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UNICREDIT CORPORATE DIVISION: GROWTH OPPORTUNITIES AND RISK CONTROL FRAMEWORK

UNICREDIT CORPORATE DIVISION: GROWTH OPPORTUNITIES AND RISK CONTROL FRAMEWORK. Verona, July 15 th , 2004. AGENDA. Pietro Modiano – Head of Corporate Division UCI Corporate Division identity card UBI’s highlights Corporate lending scenario UBI’s strategy and its ‘pact for growth’

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UNICREDIT CORPORATE DIVISION: GROWTH OPPORTUNITIES AND RISK CONTROL FRAMEWORK

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  1. UNICREDIT CORPORATE DIVISION: GROWTH OPPORTUNITIES AND RISK CONTROL FRAMEWORK Verona, July 15th, 2004

  2. AGENDA • Pietro Modiano – Head of Corporate Division • UCI Corporate Division identity card • UBI’s highlights • Corporate lending scenario • UBI’s strategy and its ‘pact for growth’ • Francesco Giordano – Head of UBI Planning, Research and Strategy • Focus on Credit Quality • Ferdinando Samaria – UBM Chief Financial Officer • Focus on Revenue Diversification and Financial Risk Management

  3. AGENDA • UCI Corporate Division identity card • UBI’s highlights • Corporate lending scenario • UBI’s strategy and its ‘pact for growth’

  4. UCI CORPORATE DIVISION IDENTITY CARD Weight on 2003 Group revenues pre Corporate Centre and elisions 32.0% 42.2% 10.1% 15.7% Corporate division Private & AM division Retail division New Europe division CORPORATE DIVISION KEY HIGHLIGHTS Customer Loans Total Revenues Cost/ Income Employees 2003 data, Euro mln UniCredit Banca d’Impresa 47,648 1,802 28.7% 3,688 1,006 1,016 26.0% 741 UBM (1) 7,440 191 29.5% 482 Locat 4,938 82 55.1% 250 Banca Mediocredito 2,367 72 49.7% 236 Other companies (2) 63,442 3,298 31.0% 6,320 Total Division (3) (1) TRADINGLAB IS INCLUDED IN UBM (2) UCI Factoring, UniCredit Gestione Crediti (3) Delta due to other companies of the division (mainly Uniriscossioni & Euro Capital Structures) and rounding

  5. AGENDA • UCI Corporate Division identity card • UBI’s highlights • Corporate lending scenario • UBI’s strategy and its ‘pact for growth’

  6. UBI: THE FOCAL POINT OF THE CORPORATE DIVISION • UBI has combined the competencies in the corporate sector of a major national bank with those of six banks with a strong local presence • UBI’s core clients are companies with revenues of over 1.5 mln euro. This client segment covers around 120,000 companies that account for a total of 350 bln eurosbank loans • Of Italy’s 120,000 SMEs around 56,500 are UBI’s clients of which 41,000 (72%) have an open lending relationship with UBI % UBI clients with outstanding loans on core clients UBI Core Clients Client Coverage (*) Total Market 119,682 56,527 47% 72% Total corporate enterprises Largest groups 512 43% Other corporate and SMEs 56,015 72% (*) Client coverage refers to the number of UBI clients with outstanding loans, according to Italian Credit Bureau, relative to an estimate of the total number of corporate enterprises. Source: Source: UBI calculations on internal data, using Italian Credit Bureau definitions

  7. UBI’s non financial customers account for over 65% of total borrowing to the segment • UBI has a share of wallet of 12,2% on its core clients (up from 11% at the beginning of 2003) IN ITS FIRST YEAR OF ACTIVITY, UBI ACCOUNTED FOR ALMOST ONE FOURTH OF ADDITIONAL LENDING BY ITALIAN BANKS TO SMEs Loans Apr. ‘04 Share of Wallet (*) Dec. ‘02 Share of Wallet (*) Apr. ‘04 (euro mln) Largest groups 6,791 8,2% 6,3% Total non financial enterprises (excluding largest groups) 26,802 11,0% 12,2% Other corporate: turnover > 50 mnl Euro 8,813 9,6% 8,5% SMEs 17,989 13,9% 13,1% Public sector, fin. companies and others 11,625 9,5% 9,5% 38,427 10,5% 11,2% Total clients (excluding largest groups) 45,218 9,6% 10,6% Total (*) Share of wallet refers to the ratio between the amount of UBI outstanding loans and the banking system outstanding loans on the same customers. Source: UBI calculations on internal data, using Italian Credit Bureau definitions

