk is primarily defined as the insolvency risk or default of the counterparty, i.e. as “the possibility for the creditor that a financial obligation will not be paid at maturity or later”. During the first half of 2020, the Bank's lending practices were affected by the Covid-19 emergency and in particular by the measures launched by the Italian Government and the Supervisory Authorities with a view to containing the economic impact of the spread of the pandemic, guaranteeing large liquid assets to all sectors of the economy and ensuring the most effective transmission of monetary policy decisions. Within the framework outlined above, and with

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specific reference to credit risk, a number of measures contained in the "Cura Italia" and "Liquidità" Italian Law Decrees such as the moratorium on credit and the activation of public guarantees (Sace and Fondo Centrale di Garanzia) on new loans to businesses, both aimed at supporting the liquidity of small and medium-sized businesses and households as well as avoiding the materialisation of effects associated with episodes of widespread insolvency and severe tightening of credit conditions (for further information, refer to Pillar III disclosure). In this context, in order to respond to the potential difficulties of customers arising from the temporary slowdown in the economic cycle and the possible impact on liquidity, the Creval Group implemented promptly the above measures and opted for the ABI (Italian Banking Association) agreements aimed at suspending repayment plans and extending the payment and repayment dates of the loans granted. The loan disbursements were made in accordance with the Group's lending strategies and policies, which aim to support the real economy of the areas where the Group operates (SMEs and households, in particular) and to guide the composition of the loans portfolio by optimising risk-adjusted profitability, limiting the concentration of exposures on single counterparties/groups, single sectors of economic activity and geographical areas. In particular, the potential credit risk arising from new disbursements and the granting of moratoria was mitigated by the acquisition of the public guarantees envisaged by the abovementioned Law Decrees, the adoption of a specific process to assess and monitor the customer's risk profile and the strengthening of the organisational units dedicated to the investigation and monitoring process. In particular, for this type of operations, an origination process was defined and adopted characterised by the application of specific controls aimed at checking the existence of the requirements and obligations envisaged by the regulations and assessing the creditworthiness of the customer, also through the analysis of the reasons for the financial difficulty in order to find out how temporary it is and how it can be traced back to the particular economic situation. Moreover, the Group adopts a process for monitoring credit and risk exposure profile on positions subject to a moratorium in order to prevent potential deterioration of positions and the existence of any indications of default by debtors.

During the first half of the year, there was an increase in Stage 2 classifications of approximately 10%, mainly due to the updating of macroeconomic scenarios with a consequent worsening of the forward looking lifetime PDs. During the same period, default entry rates and the use of availability margins on revocable credit lines remained substantially stable and in line with those observed in the pre-crisis period.

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Credit risk management policies

Organisational aspects

The lending strategies and policies adopted by the Group aim to support the real economy of the areas where the Group operates (SMEs and households, in particular) and to guide the composition of the loans portfolio by optimising risk-adjusted profitability, limiting the concentration of exposures on single counterparties/groups, single sectors of economic activity and geographical areas.

The areas of the Chief Lending Officer (CLO) and the Chief Risk Officer (CRO) are mainly involved in the monitoring and governance of credit risk, ensuring that the ordinary activities of credit granting/management and risk measurement/control are carried out.

The overall credit process is structured in sub-processes formalised in specific policies that establish the main lines of business and define the adopted organisational measures. The processes are supported by specific electronic procedures that allow uniform application of the defined rules. In this context, the following elements are particularly important:

credit policies, updated annually;

the credit rating and management process, based on the internal rating system, which is a fundamental and essential element;

the process of credit forecasting management, strengthened in order to increase the number of indicators to anticipate the identification of the state of financial difficulty (early warning system) of the customer;

the credit classification process in the various positions and the valuation of impairment losses (flat-rate on performing and non-performing portfolios below threshold, analytical on non-performing portfolios above threshold).

The entire credit process is submitted to the second-level controls carried out internally by the Loans Department and by the company's control functions (risk management function, internal validation function and internal audit function) in order to ensure the most precision in assessing risk, by maintaining a lean and efficient assessment and management process.

Management, measurement and control systems

Since 25 September 2018, the Group has been authorised to use the internal credit risk measurement system (A-IRB approach), for the “Exposures to Corporate enterprises” and “Retail exposures” regulatory classes, pursuant to Article 143 of Regulation (EU) no. 575/2013.

The PD models of the Group - of the "hybrid" type (more point in time - P.I.T. score and through the cycle - T.T.C. calibration) - are intended to comply with the precise rationale of obtaining risk measures that:

- can pinpoint the fundamental drivers of the creditworthiness of the parties towards which the Group has or intends to assume loan exposures;

- are relatively stable over time, so as to reflect the expected long-term risk of the Group’s loan exposures in each customer segment;

- can prevent uncontrolled increases in risk in positive cycle phases and – on the contrary – indiscriminate restriction of loans in negative cycle phases.

These validated PD models are clustered as follows:

- Corporate Enterprise PD model;

- Retail Enterprise PD model;

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- Private individual PD model;

- Co-ownership PD model.

The estimating algorithms present in the model are the combination of accurate and rigorous statistical tests used without losing sight of the intuitiveness of the model and the economic sense of the estimates. The set of information used for estimating the rating models was defined with the aim of assessing the entire database available and developed based on the consistency with loan management practices, which was verified through active involvement of the competent corporate functions (e.g. Loans Department). The master scale adopted by the Group consists of 9 rating classes to which the related PDs (probability of default) correspond, i.e., the probability that a counterparty belonging to a particular rating class passes to the default state within a time horizon of one year. The PDs include an appropriate precautionary factor that takes account of the presumed margin of error contained in the estimates (known as margin of conservatism or MOC).

The distributions of the performing loans and receivables with customers portfolio are shown below. The data refers to 30 June 2020 and 31 December 2019:

The second risk parameter validated for Enterprises and Private is the Loss Given Default (LGD), which represents the loss in the event of counterparty default (calibrated taking into account adverse scenarios) with respect to the exposure at the time of default (Exposure At Default, EAD).

This LGD model is characterised by the estimate of two separate components:

- estimate of the LGD, which consists of the loss rate historically recognised on bad loans (known as “workout LGD”);

- estimate of the Danger Rate, which consists of the probability that a position will migrate from a pre-bad loan position to a bad loan position. This parameter is used to calibrate the expected loss recorded on bad loans in such a way as to make it effectively applicable also to different classified positions.

6,5%

14,6

%

14,8

% 17,1

%

18,7

%

12,0

%

7,1%

5,1%

4,1%

0,1%

7,5%

15,0

%

14,6

%

20,1

%

14,3

%

12,0

%

7,3%

5,1%

4,0%

0,1%

0%

5%

10%

15%

20%

25%

Port

ion

of E

AD

Rating Class

Enterprises and PrivateDecember 2019

June 2020

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In the estimation process, not only closed and substantially closed positions (i.e. above the maximum recovery period - MRP), but also open positions subject to disposal (single name and massive) are duly taken into account.

For non-performing exposures, the RWA defaulted asset component was also estimated, equal to the difference between the LGD defaulted asset (including the downturn economic cycle component and specific caution factors) and the Expected Loss Best estimate (ELBE) parameter, which represents the best possible estimate of expected loss taking into account the current economic condition, was also estimated.

The third validated risk parameter is the Exposure At Default (EAD) risk parameter, which represents the amount of the counterparty's estimated exposure at the time of default and is determined by estimating the credit conversion factors "K”.

Methods for measuring expected losses

According to IFRS 9, all financial assets not measured at fair value through profit or loss must be assessed by means of an "expected loss" approach. In accordance with accounting standard, the Group classifies financial instruments into three different categories:

- Stage 1: all financial assets for which the bank found no evidence of a "significant" increase in credit risk between origination and reporting date. This Stage has the right to classify those instruments that, at the reporting date, are considered to have a structurally low credit risk exemption (LCRE). For these financial assets, impairment losses are calculated using the "expected credit loss - ECL" method, with a time horizon of twelve months following the reporting date;

- Stage 2: all financial assets that showed a significant increase in credit risk (SICR) since the initial recognition date. The measurement of impairment losses involves estimating expected losses over the time horizon equal to the entire contractual life (lifetime and forward looking) of the exposure being valued. The macro-economic scenarios used for forward looking estimates are provided by Prometeia and updated at least every six months or whenever extraordinary events with potential impacts on the estimates emerge (e.g. Covid-19);

- Stage 3: all non-performing financial assets (past due, unlikely to pay, non-performing forborne and non-performing). Impairment losses are measured by means of analytical impairment for UTP and bad loans above a certain threshold and a statistical approach for all past dues, UTP and bad loans below that threshold. Moreover, as required by IFRS 9, forward-looking factors that adapt the weighed-up probabilities of occurrence of the different future scenarios were included. Specifically, alternative recovery scenarios were considered like the sale of portfolios of non-performing loans in relation to the corporate objectives to reduce the non-performing financial assets in the business plan, to which a realisation probability must be attributed, to be considered in the overall measurement.

The main characteristics of the method used are set below:

1. determining the SICR threshold: in the presence of 30 overdue days, forbearance measures or the increase in lifetime probabilities of default (PD) at the reporting date with respect to the origination date above the default relevant thresholds. More specifically, for each rating class, credit risk segment (Corporate Enterprises, Retail Enterprises, Private) and residual maturity of the loan, the SICR threshold is defined as the ratio between the cumulative PD lifetime through the cycle associated with the original rating and the cumulative PD lifetime through the cycle associated with the corresponding minimum "non-performing" rating level. The use of the low credit risk exemption simplified approach is also very limited, with exclusive reference to banking counterparties (the classification in Stage 2 is carried out if,

105

at the reporting date, counterparties are assigned an external rating below a predefined threshold, identifying an actual increase in credit risk);

2. the inclusion of forward looking information in the model for calculating expected losses: in line with IFRS 9, the Group also estimated the risk parameters against a lifetime horizon conditional to expectations on future macroeconomic scenarios (known as forward looking information) through the application of specific satellite models that allow to estimate the impact of macroeconomic scenarios on individual risk parameters. The adoption of forward looking parameters is also carried out for the calculation of the expected loss relating to exposures falling under stage 3 by simulating the impacts of alternative scenarios also related to the different management options and recovery of default positions. These include, in particular, sales scenarios whereby, where the company's objectives envisage sales operations and such operations are still to be carried out, the assessment of transferable non-performing loans considers the possibility of realisation also through their sale;

3. the updating of forecasts of future trends of the macro-economic variables: the "Most likely" macro-economic scenario, i.e. the scenario considered most likely and in line with the expected macro-economic trend is used. The scenario is defined by the Studies Service on the basis of forecasts provided by Prometeia and the results of reliability tests carried out through benchmarking analysis with other public source scenarios (ECB and Bank of Italy);

4. calculation of 12-month and lifetime expected losses: the IFRS 9 estimate of the PD, LGD and EAD parameters is based on internal A-IRB models adopted by the Group, net of conservative margins and regulatory downturn components but including an Add-on to take account of the non-linearity of the scenarios. Moreover, IFRS 9 risk parameters are adapted to incorporate forward looking information and the multi-period horizon. In addition to the above risk parameters, the following additional components were estimated for the purpose of determining impairment losses on performing exposures:

- trend of the exposure over time, significant only for amortising products;

- probability of prepayment (early repayment of the loan applied in accordance with the Standard, limited to Stage 2 as it relates only to the lifetime component).

In addition to the above, the Group adopts the “Most Likely scenario + Add-on” approach. Expected losses are estimated based on the impacts of the Most Likely scenario and corrected by a factor reflecting the non-linearity of the relationship between scenarios and expected losses:

VARIABLES

(2020-2022 CAGR) Most likely scenario

GDP -0.98%

Consumer prices +0.89%

Unemployment rate +2.02%

Price of Residential properties +0.62%

Price of Commercial properties +0.58%

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Collective impairment on performing loans - during the first half of 2020 - remained at comparable values with respect to December 2019 (coverage of approximately 0.6%), due to the combined effect of the prudential update of the post-Covid-19 macroeconomic scenarios offset by the improvement in the risk profile of the loan portfolio.

The following table shows the breakdown of exposures and IFRS 9 expected loss between Stage 1 and 2 by customer segments, type of business and geographic area:

Segment Stage 1 portion Stage 2 portion Stage 1 ECL Stage 2 ECL

Corporate enterprises 89.9% 10.1% 0.223% 4.666%

Retail enterprises 88.0% 12.0% 0.358% 4.217%

Private 88.7% 11.3% 0.090% 1.709%

Type of Business Stage 1 portion Stage 2 portion Stage 1 ECL Stage 2 ECL

Industrial 94.7% 5.3% 0.177% 3.937%

Shops 92.8% 7.2% 0.208% 3.702%

Building industry 66.3% 33.7% 0.503% 4.131%

Real estate 75.6% 24.4% 0.480% 5.321%

Services 92.8% 7.2% 0.248% 4.963%

Geographic area Stage 1 portion Stage 2 portion Stage 1 ECL Stage 2 ECL

North-west 88.9% 11.1% 0.188% 3.546%

North-east 94.0% 6.0% 0.195% 2.703%

Centre 90.3% 9.7% 0.201% 3.752%

Islands 87.0% 13.0% 0.248% 3.828%

South 87.7% 12.3% 0.359% 6.209%

Where no internal estimates are available, the Group uses the external PD and LGD risk parameters provided by an independent ECAI and the expected future cash flows for determining the EAD.

Finally, note the assessment of the risk exposure on the sovereign portfolio for which reference is made to the following paragraphs of this Report.

Credit risk mitigation techniques

Risk mitigation techniques include instruments that help to reduce the loss the Bank would incur in the event of counterparty default, including collaterals and personal guarantees. In case of collaterals, the reduction of credit risk on the exposure arises from the Bank's right to liquidate certain assets, to transfer ownership of the collateralised asset or to reduce the credit by the amount of the collateral, in the event of default by the counterparty or on the occurrence of other specific credit events affecting the counterparty. In case of personal guarantees, the reduction of credit risk on the exposure results from the obligation of a third party to pay a certain amount upon the occurrence of a default or other specific credit events.

The granting of loans is based on the borrower’s actual capacity to repay the loan but, where appropriate or required by the credit policies in question, in order to reduce credit risk, the Group acquires from its customers the typical banking guarantees, mainly mortgages on real estate, collaterals on securities and personal guarantees.

The process of acquiring, managing and using guarantees is regulated by specific internal regulations. All the regulations are aimed at ensuring the effectiveness of the guarantee. In

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particular, the granting of credit with the acquisition of collateral is subject to internal rules and processes for the valuation of the asset, the finalisation of the collateral and the control of the value. The properties were assessed by external experts coordinated by the Real Estate Area of Credito Valtellinese. The real estate valuations include a series of information elements relating to the location, urban planning/authorisation data, the consistency of the asset, its building characteristics, the intended use of the different portions being assessed (and then any mortgage). As part of its management activities, the Group adopts a system aimed at monitoring the market value of real estate assets as a guarantee for the loans granted. This system is based on the continuous updating of a database on securities on properties through a series of evaluations and checks on the data. Asset repossessing is assigned to the Group company Stelline Real Estate S.p.A. and to the Parent, whereas the Real Estate Area deals with property and facility management and property valuation.

As part of the ICAAP process, the Group also provides for the assessment of residual risk, i.e. the risk that the recognised techniques used to mitigate credit risk are less effective than expected. The use of these techniques may in fact expose the Group to a series of further risks (for example of an operational or legal nature) which, if they occur, may lead to a greater lending risk than had been expected due to the lower effectiveness or actual unavailability of the protection. The residual risk is mainly managed by acting on the procedural and organisational plan.

The Auditing Department is assigned the third-level controls designed to ensure timely compliance with the obligations relating to the management of guarantees.

With reference to the eligibility of guarantees for determining asset requirements, the Group regulated a process that guides and applies their eligibility and admissibility requirements.


Management strategies and policies

The irregularly performing loans are classified in compliance with what is provided by supervisory regulations as: past due non-performing loans, unlikely to pay and bad loans. As explained in more detail below, in addition to what is described above, the regulation introduces the concept of forborne exposure, which includes relationships in respect of which the “forbearance measures” granted to a debtor in financial difficulty have been extended. Non-performing forbearance exposures do not form a separate category of non-performing assets but are a characteristic of the previous categories of non-performing assets.

Loans are classified as non-performing exposures either automatically or on the basis of proposals and expert assessments depending on the circumstances. The methods and procedures for the classification of loans are regulated by the Group in specific internal regulations.

More specifically, the classification of past due and/or overdue loans is carried out automatically when the conditions laid down by the regulations are met:

- the customer shows loans that are past due by more than 90 days continuously;

- the higher of the following two values is equal to or greater than the materiality threshold of 5%:

- average of past due and/or overdue portions of the entire exposure registered on a daily basis in the last previous quarter prior to the classification date;

- past due and/or overdue portion of the entire exposure at the end of the reporting period.

On the other hand, the unlikely to pay (UTP) classification can be carried out:

108

- at the manager's suggestion, as part of the ongoing monitoring of the counterparty;

- when accelerating events occur (UTP trigger) in two different ways:

- automatic: when the trigger occurs, the position is automatically classified as UTP;

- by expert analysis: when the trigger occurs, the position is compulsorily subjected to expert analysis for possible classification to UTP; in particular, the position manager is required to open a special file, within the timeframe envisaged by the dedicated operating manual, which will be forwarded to the competent body that, in turn, will analyse the proposal and possibly decide on the classification as unlikely to pay, where the conditions exist.

Finally, the classification as bad loans is made at the manager's suggestion, as part of the continuous monitoring of the counterparty. The competent body is called upon to carefully evaluate the proposal in order to define any resolution to classify the counterparty as bad loan.

The non-performing exposures become performing, regulated by the Supervisory Authority as well as by specific internal regulations, on the initiative of the Structures responsible for management, subject to verification that the critical conditions and the state of insolvency are no longer present.

With regard to exposures classified as “past due and/or overdue non-performing", they become automatically performing once the exposure has been repaid; the same mechanism is applied to small exposures, already automatically classified as unlikely to pay, if, again by automatic verification, the conditions leading to their classification are no longer present.

The management of non-performing loans is entrusted to dedicated structures that operate through previously set recovery procedures, differentiated according to the risk classification.

Non-performing financial assets are subject to an analytical valuation process aimed at determining the relevant anticipated loss. The impairment loss of individual loans is equal to the difference between its carrying amount at the time of measurement (amortised cost) and the present value of the expected future cash flows, calculated using the original effective interest rate.

The estimate of anticipated loss and time of recovery is made taking into account all the factors useful for assessing the debtor's ability to repay its debts, or the Group's ability to collect its credit. For this purpose, data relating to financial statements, mortgage surveys, information from the Bank of Italy Central Credit Bureau, the most recent property valuation reports, risk parameters, information obtained from third parties and documents submitted by debtors and guarantors are used.