  8. A CORPORATE BANK, WITH A WELL BALANCED REVENUE BASE IN TERMS OF CLIENT SEGMENTATION AND OF INTEREST vs FEE INCOME Total Revenues Total Revenues Breakdown Weight of Interest Income on revenues Weight of Fee Income on revenues (euro mln) Quarterly data as March 2004 Largest groups 34 8% 59% 36% Other corporates and SMEs 302 70% 61% 36% Other corp: turnover > 50 mnl Euro 59 14% 52% 43% SMEs: turnover 5- 50 mnl Euro 164 38% 37% 60% 18% 68% 29% SMEs: turnover 1,5 - 5 mnl Euro 79 94 22% 65% 30% Public sector, fin. companies and others 396 92% 62% 34% Total (excluding largest groups) Total 430 100% 61% 35% Source: UBI calculations on internal data

  9. UBI’S MAIN STRATEGY OBJECTIVES CONFIRMED BY RECENT ACHIEVEMENTS UBI’s main strategy objectives Recent achievements • Total loans increased by 5.5 mln in the 18 months running up to March 2004 • Strategy based on lending growth • Share of wallet on existing core clients up from 11% in April 2003 to 12.2% in April 2004 • Increase in share of wallet of existing clients • From the beginning of 2003 up to April 2004, around 2600 new core clients with outstanding loans, many of which in Lombardy • Acquisition of new clients in selected areas • Amount of MLT loans issued up to June twice as large as last year • Focus on longer maturities • Fee income, excluding derivatives, up to 29% of interest income in April 2004 from 25% a year earlier • Fee income revenues boosted by ‘revenue multiplier’ • Average rating, based on balance sheet data (Cebi ratings), unchanged at around 4,9 • Risk profile unchanged

  10. AGENDA • UCI Corporate Division identity card • UBI’s highlights • Corporate lending scenario • UBI’s strategy and its ‘pact for growth’

  11. ITALY’S MANUFACTURING SLOWDOWN HAS LASTED LONGER THAN IN PAST CYCLES, BUT THERE ARE CLEAR SIGNS OF RECOVERY AHEAD Industrial production index • Italy’s industrial production recovery considerably slower than in previous downturns… Note: The cyclical low is set at 100. X axis shows the number of months from the cyclical low 108 110 108 106 106 104 • … but recent data (e.g. orders and business turnover) highlight that the global recovery is finally reaching Italy 104 102 102 100 100 98 98 96 96 Turnover 3mma 94 94 Turnover Orders 3mma sc. dx 92 92 Orders sc. dx. 90 90 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Source: UBI on ISTAT

  12. DESPITE PROLONGED PRODUCTION WEAKNESS, COMPANIES’ PROFITABILITY SHOWS CONSIDERABLE RESILIENCE Italian companies key ratios (%) 1993 2000 2001 2002 EBITDA/ turnover 11.1 9.6 9.7 9.5 Gross financial charges / op. income 142.5 48.3 50.6 53.3 ROE -6.3 6.5 5.0 2.6 Equity/ Total assets 23.9 26.7 26.9 28.4 Italian manufacturing sectors: EBITDA/ production (%) ’90-’03 ’92-’93 ’02-’03 Food, beverages and tobacco 10.4 11.4 10.8 Textile and clothes production 11.9 11.9 11.0 Chemical products, rubber and plastics 12.7 11.3 12.2 Leather 8.6 10.4 6.2 Machinery and mechanical products 9.9 11.0 7.9 Source: UBI on BACH and ISTAT

  13. IN 2002-2003 CORPORATE LENDING GROWTH RATES WERE HIGHER THAN IN PREVIOUS PERIODS OF ECONOMIC WEAKNESS Corporate lending demand in 2002-2003 was associated with: • Cyclical factors • relatively high financing requirements (inventory building partly offsetting economic weakness) • low EBITDA • One-off factors • major M&A transactions (particularly in the second half of 2003) • Structural factors • low interest rates, enabling companies to maintain higher debt levels ‘96- ‘97 ‘02- ‘03 Corporate loans in cyclical downturns ‘93- ‘94 Nominal Corporate loans y/y % change 4.7 1.1 6.1 Nominal Investments y/y % change -0.9 4.2 3.3 (incl. inventories) y/y % change 8.2 3.2 0.2 EBITDA Short-term interest rates, % 12.5 10.9 5.4 Loans/ Value Added, % 86.6 80.8 96.6 Source: UBI on ISTAT and Bank of Italy