Consistently with the indications contained in the reference regulations, the Group always assesses non-performing positions through individual impairment and, depending on the case in point, can envisage the application of one of the two cases indicated:

- the use of calculation formulas based on statistical approach based on EL best estimate for positions classified as UTP below a predefined amount threshold, for positions classified as bad loans below a predefined amount threshold and for all positions classified as past due;

- the use of an "expert assessment" by the competent subjects/bodies. This assessment is carried out on the occasion of their classification, on the occurrence of significant events and, in any case, reviewed periodically in accordance with the criteria and methods illustrated in this document.

Moreover, forward-looking factors that adapt the weighed-up probabilities of occurrence of the different future scenarios were included in the valuations of exposures classified in the third

109

stage. Specifically, alternative recovery scenarios were considered like the sale of portfolios of non-performing loans in relation to the corporate objectives to reduce the non-performing financial assets in the business plan, to which a realisation probability must be attributed, to be considered in the overall measurement.

Write-off

A write-off is an event that results in derecognition when we no longer have reasonable expectations of recovering the financial asset. It may occur before the legal actions for the recovery of the financial asset are terminated and does not involve the waiver of the right of claim by the bank.

The write-off of a loan is the result of an evaluation of the position made by the credit manager and can take place both for non-recoverability and for lack of economic convenience of the recovery actions. The write-off for non-recoverability refers to cases where the Bank is in possession of documents attesting to the significant probability that the loan cannot be recovered in whole or in part. The write-off for lack of economic convenience is made when it is evident, and can be demonstrated, that the costs associated with pursuing credit recovery actions (e.g. legal and administrative costs, etc.) are higher than the value of the financial asset that is expected to be recovered.

The Group adopts formalised processes and procedures for the measurement and accounting of write-offs. In particular, the write-off of a position is the result of a measurement made by the reference manager. In particular, if the manager identifies the presence of a case of non-recoverability or the possibility of write-off for lack of economic convenience, he/she must thoroughly analyse the credit position and forward the proposal for write-off to the competent decision-making body that, after checking the proposal itself, if it deems it appropriate, carries out the resolution.

Acquired or originated impaired financial assets

According to IFRS 9, receivables considered non-performing at the time of initial recognition in the financial statements, due to the associated high credit risk, are defined as Purchased or Originated Credit Impaired Assets (POCI).

These receivables, if they fall under the scope of application of impairment pursuant to IFRS 9, are measured by setting aside, starting from the date of initial recognition, provisions to cover losses covering the entire residual life of the receivable (known as Expected Credit Loss Lifetime).

Since these are non-performing loans, they will be initially recognised in Stage 3, without prejudice to the possibility of being included in performing loans (Stage 2) if there is no evidence of impairment.

The impaired financial assets acquired for the Group are mainly those originating from the business combination deriving from the acquisition of Claris Factor. In particular, this refers to positions classified as non-performing (Stage 3) as at 30 June 2018.

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Financial assets subject to commercial renegotiation and exposures subject to forbearance measures

In addition to the positions described above, the supervisory regulations introduce the concept of forborne exposure, which includes relationships in respect of which the “forbearance measures” granted to a debtor in financial difficulty have been extended.

In order to assign the forborne characteristic, to be understood as position-wide and therefore not a separate position, two main conditions must be met:

- granting of a forbearance measure, intended as a contractual amendment compared to the initial conditions, granted to the customer in order to enable it to fulfil its obligations (e.g.: moratorium, instalment queuing, restructuring of the repayment plan, etc.);

- financial difficulties of the customer in fulfilling its contractual obligations.

For the purposes of the correct identification of forborne exposures, the Group adopted special procedures characterised by a forbearance presumption algorithm and by a presumption algorithm of financial difficulty, which use information such as the administrative status, the rating and the management status of the counterparty.

The final classification as forborne is always assessed on an analytical basis by the decision-making body during the credit disbursement or review processes. In line with supervisory regulations, forborne exposures are classified (according to an approach by transaction) into two categories:

- non-performing forborne, i.e. forbearance exposures due to financial difficulties of the debtor classified as non-performing assets (bad loans, unlikely to pay, past due and/or overdue non-performing loans);

- performing forborne, i.e. forbearance exposures due to financial difficulties of the debtor classified as non-performing assets;

for which different credit monitoring procedures are used.

Within the processes and procedures listed above, the criteria for monitoring and reclassifying forborne loans and receivables are also formalised.

With reference to the classification from non-performing to performing forborne, the adoption of a 12-month cure period during which the debtor must demonstrate the regularity of payments is important. On the other hand, the counterparty is no longer classified as a forborne counterparty when all exit criteria defined by internal policies are met. As regards these criteria, the adoption of a probation period of two years from the date from which the forbearance exposure was considered performing is particularly significant.

Concentration risk

The exposure to concentration risk, by single counterparty or group of related customers, by business segments and by geographical areas, is limited and consistent with company objectives.

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QUANTITATIVE INFORMATION

CREDIT QUALITY

NON-PERFORMING AND PERFORMING LOANS: AMOUNTS AND IMPAIRMENT LOSSES

Distribution of financial assets by portfolio and credit quality (carrying amounts)

Portfolio/Quality Bad loans Unlikely to pay

Past-due non-performing

loans

Past-due performing

loans

Performing loans

Total

1. Financial assets at amortised cost 110,360 427,229 37,373 298,735 20,250,409 21,124,106


- - - - 896,334 896,334

3. Financial assets at fair value - - - - - -

4. Other financial assets mandatorily measured at fair value - - - - 3,446 3,446

5. Financial assets held for sale 23,516 63,338 - - - 86,854

Total as at 30/06/2020 133,876 490,567 37,373 298,735 21,150,189 22,110,740

Total as at 31/12/2019 158,892 547,636 63,275 235,876 21,353,051 22,358,730

Distribution of credit exposures by portfolio and credit quality (gross amount and carrying amount)

Portfolio/Quality

Non-performing Performing Total

(carrying amount)

Carrying amount

Total impairment

losses

Carrying amount

Total partial write-offs* Carrying

amount

Total impairment

losses

Carrying amount

1. Financial assets at amortised cost 1,038,313 -463,351 574,962 20,757 20,640,314 -91,170 20,549,144 21,124,106

2. Financial assets at fair value through other comprehensive income - - - - 897,531 -1,197 896,334 896,334

3. Financial assets at fair value - - - - X X - -

4. Other financial assets mandatorily measured at fair value - - - - X X 3,446 3,446

5. Financial assets held for sale 312,931 -226,077 86,854 35,999 - - - 86,854

Total as at 30/06/2020 1,351,244 -689,428 661,816 56,756 21,537,845 -92,367 21,448,924 22,110,740

Total as at 31/12/2019 1,911,721 -1,141,918 769,803 144,722 21,670,317 -84,949 21,588,927 22,358,730

* Value to be shown for information purposes

Portfolio/Quality

Assets with a clear poor credit quality Other assets

Accumulated losses Carrying amount Carrying amount

1. Financial assets held for trading 3,998 - 135

2. Hedging derivatives - - -

Total as at 30/06/2020 3,998 - 135

Total as at 31/12/2019 3,998 - 273

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Prudential consolidation – On and off-statement of financial position credit exposures with banks: gross amount and carrying amount

Type of exposure/Amounts

30/06/2020

Gross amount

Total impairment losses and total provisions

Carrying amount

Non-

performing

Performing

A. On-statement of financial position credit exposures

a) Bad loans - X - -

- of which: forbearance exposures - X - -

b) Unlikely to pay - X - -


c) Past due non-performing loans - X - -


d) Past due performing loans X - - -

- of which: forbearance exposures X - - -

e) Other performing loans X 1,613,662 -1,463 1,612,199

- of which: forbearance exposures X - - -

Total (A) - 1,613,662 -1,463 1,612,199

B. Off-statement of financial position credit exposures

a) Non-performing - - - -

b) Performing X 61,271 -11 61,260

Total (B) - 61,271 -11 61,260

Total (A+B) - 1,674,933 -1,474 1,673,459

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Prudential consolidation - On and off-statement of financial position credit exposures with customers: gross amount and carrying amount

Type of exposure/Amounts

30/06/2020

Gross amount Total impairment

losses and total provisions

Carrying amount

Non-

performing

Performing


a) Bad loans 452,774 X -318,898 133,876

- of which: forbearance exposures 112,713 X -62,990 49,723

b) Unlikely to pay 856,019 X -365,452 490,567

- of which: forbearance exposures 475,525 X -229,424 246,101

c) Past due non-performing loans 42,451 X -5,078 37,373

- of which: forbearance exposures 2,619 X -383 2,236

d) Past due performing loans X 308,404 -9,669 298,735

- of which: forbearance exposures X 60,442 -1,477 58,965

e) Other performing loans X 19,631,861 -81,261 19,550,600

- of which: forbearance exposures X 153,399 -17,341 136,058

Total (A) 1,351,244 19,940,265 -780,358 20,511,151


a) Non-performing 66,688 X -8,667 58,021

b) Performing X 5,364,724 -4,990 5,359,734

Total (B) 66,688 5,364,724 -13,657 5,417,755

Total (A+B) 1,417,932 25,304,989 -794,015 25,928,906

DISTRIBUTION AND CONCENTRATION OF CREDIT EXPOSURES

Prudential consolidation - Distribution of on and off-statement of financial position credit exposures with customers by business segment

Exposures/Counterparties

Public administrations Financial companies Financial companies (of which: insurance

companies)

Carrying amount

Total impairment

losses

Carrying amount

Total impairment

losses

Carrying amount

Total impairment

losses


A.1 Bad loans 134 -73 12,274 -14,286 - -

- of which: forbearance exposures - - 9,688 -9,245 - -

A.2 Unlikely to pay 804 -167 11,301 -16,398 - -

- of which: forbearance exposures - - 6,916 -15,115 - -

A.3 Past due non-performing loans 5 -2 1,251 -254 - -

- of which: forbearance exposures - - - - - -

A.4 Performing loans 4,880,038 -1,044 2,571,535 -3,829 11,208 -68

- of which: forbearance exposures - - 766 -85 - -

Total (A) 4,880,981 -1,286 2,596,361 -34,767 11,208 -68


B.1 Non-performing loans 5 - 1,523 -31 - -

B.2 Performing loans 372,510 -162 223,849 -142 66 -

Total (B) 372,515 -162 225,372 -173 66 -

Total (A+B) 30/06/2020 5,253,496 -1,448 2,821,733 -34,940 11,274 -68

Total (A+B) 31/12/2019 5,250,235 -888 2,537,644 -35,755 11,841 -65

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Exposures/Counterparties

Non-financial companies

Households

Carrying amount Total impairment losses

Carrying amount Total impairment losses


A.1 Bad loans 96,809 -252,461 24,659 -52,078

- of which: forbearance exposures 38,393 -51,066 1,642 -2,679

A.2 Unlikely to pay 361,219 -291,295 117,243 -57,592


A.3 Past due non-performing loans 16,192 -2,685 19,925 -2,137

- of which: forbearance exposures 1,990 -353 246 -30

A.4 Performing loans 7,067,644 -64,700 5,330,118 -21,357


Total (A) 7,541,864 -611,141 5,491,945 -133,164


B.1 Non-performing loans 54,802 -8,313 1,691 -323

B.2 Performing loans 4,057,494 -3,687 705,881 -999

Total (B) 4,112,296 -12,000 707,572 -1,322

Total (A+B) 30/06/2020 11,654,160 -623,141 6,199,517 -134,486

Total (A+B) 31/12/2019 11,831,316 -906,984 6,221,697 -295,285

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Large exposures 30/06/2020

a) Amount - carrying amount 9,648,022

b) Amount - weighted amount 888,286

c) Number 15

In accordance with Regulation 575/2013, the number of large exposures is determined by reference to non-weighted exposures exceeding 10% of eligible capital, where exposure is defined as the sum of on-statement of financial position (excluding those deducted from eligible capital) and off-statement of financial position exposures with regard to a customer, or group of associated customers, without the application of weighting factors.

Since 31 December 2019, the EBA/GL/2017/15 guidelines have been applied. The Credito Valtellinese Group uses the alternative approach for exposures to central governments; thus, groups of state-controlled companies, even if they would not exceed individually the 10% threshold, should be considered together with the exposure to central government, thus exceeding the 10% threshold.

The table above shows the carrying amount of the exposure and the exposure weighted amount, i.e. the exposure value after applying the Credit Risk Mitigation and the exemptions pursuant to Article 400 of the CRR considering the exposure to the Italian Government only once. The report shows positions that exceed the 10% threshold of the eligible capital, attributable to exposures towards the Italian Government of EUR 4,909,710 thousand, exposures towards Cassa Compensazione e Garanzia of EUR 1,293,279 thousand and, for the remaining part, mainly exposures towards banking, financial and government counterparties, as well as exposures to state-controlled companies (which taken individually would not exceed the 10% threshold).

1.2 MARKET RISKS

1.2.1 - INTEREST RATE RISK AND PRICE RISK - REGULATORY TRADING BOOK

QUALITATIVE INFORMATION

A. General aspects

“Regulatory trading book” means the portfolio of financial instruments subject to the capital requirements for the market risks, as stated by the measures regarding supervisory reports. The trading book comprises bonds, shares and trading derivatives. The financial instruments in the book are mainly in Euro.

The risk is allocated to the Parent and the exposure remains well within established limits; the size and risk of the book comply with the established limits. Risk hedging tools and techniques are used in the management of the portfolio.

Risk is measured using both analytical techniques (establishing the duration of the bond portfolio with regard to interest rate risk exposure) and statistical estimate techniques of the Value at Risk (VaR) that allows to evaluate the maximum potential loss in the trading book within a given time horizon with an established level of confidence.

The estimate is carried out by using the parametric approach, based on the volatility and the correlations of risk factors observed in a certain period, over a 10-day period and a 99% confidence interval. The data used is provided by Prometeia (RiskSize).

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During the half-year, the VaR recorded limited values with relation to the book's size and to the allocated VaR. At the end of the reporting period, the main factor to which the portfolio is exposed is the price risk. Exposure to currency risk, exposure to issuer risk and exposure to interest rate risk are limited.

Regulatory trading book – VaR performance

First half of 2020 2019

Average Minimum Maximum 30/06/2020 Average Minimum Maximum

130 72 210 109 323 63 1,048

Regulatory trading book – VaR performance

Regulatory trading book – Contribution of risk factors to calculation of VaR

Situation as at 30/06/2020

Price and specific risk Interest rate risk Currency risk Issuer risk

Benefit of diversification

72.9% 0.6% 26.3% 0.2% -55.1%

Regulatory trading book – Breakdown of bond exposures by issuer type

Situation as at 30/06/2020

Sovereign

issuers

Public

issuers Banks

Insurance companies and other financial

companies

Corporate

8.1% 89.6% 2.3% 0.0% 0.0%

-

60

120

180

240

300

2-Jan 3-Feb 3-Mar 1-Apr 4-May 3-Jun 30-Jun

Credito Valtellinese Group VaR First half of 2020

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1.2.2 - INTEREST RATE RISK AND PRICE RISK - BANKING BOOK

The banking book consists of all financial instruments payable and receivable not included in the trading book. It mainly comprises loans and receivables with banks and customers, Government bonds and GACS-backed securities of securitisation.

The interest-rate risk mainly derives from the existence in the financial statements of the bank of interest-bearing assets and onerous liabilities. Interest rate risk management aims to minimise the impact of unfavourable changes in the rates curve on the economic value of equity and on cash flows generated by statement of financial position items. Limiting exposure to interest rate risk is achieved primarily by index-linking asset and liability items to money market benchmarks (usually the Euribor rate) and by balancing the duration of the asset or liability.

The objectives with respect to interest rate risk exposure are considered when carrying out strategic and operational planning, both when identifying and developing new products. The Financial and Operational Risk Department monitors on a monthly basis the exposure to the interest rate risk and verifies the compliance with the system of limits. Adequate information flows are provided on a regular basis and timely to corporate bodies and functions of management and control.

Measurement of interest rate risk is firstly based on the economic value approach, defined as the current value of expected net financial flows generated by assets, liabilities and off-statement of financial position items. The behavioural profile of sight items, analysed on a statistical basis with a special model, is also considered in the assessment of the exposure to risk, based on the revaluation of positions in different scenarios.

In the measurement of the risk, the current profit approach is used additionally and leads to the estimate of the impact of change in interest rates on net interest income, which represents a significant portion of bank revenue.

The exposure to interest rate risk was subject to limits, both at individual and consolidated level, defined in terms of fair value change at the end of the reporting period (static ALM) resulting from instantaneous movements of the rate curve. To this end, both parallel shifts of fixed size (typically 100 and 200 basis points) and specific changes for each node of the interest-rate structure are considered, determined on the basis of major decreases and increases actually recorded in an observation period of 6 years (considering the 1st and 99th percentile of the distribution, respectively). Moreover, non-parallel shifts of the yield curve that can change its inclination (flattening, steepening and reversal of the interest rate structure) are also taken into consideration.

At half-year end, the changed duration calculated for all financial statement assets and liabilities as well as the duration gap were moderate. Assuming that the rate structure makes a parallel shift upwards of 100 basis points, the fair value would decrease by EUR 59.7 million. In the event of an equal downward shift, using the floor provided by the EBA, which goes from -100 basis points for short-term maturities to 0 basis points for the 20-year node, there would be an increase of EUR 60.6 million. These amounts express the effect of changes in the interest rates on the banking book, excluding changes in the composition and size of the financial statement items.

The banking book consists also of the shares that are held as part of more in-depth relations with specific companies or represent the instrument supporting significant initiatives undertaken in the Group's reference territory. Therefore, the price risk management methods for such financial instruments tend more towards the management approach for investments in associates and companies subject to joint control, rather than the risk measurement techniques and instruments used for the trading book.

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With regard to the exposure profile to interest rate risk, the health emergency led to the suspension of reimbursement plans and the extension of payment deadlines during the first half of the year, which resulted in a modest increase in average asset maturities; at the same time, participation in monetary policy operations (TLTRO III) led to a significant lengthening of the maturity of liabilities, reducing the duration gap between assets and liabilities and mitigating the risk exposure profile.

Fair value hedges

The hedging of interest rate risk aims to protect the banking book from fair value changes of loans caused by changes in the interest rate curve (fair value hedge); types of derivatives used are represented by interest rate swaps (IRS) carried out with third parties.

At the end of the half-year, the banking book of Financial assets at amortised cost included only one hedging operation for Italian government bonds (BTPs). To this end, hedging derivatives (IRS) were used. They were entered into together with the purchase of underlying securities.

The effectiveness tests carried out on a monthly basis confirmed a very high effectiveness and, anyway, within the range required by the IFRS.