  14. IN COMING YEARS, CORPORATE LENDING SHOULD RETURN TO GROWTH RATES CONSISTENT WITH THE CYCLE… • The moderate economic recovery should keep corporate lending growth rates relatively low (around 5.9% on average in 2004-2007) • The influence of low interest rates on Italian companies’ debt levels should gradually lessen • The loans/value added ratio is higher than in the early 1990s and should remain at current levels Corporate loans, y/y % change Annual average End of period 2004 5.4 5.7 2005 7.0 6.4 2006 6.2 5.7 2007 5.1 4.8 Source: UBI on ISTAT and Bank of Italy

  15. … WHILE GROWTH IN MEDIUM/LONG-TERM LOANS SHOULD CONTINUE TO OUTDO SHORT-TERM LOAN GROWTH AS OCCURRED IN THE PAST TWO YEARS… Different trends in short-term and medium/long-term loans reflect: • Cyclical factors • cyclical weakness and low interest rates • One-off factors • debt restructuring undertaken by a number of large industrial groups • Structural factors • the propensity for companies to hold a higher proportion of medium/long-term debt in a trend towards convergence with the rest of Europe Corporate Loans, y/y % change Short term M/L term 2000 12.1 9.4 2001 12.2 7.2 2002 -0.8 12.4 Short-term corporate bank debt over total corporate bank debt 2003 0.1 12.9 Source: Bank of Italy

  16. ITALY FRANCE GERMANY SPAIN Total debt/ Equity 2002 2.19 1.58 1.64 1.31 2001 2.30 1.58 1.70 1.24 1995 2.58 1.63 1.68 1.51 Bank debt / Total debt 2002 29.4% 13.8% 10.6% 21.2% 2001 29.8% 16.1% 11.1% 21.6% 1995 31.8% 14.9% 13.2% 28.8% Short-term bank debt / Total bank debt 2002 65.9% 38.8% 54.1% 54.1% 2001 67.1% 48.6% 56.2% 54.2% 1995 71.4% 52.7% 56.1% 60.8% … AS ITALIAN COMPANIES HAVE WEAKER FINANCIAL STRUCTURES AND A HIGHER PROPORTION OF SHORT-TERM DEBT… Financial structure of European manufacturing companies • The financial structure of Italian companies is characterised by: • high debt-equity levels • a high proportion of bank debt relative to total debt • very high levels of short-term bank debt • In 2002 Italian manufacturing companies had debt-equity levels of 2.2x, compared to about 1.5x for their French, German and Spanish counterparts • Bank debt as a proportion of total debt • is almost double the average in other European countries (29% versus 15%) … • … and most of it is short-term debt Source: UBI on BACH. For Germany data as 2000 and 2001

  17. M/L t. loans, y/y % change Annual Average End of year 2004 11.6 9.0 2005 8.9 7.9 2006 7.7 7.2 2007 6.6 6.3 … HIGHLIGHTING THE NEED TO IMPROVE THE BALANCE OF DEBT MATURITIES, BOOSTING MEDIUM/LONG-TERM CORPORATE LENDING DEMAND • Medium + Long-term loans should account for almost 60% of the total by the end of 2007 (from around 56% in March 2004) • Total Medium + Long-term lending should increase by around 100 billion euro between April 2004 and the end of 2007. If Italian companies’ financial structures were to fully converge with those of the average of its European counterparts, medium + long-term lending flows could amount to more than double that level M/L term corporate over total corporate loans, % Source: UBI on Bank of Italy

  18. THE FINANCIAL EXPOSURE OF THE CORPORATE SECTOR APPEARS TO BE SUSTAINABLE • Forecast loan growth, in the presence of a cyclical recovery, is consistent with a strengthening in companies’ financial position: • EBITDA margins should outgrow net financial charges • the resulting increase in net profits implies improving self-financing capacity • this self-financing capacity should ensure that the overall financial balance of companies is not compromised even while financial debt increases • the ratio of financial debt to equity should fall from 94.8% at end-2002 to 92.6% at end- 2007 Source: UBI on BACH

  19. AGENDA • UCI Corporate Division identity card • UBI’s highlights • Corporate lending scenario • UBI’s strategy and its ‘pact for growth’