1.3 DERIVATIVE INSTRUMENTS AND HEDGING POLICIES

1.3.1 TRADING DERIVATIVE INSTRUMENTS

A. FINANCIAL DERIVATIVES

Trading financial derivatives: positive and negative fair value – breakdown by product

Types of derivatives

30/06/2020 31/12/2019

Over the counter

Organised markets

Over the counter

Organised markets

Central

counterparties

Without central counterparties Central

counterparties

Without central counterparties

With netting

agreements

Without netting agreements

With netting

agreements

Without netting

agreements

1. Positive fair value

a) Options - - 2 - - - 6 -

b) Interest rate swaps - - - - - - - -

c) Cross currency swaps - - - - - - - -

d) Equity swaps - - - - - - - -

e) Forwards - - 26 - - - 58 -

f) Futures - - - - - - - -

g) Others - - - - - - - -

Total - - 28 - - - 64 -

2. Negative fair value

a) Options - - - - - - - -



d) Equity swaps - - - - - - - -

e) Forwards - - 79 - - - 26 -

f) Futures - - - - - - - -

g) Others - - - - - - - -

Total - - 79 - - - 26 -

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1.3.2 HEDGE ACCOUNTING

A. HEDGING DERIVATIVES

Hedging derivatives: positive and negative fair value – breakdown by product

Types of derivatives

30/06/2020 31/12/2019

Over the counter

Organised markets

Over the counter

Organised markets

Central

counterparties

Without central counterparties Central

counterparties

Without central counterparties

With netting

agreements

Without netting

agreements

With netting

agreements

Without netting

agreements

1. Positive fair value

a) Options - - - - - - - -



d) Equity swaps - - - - - - - -

e) Forwards - - - - - - - -

f) Futures - - - - - - - -

g) Others - - - - - - - -

Total - - - - - - - -

2. Negative fair value

a) Options - - - - - - - -

b) Interest rate swaps - - 163,097 - - - 153,051 -


d) Equity swaps - - - - - - - -

e) Forwards - - - - - - - -

f) Futures - - - - - - - -

g) Others - - - - - - - -

Total - - 163,097 - - - 153,051 -

1.4. LIQUIDITY RISK

The liquidity risk to which the banks are normally exposed due to the phenomenon of transformation of maturities is the risk that the banks will not be able to meet their payment commitments due to inability to procure the funds (funding liquidity risk) and to divest their assets (market liquidity risk).

Liquidity management is aimed primarily at ensuring the solvency also in stressful or crisis conditions. Exposure to risk occurs according to different exposure profiles compared to the considered time horizon, to which specific methodological approaches, measurements, mitigation tools and corrective actions correspond. The approach adopted for risk management envisages integration of the cash flow matching approach (which tends to make expected cash inflows coincide with expected cash outflows for each time horizon) with the liquid assets approach (which requires the financial statements to include a set number of financial instruments that can be readily converted into cash). In order to face up to the possible occurrence of unexpected liquidity requirements and thus to mitigate the relevant risk exposure, the Group provides itself with adequate short-term cash reserves (liquidity buffer).

The liquidity risk management process mainly involves some specific structures. In particular, the Finance Department of Credito Valtellinese is in charge of treasury management and of the supply on the inter-bank market and manages the intraday and short-term liquidity risk; the Planning and Control Department participates in defining the structural liquidity balance of the Banks and of the Group as a whole; the risk control function - independently from the

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“operational management” of the liquidity risk - contributes to the definition of the policies and processes of risk management, develops the assessment process of liquidity risk, supports the governing bodies in defining and carrying out activities related to the observance of the prudential regulations, and ensures accurate, complete and timely information.

Following the spread of the Covid-19 pandemic, monetary and tax authorities put in place strongly expansionary measures, which helped to contain the shock in the markets. In March, the Governing Council of the ECB decided on a comprehensive set of monetary policy measures and announced, in particular, a redefinition of the conditions of the TLTRO III refinancing programme in order to facilitate the granting of credit to the companies most affected by the emergency; the measures were accompanied by a series of short-term auctions to provide banks with the necessary liquidity until the next TLTRO window at the end of June. In April, the Council approved temporary measures aimed at increasing the availability of guarantees, thereby facilitating banks' access to finance and supporting credit for businesses and households; the European Central Bank adopted measures to mitigate the impact of possible downgrades in the rating caused by the economic deterioration following the pandemic on the availability of collateral, deciding to reduce the minimum rating levels of eligible assets until September 2021. In this context, the interbank market continued to benefit from the extensive liquidity provided by the ECB.

The Group held liquidity reserves mostly consisting of Italian Government bonds and other assets eligible for refinancing operations with the ECB (including loans that meet the eligibility requirements), deemed appropriate to the contingent and perspective requirements.

The measures approved by the ECB have further contributed to the increase in liquidity potentially obtainable by securing the assets held. The "Liquidity Coverage Ratio" indicator is well above the minimum required by the regulations.

The deterioration of the overall economic situation and the measures taken in favour of customers in the face of the health emergency mentioned above have led to a review and reallocation of the expected cash flows; however, there were no significant repercussions on the liquidity position.

The main source of funding consisted of stable and diversified retail customers. The use of long-term refinancing transactions with the Central Bank and funding from central counterparties are also important. In the economic and financial environment described above, in June Creval completed transactions aimed at extending maturities and increasing long-term funding from the ECB.

In consideration of the current composition of deposits carried out by the Group, in order to assess the concentration, the degree of dependence on a limited number of counterparties is analysed, in particular, whereas transactions in currencies other than the euro and the concentration on special technical forms such as securitisations are not important. The Group monitors the stock of liabilities on sight or with a short-term to the major wholesale counterparties (institutional investors, large companies or groups, non-economic institutions) considered more sensitive to the market situation and to the real or perceived situation of the Bank. The degree of concentration remains at low levels.

From the structural perspective, the Group carried out a modest transformation of maturities.

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Securitisation transactions

The specific risk deriving from securitisations is defined as the “risk that the economic substance of the securitisation transaction may not be fully reflected in the decisions of risk assessment and management”. The carrying out of securitisations also involves an exposure to other types of risks, different by type and entity in relation to the structure of the transactions. With regard to assessment of exposure to risk, the different profiles are taken in consideration as part of the ordinary course of business related to the different types of risk.

At the reporting date, the securitisation transactions detailed below are in place.

The Quadrivio RMBS 2011 transaction was carried out pursuant to Italian Law 130/1999. In the Quadrivio RMBS 2011 transaction, the originator bank Credito Valtellinese fully holds the junior tranches, without transferring any credit risk.

In 2018, the Group completed the Quadrivio SME 2018 securitisation transaction with the issue of seven classes of securities for a total of approximately EUR 1.5 billion. Senior class A3 in the amount of EUR 200 million was fully subscribed by the European Investment Bank (EIB), while the other classes were fully subscribed by the originator bank Credito Valtellinese. In January 2019, the European Investment Bank (EIB) purchased approximately EUR 85 million of the C1 lower mezzanine class.

Both of the transactions described above do not meet the criteria for the derecognition of the transferred loans and receivables that are therefore fully represented in the asset items.

In 2017, the Group completed the securitisation of a bad loans portfolio for a gross amount of approximately EUR 1.4 billion as at 30 November 2016 by transferring this portfolio to a securitisation vehicle – Elrond NPL 2017 - established pursuant to Italian Law 130/1999, and the latter issued three different classes of ABS securities.

The securities of the senior tranche – with investment grade rating (Baa3 assigned by Moody's and BBB- by Scope Ratings), for which the Ministry of Economy and Finance granted the State guarantee (GACS) – are fully retained by Credito Valtellinese, whereas the mezzanine and junior tranches were placed with an institutional investor at the end of a competitive process (net of the significant interest of 5% that must be maintained by the originator).

In 2018, in line with the company's de-risking objectives, the Group completed a further securitisation of a portfolio of bad loans for a Gross Book Value on the cut-off date (31 December 2017) of approximately EUR 1.7 billion, by transferring this portfolio to a securitisation vehicle – Aragorn NPL 2018 – established pursuant to Italian Law 130/1999, and the latter issued three different classes of ABS securities.

The securities of the senior tranche – with investment grade rating (BBBL assigned by DBRS and BBB- by Scope Ratings), for which the Ministry of Economy and Finance granted the State guarantee (GACS) – are fully retained by Credito Valtellinese, whereas the mezzanine and junior tranches were placed with institutional investors (net of the significant interest of 5% that must be maintained by the originator).

For the Elrond and Aragorn transactions, the conditions for the derecognition of transferred loans and receivables (transfer of risks) have been met.

During 2018, Credito Valtellinese, together with other banks, transferred its receivables claimed from Rainbow Magicland S.p.A. to the Special purpose entity Pillarstone Italy SPV. Against a total of EUR 8.4 million in receivables transferred, in January 2019 Credito Valtellinese subscribed EUR 1.5 million of class B securities and EUR 6.9 million of class C2 securities (security fully written down).

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The securitisation transactions of performing loans in which the Bank acts as originator were carried out regularly, while there have been deviations from the initial plans for the recovery of non-performing loans. Therefore, the Elrond securitisation tranches were downgraded.

Credito Valtellinese also invests in securitisation transactions originated by third parties. At the reporting date, the exposure is composed almost entirely of senior notes and refers to Italian asset portfolios.

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1.5. OPERATIONAL RISKS

The operational risk is defined as the risk of incurring losses due to the inadequacy or inefficiency of procedures, human resources and internal systems or due to external events, including the legal risk. It includes, inter alia, losses deriving from fraud, human error, interruption of operations, system break-down, contractual non-performance and natural disasters.

Risk containment is achieved using regulatory, organisational and procedural measures and training. Any critical area, identified through joint analysis of various sources of data, is examined in further depth by department managers who, together with the Risks and Control Department, establish the appropriate corrective actions.

Under the regulatory profile, the Group calculated the capital requirement to meet the operational risk in the separate and consolidated financial statements by using the Traditional Standardised Approach (TSA). From the management viewpoint, risk exposure is assessed both in quantitative terms, by analysing the operating losses incurred, and in qualitative terms, through risk self-assessment.

Legal risks

A provision was made in the financial statements, appropriate and consistent with the policy for calculating the provisions adopted by the Group, in order to mitigate the potential economic losses resulting from the pending legal proceedings with regard to the Bank and the banks belonging to the Group.

As at 30 June 2020, there are 1,429 actions brought against the companies belonging to the Group for an overall amount of EUR 146 million against which a total loss of EUR 16 million is expected.

Details of the existing actions brought against the Bank are shown below:

Type of cases No. of cases Relief sought

(in millions of EUR)

Provision made

(in millions of EUR)

Compound interests 236 30 5

Bankruptcy clawbacks 26 40 3

Investment services 30 6 2

Other 1,137 70 6

Total 1,429 146 16

There are also 367 out-of-court claims for which a total loss of approximately EUR 1 million was estimated.

The Group pursues careful and considered transactional logic, based on an in-depth analysis of the concrete grounds on which the actions are based, meaning the existence of both the subjective and objective elements.

Some information concerning important actions against the Group is summarised below.

Gianfranco Ferrè in A.S.

In 2012, the Procedure started bankruptcy clawback proceedings against Credito Artigiano, now Credito Valtellinese, pursuant to Article 67 of the Bankruptcy Law with reference to the settlement remittances paid into the current account of the bankrupt company quantified by the counterparty in EUR 10.4 million. The Court of Isernia rejected the requests made by the Receivership in their entirety, considering that the subjective profile of the revocation action

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proposed by the opposing party was non-existent. The opposing party appealed against the judgement in first instance and Creval appeared before the court. The case was remanded to the CP on 13 January 2021. In the meantime, the Commissioners of the Procedure revealed the possibility of a settlement of the dispute against the recognition by Creval of an amount not less than 45% of the maximum return, quantified by the court-appointed expert in first instance, pursuant to Article 70 of the Bankruptcy Law, equal to a total of EUR 1.07 million, in addition to a recognition of legal costs.

A settlement proposal was formalised with the payment by Creval of the total sum of EUR 0.5 million to completely settle the claims of the Procedure. The Official Receivers have given a favourable opinion and ministerial authorisations to finalise the agreement are awaited.

Le Betulle S.p.A. (Marina di Archimede)

The lawsuit concerns a proceeding for damages of EUR 6.65 million related to the case of abusive lending. The claim is started jointly and severally against Credito S.p.A., as assignee of Mediocreval and Credito Siciliano, the other Banks participating in the pool that had financed the company Marina di Archimede S.p.A. for the construction of the marina of Siracusa, as well as against Rina Services, which had been appointed as the person responsible for verifying the progress of work, and Rina Check. The building project was never completed and the financed company, in default, was admitted to the composition proceeding. The plaintiff Company Le Betulle S.p.A., former creditor of the insolvent company Marina di Archimede S.p.A., contests the banks' right to the wrong and unlawful performance of the loan agreement inducing the creditors to reasonably rely on the solvency of the financed party. The Court rejected all the opposing requests for preliminary investigations and adjourned the case for the summing of the evidence to 15 January 2020 without accepting any of the evidence requested by the plaintiff. At this stage, the risk of losing the case is considered to be remote. A favourable judgement was delivered - albeit it has not yet become final - declaring all the counterparty's claims inadmissible.

Tax dispute

During the first half of 2020, there are no notices of assessment of a particularly significant amount.

With regard to past disputes and assessments, note that they were closed with final judgements, or through institutions deflating the dispute, with marginal charges borne by the Group companies.

Labour related lawsuits

As at 30 June 2020, labour related lawsuits amounted to no. 12 disputes. As regards risk quantification, as at 30 June 2020, against the relief sought of the labour dispute amounting to approximately EUR 1.05 million, provisions were made of EUR 0.45 million. A new entry was recorded during the half year. A former employee filed an appeal by which he/she challenges his/her dismissal for just cause. In the same period, Creval settled a dispute and won a labour related lawsuit referring to a judgement that became final. Details of the existing dispute is shown below:

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Type of cases No. of cases

Relief sought (in thousands of

EUR)

Provision made (in thousands of EUR)

Contestation of dismissal 7 580.9 255.0

De-skilling - higher qualification 4 455.6 172.0

Other 1 17.9 27.0

Overall total 12 1,054.4 454.0

IT (or ICT) risk

IT risk is the risk of incurring economic, reputation and market share losses in relation to the use of the Information and Communication Technology - ICT. In the integrated representation of business risks for prudential purposes (ICAAP), this type of risk is considered, in accordance with the specific aspects, among operational, reputational and strategic risks.

The IT risk analysis is a tool guaranteeing the efficiency and effectiveness of the protection measures of the ICT resources.

In the light of the supervisory provisions on this matter, the Group defined the overall framework for managing the IT risk as well as the methods of risk analysis and assessment.

The percentage distribution of operational losses recognised in the internal database during the period is shown in terms of frequency and impact.

Operational losses - Distribution by type of event

The events reported during the half-year are mainly attributable in terms of frequency to the following event types: "Execution, delivery and management of processes" (78.2%), "External fraud" (12.7%) and "Customers, products and business practices" (6.5%).

In terms of impact, losses recognised in the half-year are attributable to “Customers, products and business practices” by 72.6%, to “Execution, delivery and management of processes” by 16% and to “External fraud” by 10.7%; losses attributable to other event types are of lesser importance.

0.5%

10.7%

72.6%

0.2%

16.0%

Losses Other*

External fraud

Customers, products andbusiness practices

Stoppage of operationsand malfunctions of thesystemsExecution, delivery andmanagement of processes

* Internal fraud, contractual relationship and safety in the workplace, damage caused by external events.

0.5%12.7%

6.5%2.1%

78.2%

Event size

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1.6. OTHER RISKS

Sovereign risk

The investment in Italian Government bonds, mostly recorded in “Financial assets at amortised cost”, involves the exposure to the credit risk of the Italian Republic that, as with any other issuer, may occur in the form of a decrease in creditworthiness or, in extreme cases, of insolvency. The investment in Spanish, Portuguese and American Government bonds, of a smaller size, generates an exposure to the credit risk of Spain, Portugal and the United States.

The exposure is monitored on a regular basis and referred to corporate bodies. In particular, the spread of the epidemic initially caused a significant increase in the Italian Republic's credit risk, which then gradually decreased thanks to the ECB's monetary policy initiatives and the extraordinary measures prepared by the European Union (Recovery Fund).

The outlook of the exposure to the sovereign risk profile is weighed considering adverse scenarios of varying intensity, also based on historical simulations, and their impact on the value of the portfolio.

The total amount of government securities in the portfolio is in line with that at the end of the previous year. On the other hand, exposure to risk was higher than at year-end, due to the increase in Italy's credit risk arising from the Covid-19 epidemic.

The table below shows the carrying amount of the exposures to Government bonds, broken down by portfolio:

Countries Financial assets at fair value through profit or

loss

Financial assets at fair value through other

comprehensive income

Financial assets at amortised cost Total

Valuation reserve (*)

Italy 98 706,606 3,543,672 4,250,376 1,473

Spain - - 424,338 424,338 -

Portugal - - 39,363 39,363 -

Other 5 - 35,858 35,863 -

Total 103 706,606 4,043,231 4,749,940 1,473

(*) Reserve calculated after the tax effect

The securities of the Elrond and Aragorn securitisations, assisted by Gacs for EUR 762 million, are also excluded.

The following table provides information on the expiry of exposures in securities to sovereign debt risk.

Portfolio Second half of 2020

2021 2022 2023-2025 2026-2030 Beyond 2030

Total

Financial assets at fair value through profit or loss - 96 - 1 6 - 103

Financial assets at fair value through other comprehensive income 83,819 448,511 164,935 9,341 - - 706,606

Financial assets at amortised cost 9,995 56,473 328,526 2,729,056 456,598 462,583 4,043,231

Total 93,814 505,080 493,461 2,738,398 456,604 462,583 4,749,940

As at 30 June 2020, securities issued by the Governments were measured referring to prices inferred from markets (Level 1 fair value).

Additionally, loans and receivables with customers referring to central and local public administrations amounting to EUR 131 million are also recognised.

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Risk of excessive leverage

The leverage ratio is considerably higher than the minimum threshold proposed by the international standards.

Risks towards associated parties

Exposure remained essentially constant in the half-year and is in full compliance with the limits set by the prudential regulations and by internal policies.

Reputational risk

During the half-year, there is no element that may have changed or may change significantly in the short term the perception of the image of the Group with the various categories of stakeholders (customers, counterparties, shareholders, investors or supervisory authorities).

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Information on consolidated own funds The elements forming Own Funds are set below:

- Common Equity Tier 1 – CET1;

- Additional Tier 1 – AT1;

- Tier 2 – T2. CET1 and AT1 form the Total Tier 1 capital that together with Tier 2 capital allows to determine Total Own Funds. Total Common Equity Tier 1 (CET1), which does not include the profit for the period, amounted under transitional regulations to EUR 1,844.5 million. The main changes occurred during the half-year concern:

- positive change in valuation reserves of approximately EUR 2.1 million;

- lower deductions related to deferred tax assets (impact of EUR 12.7 million);

- a positive effect related to the new IFRS 9 transitional regime on the dynamic component envisaged by Regulation 873/2020 in response to Covid-19 for 10 million, offset by the negative effect of approximately EUR 78 million related to the reduction of the percentage of the IFRS 9 transitional regime on the static component from 85% in 2019 to 70% in 2020.

As at 30 June 2020, both significant investments in Common equity tier 1 capital instruments held in financial sector entities and non-significant investments in equity instruments of entities in the financial sector are below the exemption limits envisaged by the regulations. Tax assets deriving from temporary differences and depending on future profitability are above the exemption limits envisaged by the regulations and are therefore deducted from Common equity tier 1 capital in the amount of EUR 74.2 million. As at 30 June 2020, Tier 2 Capital included in T2 instruments the subordinated loans issued by Credito Valtellinese of EUR 169 million. The main changes occurred compared to December 2019 concern the theoretical amortisation of the loans calculated on a daily basis in compliance with the provisions of regulation 575/2013. As at 30 June 2020, risk-weighted assets amounted to EUR 8,829 million, compared to EUR 9,423 million as at 31 December 2019. The capital ratios, determined on the basis of transitional methods in force, stood at:

- 20.89% for Common Equity Tier 1 ratio and Tier 1 Capital ratio;

- 22.77% for Total Capital ratio.

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(in thousands of EUR) 30/06/2020 31/12/2019

Common Equity Tier 1 capital (CET1) 1,844,546 1,896,619

Tier 1 Capital 1,844,546 1,896,619

Total Own Funds 2,010,549 2,078,493

Credit risk and counterparty risk 619,213 666,361

Credit valuation adjustment risk 878 908

Settlement risks - -

Market risks 125 410

Operational risk 86,129 86,129

Other calculation elements - -

Total capital requirements 706,345 753,808

Risk-weighted assets 8,829,322 9,422,606




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Business combinations No business combinations were carried out in the first half of 2020.

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Related party transactions Related party transactions are mainly regulated:

- by Article 2391-bis of the Italian Civil Code, whereby the governing bodies of companies resorting to the equity market adopt, according to general principles indicated by Consob, rules that assure “the transparency and substantial and procedural correctness of related party transactions” carried out directly or through subsidiaries;

- by the “Related Party Transaction Regulation” adopted by Consob with resolution no. 17221 of 12 March 2010, as amended, (hereinafter also the “Consob Regulation”);

- by the supervisory provisions issued by the Bank of Italy (Circular 285/13) on risk assets and conflicts of interest with respect to “Associated Parties”, provisions that complement what is provided by the Consob regulation;

- by the provisions of Article 136 of the Consolidated Banking Act.

In compliance with the combined provision of the above-mentioned regulations, the Board of Directors approved the “Procedures concerning Related Party Transactions and Associated parties” (hereinafter also the “RPT Creval Procedures”). The RPT Creval Procedures establish the procedures and rules for ensuring transparency and substantive and procedural correctness in transactions with Associated Parties and "Other Members of the Single Perimeter" that together make up the Single Perimeter of the Credito Valtellinese Group, directly or by means of its subsidiaries and also define the cases, methods, conditions and circumstances in which, without prejudice to the obligations required, the partial or full exclusion of the application of the RPT Creval Procedures is allowed. They also comply with the applicable regulations of the Bank of Italy on risk assets towards associated parties. In accordance with current regulations, the document is published on the Website, www.gruppocreval.com – Corporate Governance section – Corporate documents.

The Board of Directors of the Parent also approved the “Internal Policies regarding controls on risk assets and on conflicts of interest in relation to Associated Parties of the Credito Valtellinese Banking Group” (hereinafter also “Policy”) that describes, in relation to the operational features and the strategies of the Bank and of the Group, the business segments and the types of business relations, also other than those implying the assumption of risk assets, in relation to which conflicts of interest may arise, as well as the safeguards inserted in the organisational structures and in the internal control system to ensure constant compliance with prudential limits and the above decision-making procedures. The document also summarises the principles and rules applicable to transactions with associated parties that were used for the preparation of the relevant Procedures. The international financial reporting standards regulate the related party disclosure with IAS 24, standard approved with Regulation (EU) no. 1126/2008 (amended by subsequent regulations).

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1. Information on remuneration of key management personnel

Information on remuneration of key management personnel is indicated below. FEES 1st half of 2020

a) short-term benefits (*) 2,146

b) post-employment benefits 61

c) other long-term benefits 233

d) termination benefits -

e) share-based payments -

Total 2,440

(*) The indicated amount includes payments to Directors and the Board of Statutory Auditors.

2. Information on related party transactions

On the basis of the instructions of IAS 24 applied to the organisational and governance structure of the Bank and of the Credito Valtellinese Banking Group as at 30 June 2020, the following natural persons and corporate bodies are considered related parties:

- parties who exercise significant influence over Credito Valtellinese;

- subsidiaries, companies over which the Parent directly or indirectly exercises control, as defined by IFRS 10;

- associates, companies over which the Parent directly or indirectly exercises significant influence, as defined by IAS 28 and their subsidiaries;

- companies subject to joint control, companies in which the Parent directly or indirectly exercises joint control, as defined by IFRS 11;

- the Directors, the Statutory Auditors, the General Manager, the Deputy General Managers as well as the Chief Risk Officer;

- other related parties, which include:

immediate family members - relatives until the second degree of kinship and the spouse or common law spouses of one related party as well as their children - of subjects as defined above;

subsidiaries, companies subject to joint control or to significant influence by subjects as defined above, as well as by their immediate family members;

pension funds established by companies of the Group.

Related party transactions, both intra-group and with parties not belonging to the Creval Group, are regulated at market or standard conditions. Relations between Group companies are regulated based on specific contractual agreements that take into account the actual use by each user company. The Board of Directors is exclusively responsible for the definition of intra-group contractual agreements and approval and possible amendment of the related economic conditions. Related party transactions with parties other than Companies in the Credito Valtellinese Group are part of normal banking activities and are generally regulated at arm's length for specific transactions, or aligned to the most favourable measure that may have been agreed for employees.

In relation to the specific business, the provisions of Article 136 of the Consolidated Banking Act on obligations of banking representatives also apply to the Companies.

No atypical or unusual transactions that impacted significantly on the financial position or results of operations of the company have taken place during 2020.

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Statement of financial position data as at 30 June 2020 and income statement data of the first half of 2020 with regard to related parties as defined above in accordance with IAS 24 as well as their percentage impact on the corresponding financial statements data are provided below. The impact of transactions completed with Group companies has not been included, as their line-by-line consolidation requires the netting of intra-group balances and transactions.


RELATED PARTY TRANSACTIONS

30/06/2020

Parties who exercise

significant influence

Associates

Companies subject to joint control

Executives and

control bodies

Other related parties

% incidence

STATEMENT OF FINANCIAL POSITION ITEMS

40. Financial assets at amortised cost - 45,982 - 1,195 3,306 0.2

130. Other assets - - - - 71 -

TOTAL ASSETS - 45,982 - 1,195 3,377

10. Financial liabilities at amortised cost - 12,509 70 2,444 2,390 0.1

80. Other liabilities - - - 5 - -

TOTAL LIABILITIES - 12,509 70 2,449 2,390

Guarantees given - 647 - - - 0.5

Commitments to disburse funds - 776 - 902 198 -

TOTAL GUARANTEES AND COMMITMENTS - 1,423 - 902 198

Financial assets at amortised cost include loans to associates, which were written down by a total of about EUR 3.4 million.


RELATED PARTY TRANSACTIONS

1st half of 2020

Parties who exercise significant influence Associates

Companies subject to joint control

Executives and

control bodies

Other related parties

% incidence

INCOME STATEMENT ITEMS

Net interest income - 423 - (2) 37 0.3

Net fee and commission income - 45 - 2 5 0.1

Administrative expenses - - - (2,715) (462) 1.5

Other operating net income - 62 - - 1 0.3

TOTAL INCOME STATEMENT - 530 - (2,715) (419)

134

Most significant transactions

For the most significant transactions, as defined in the Consob Regulation, the procedural regulations and the reporting obligations specified by the RPT Procedures were applied. In the first half year of 2020, the credit lines granted to a subsidiary were reviewed.

135

Share-based payment agreements Qualitative information On 24 April 2020, the ordinary shareholders' meeting of Credito Valtellinese approved the incentive plan called “2020 Bonus Pool incentive plan” based on the allocation of phantom shares. The 2020 Bonus Pool Plan envisages a maximum variable incentive of 200% of fixed remuneration and covers the time period from 1 January 2020 to 31 December 2020. Any entitlement to the bonus is subject to the achievement of all four indicators (“Gate indicators”) for the 2020 financial year defined in the RAF:

- Group Common Equity Tier 1 Ratio;

- LCR;

- NSFR;

- Net profits (losses). After verifying whether the Gate Indicators had been reached and determining the maximum amount of the bonus pool accrued, the individual bonus payable to the beneficiaries is determined, taking into account the maximum amount of the bonuses, the achievement of the results individually assigned and found on the basis of a managerial and compliance assessment. This assessment of individual performance is based on the results actually achieved in the reference period compared to pre-identified individual objectives and assigned to the individual Beneficiaries. Between the allocation date of the phantom shares and their payment date, there will be a period of one year (retention period). In case of termination of employment between the beneficiary and Group before the payment of the individual bonus or a portion thereof, the beneficiary will automatically lose all the rights that will become ineffective and it will not be entitled to receive any indemnity for any reason whatsoever.

Quantitative information The phantom shares are recognised in accordance with IFRS 2, so the commitment undertaken is measured at the fair value of the liability. Until the liability is cancelled, the fair value at the end of each reporting period and at the settlement date is recalculated, with all fair value changes recognised in the income statement. With reference to the incentive systems activated (MBO 2018 and Bonus Pool 2019), as at 30 June 2020 liabilities amounting to approximately EUR 0.8 million were recognised.

136

Segment Reporting Segment reporting is shown below. The previous period was reclassified for consistency with the current period.


Retail Corporate Finance and Treasury / ALM Equity investments and other Total

30/06/2020 31/12/2019 30/06/2020 31/12/2019 30/06/2020 31/12/2019 30/06/2020 31/12/2019 30/06/2020 31/12/2019

STATEMENT OF FINANCIAL POSITION DATA

Direct funding from customers

11,969,476 11,796,354 3,762,346 4,323,377 2,008,283 2,849,140 - - 17,740,105 18,968,871

Indirect funding 8,939,653 9,163,080 1,149,698 1,202,913 - - - - 10,089,351 10,365,993

Loans 6,452,499 6,385,162 7,643,722 7,938,586 531,430 161,409 - - 14,627,651 14,485,157

Financial assets - - - - 5,963,409 6,055,478 259,868 269,249 6,223,277 6,324,727

ORGANISATIONAL DATA

Personnel 1,971 2,014 950 971 14 15 621 634 3,556 3,634


Retail Corporate Finance and Treasury / ALM Equity investments and other Total

1st half of 2020

1st half of 2019

1st half of 2020 1st half of 2019 1st half of 2020 1st half of 2019

1st half of 2020

1st half of 2019

1st half of 2020

1st half of 2019

INCOME STATEMENT DATA

Net interest income 69,530 79,477 75,342 81,421 16,031 13,746 609 3,929 161,512 178,573

Net fee and commission income 79,174 88,549 32,066 33,729 (277) (281) 682 1,810 111,645 123,807

Other revenue 1,349 560 274 208 1,141 3,532 8,927 5,145 11,691 9,445

Operating income 150,053 168,586 107,682 115,358 16,895 16,997 10,218 10,884 284,848 311,825

Operating costs (124,943) (137,872) (70,643) (78,437) (3,193) (3,545) (1,954) (2,895) (200,733) (222,749)

Operating profit 25,110 30,714 37,039 36,921 13,702 13,452 8,264 7,989 84,115 89,076

Impairment losses, gains/losses on sale and other provisions

(19,931) (25,708) (20,870) (28,210) 6,438 13,721 (27,962) (46,527) (62,325) (86,724)

Net gains (losses) on sales of investments and valuation differences on property and equipment at fair value

- - - - - - 33,357 5,211 33,357 5,211

Banking system expenses - - - - - - (13,355) (11,263) (13,355) (11,263)

Pre-tax profit (loss) from continuing operations

5,179 5,006 16,169 8,711 20,140 27,173 304 (44,590) 41,792 (3,700)

Commercial Bank segment The Commercial Bank segment (in its Retail and Corporate components) is the core business since it includes all the lending, investment and transfer products and services.

In the first half of 2020, the Retail component generated operating income of EUR 150 million, while the Corporate component generated operating income of EUR 107.7 million.

Direct funding from the commercial sector amounted to EUR 15,732 million (of which EUR 11,969 million relating to the retail component). Loans and receivables with commercial customers at the end of June 2020 amounted to EUR 14,096 million.

At the end of June 2020, there were 2,921 human resources employed in the segment and 355 bank branches.

Finance, Treasury and ALM segment The Finance, Treasury and ALM segment generates its revenue from the Group's securities portfolio, management of interbank and liquidity risk, loans and institutional funding as well as funding in securities. In the first half of 2020, this segment generated operating income of EUR 17 million.

137

Financial assets, consisting of the Group's securities portfolio, amounted to EUR 5,963 million.

In application of IFRS 15, the breakdown of fee and commission income and expense by business segment is illustrated below.

Retail Corporate

Finance and Treasury /

ALM

Equity investments

and other 1st half of

2020 1st half of

2019

FEE AND COMMISSION INCOME 84,935 38,173 - 682 123,790 139,333

Guarantees given 659 2,052 - - 2,711 3,081

Currency trading 317 1,149 - - 1,466 1,807

Custody of securities, order acceptance and transmission 2,297 62 - - 2,359 2,312

Placement of securities 14,389 516 - - 14,905 16,357

Consulting services on financial structuring - 107 - - 107 1,539

Distribution of portfolio management 3,928 128 - - 4,056 4,453

Distribution of insurance products 9,754 398 - - 10,152 11,464

Distribution of other third party products 2,695 201 - - 2,896 3,752

Collection and payment services 19,648 12,140 - - 31,788 38,327

Factoring transaction services - 1,902 - - 1,902 1,770

Current account keeping and management 18,949 5,909 - - 24,858 26,428

Other services 12,299 13,609 - 682 26,590 28,043

FEE AND COMMISSION EXPENSE (5,761) (6,107) (277) - (12,145) (15,526)

NET FEE AND COMMISSION INCOME 79,174 32,066 (277) 682 111,645 123,807

138

CERTIFICATION OF THE CONDENSED INTERIM CONSOLIDATED

FINANCIAL STATEMENTS PURSUANT TO ARTICLE 81-TER OF CONSOB

REGULATION NO. 11971/99

The undersigned, Luigi Lovaglio, as Managing Director, and Simona Orietti, as the Manager in charge of financial reporting of Credito Valtellinese S.p.A., also considering the provisions of article 154-bis, paragraphs 3 and 4, of Legislative Decree no. 58 of 24 February 1998, hereby certify: the adequacy, in relation to the business characteristics and the effective application of administrative and accounting procedures for preparing the

condensed interim consolidated report during the period 1 January 2020 - 30 June 2020.

2. The assessment of the adequacy and the actual application of the administrative andaccounting procedures for preparing the condensed interim consolidated report during theperiod between 1 January 2020 – 30 June 2020, is based on a model conceived by CreditoValtellinese S.p.a., in line with the “Internal Control - Integrated Framework (CoSO)” andwith the “Control Objective for IT and Related Technologies (Cobit)”, which representreference standards for the internal control system and for financial reporting in particular,generally accepted at international level.

3. We also certify that:3.1 the condensed interim consolidated report:

a) was prepared in compliance with applicable IFRS endorsed in the European Communitypursuant to (EC) Regulation no. 1606/2002 of the European Parliament and Council, dated 19 July 2002;

b) is consistent with accounting books and records;c) provides a true and fair view of the financial position and performance of the issuer and

the group of companies included in the scope of consolidation.

3.2 the interim report on operations includes a reliable analysis of the references to the important events that occurred in the first six months of the year and to the effect they had on the condensed interim consolidated report, together with a description of the main risks and uncertainties for the remaining six months of the year. The interim report on operations also includes a reliable analysis of the information on significant transactions with related parties.

Sondrio, 5 August 2020 Manager in charge of financial

Managing Director reporting Luigi Lovaglio Simona Orietti

KPMG S.p.A. Revisione e organizzazione contabile Via Vittor Pisani, 25 20124 MILANO MI Telefono +39 02 6763.1 Email [email protected] PEC [email protected]

Ancona Aosta Bari Bergamo Bologna Bolzano Brescia Catania Como Firenze Genova Lecce Milano Napoli Novara Padova Palermo Parma Perugia Pescara Roma Torino Treviso Trieste Varese Verona

Società per azioni Capitale sociale Euro 10.415.500,00 i.v. Registro Imprese Milano e Codice Fiscale N. 00709600159 R.E.A. Milano N. 512867 Partita IVA 00709600159 VAT number IT00709600159 Sede legale: Via Vittor Pisani, 25 20124 Milano MI ITALIA

KPMG S.p.A. è una società per azioni di diritto italiano e fa parte del network KPMG di entità indipendenti affiliate a KPMG International Cooperative (“KPMG International”), entità di diritto svizzero.

(Translation from the Italian original which remains the definitive version)

Report on review of condensed interim consolidated financial statements

To the shareholders of Credito Valtellinese S.p.A.

Introduction We have reviewed the accompanying condensed interim consolidated financial statements of the Credito Valtellinese Group, comprising the consolidated statement of financial position as at 30 June 2020, the consolidated income statement and the consolidated statements of comprehensive income, changes in equity and cash flows for the six months then ended and notes thereto. The directors are responsible for the preparation of these condensed interim consolidated financial statements in accordance with the International Financial Reporting Standard applicable to interim financial reporting (IAS 34), endorsed by the European Union. Our responsibility is to express a conclusion on these condensed interim consolidated financial statements based on our review.

Scope of review We conducted our review in accordance with Consob (the Italian Commission for Listed Companies and the Stock Exchange) guidelines set out in Consob resolution no. 10867 dated 31 July 1997. A review of condensed interim consolidated financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (ISA Italia) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion on the condensed interim consolidated financial statements.

Credito Valtellinese Group Report on review of condensed interim consolidated financial statements 30 June 2020

2

Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed interim consolidated financial statements of the Credito Valtellinese Group as at and for the six months ended 30 June 2020 have not been prepared, in all material respects, in accordance with the International Financial Reporting Standard applicable to interim financial reporting (IAS 34), endorsed by the European Union.

Milan, 13 August 2020

KPMG S.p.A.

(signed on the original)

Luca Beltramme Director of Audit

Documents

Relazione finanziaria semestrale al 30.06.2020 EN Definitivo · 2020. 9. 14. · &2162/,'$7(' +,*+/,*+76 $1' $/7(51$7,9( 3(5)250$1&( ,1',&$7256 $6 $7 -81( 67$7(0(17 2) ),1$1&,$/ 326,7,21

Relazione finanziaria semestrale al 30.06.2020 EN Definitivo · 2020. 9. 14. · &2162/,'$7(' +,+/,+76 $1' $/7(51$7,9( 3(5)250$1&( ,1',&$7256 $6 $7 -81( 67$7(0(17 2) ),1$1&,$/ 326,7,21