  20. UBI’S SERVICE MODEL RELIES ON THE INTERACTION BETWEEN GENERALIST RELATIONSHIP MANAGERS AND PRODUCT SPECIALISTS GENERAL MANAGEMENT • The relationship manager: • has responsibility over the first assessment of a company’s creditworthiness and represents UBI’s single point of contact with the company; • is supported by a team of specialists in areas such as: • derivatives • foreign transactions • payment systems • corporate finance • Specialists: • provide support in identifying and executing transactions requiring in-depth, up-to-date knowledge • offer innovative products and tailor-made solutions that meet companies’ needs 4 REGIONAL MANAGEMENT BODIES • specialist products • derivatives • foreign transactions • payment systems • corporate finance 13 REGIONAL CO-MGMT BODIES 211 BRANCHES 48 FOREX CENTRES foreign assistant credit assistant 892 REL MNGRS COMPANY

  21. Segment New organisational model Tools • proprietary, IT based system for targeted commercial approach Groups • dedicated account managers and product specialists Mid corporate • increase commercial time of RM (reviewing of managed portfolio and higher number of assistants) • highly developed marketing and credit monitoring tools, to support commercial activity and monitor results Small corporate (< 5 mln turnover) • increase in number and frequency of meetings with RM • possible review of distribution model • dedicated product portfolio and credit approval channel to cut average response times • identification of prospects • commercial approach based on target characteristics and pre-approved lending offer • regional teams scouting for prospective clients for referral to local branches Prospective clients SEGMENTATION OF CORE CLIENTS BY SIZE AND TYPE OF COMPANY ALLOWS DIVERSIFIED APPROACHES FOR EACH SEGMENT

  22. UBI’S STRATEGY IS FOCUSED ON A BROAD, SELECTIVE AND “VERY HIGH QUALITY” CREDIT SUPPLY POLICY • Through its commercial strategy, UBI intends to encourage clients to : • focus on a smaller number of credit relationships and develop deeper and more exclusive commercial ties • migrate towards more complex and effective credit products, and away from traditional short term loans backed by personal guarantees • take action that will boost financial strength while offering specialised support for that purpose Strategy • District bond: completion of the first securitisation of M/L t. loans granted to Italian SMEs (in conjunction with a credit consortium in Italy’s North East) • Launch of several M/L t. offers for SMEs based on: • cash flows analysis and medium term credit standing • pricing according to UBI’s internal rating system and at levels consistent with credit spreads prevailing in the capital market • Definition of commercial offer known as the ‘pact for growth’ Recent actions

  23. THE ‘PACT FOR GROWTH’: A CREDIT OFFER WHICH ENCOURAGES COMPANIES TO STRENGTHEN THEIR FINANCIAL STRUCTURE IN EXCHANGE FOR BETTER LENDING CONDITIONS (i) • The traditional features of Italy’s corporate lending: • Prevalence of short term lending, often to cover long term assets • Weak financial indicators, often associated with solid industrial performance • Frequent use of personal guarantees by entrepreneurs to support credit applications Sample (# of companies) (1) Companies with loans backed by guarantees (2) (2)/(1) Companies with loans backed by personal guarantees (3) (3)/(1) Total Turnover, Euro mln 0-15 37,937 19,783 52% 14,853 39% 15-50 6,874 2,114 31% 1,542 22% 50-100 1,451 329 23% 194 13% > 100 1,108 268 24% 124 11% Total 47,730 22,494 47% 16,713 35% Source: UBI

  24. THE ‘PACT FOR GROWTH’ (ii) • Such ample use of personal guarantees implies that: • the availability of bank lending is often based on the creditworthiness of the entrepreneur rather than on the company’s true capacity to generate income • our estimates indicate that the banking system tends to overestimate the reduction in LGD* granted by personal guarantees • UBI is now marketing a credit offer – known as the‘pact for growth’ – based on the following features: • Offer of medium-/long-term financing of an amount that will improve the financial structure of the company • Require companies to increase equity by a level that will improve the company’s rating • Set covenants to be monitored every six months • If a satisfactory level of creditworthiness is reached, UBI is prepared to give up personal guarantees (*) LGD: Loss Given Default

  25. SUMMING UP • UBI strategy has been confirmed by recent results: UBI has increased its share of wallet, boosted fee revenues (ex. derivatives), while keeping an unchanged risk profile • To achieve further, significant growth UBI also needs to update its supply policy: the flow of Italian corporate lending should focus on medium to long term maturities • Both theeconomic and the lending scenarios should ensure that lending growth is achieved without a deterioration in creditworthiness • At the same time companies should migrate towards more complex and effective credit products, and away from traditional short term loans backed by personal guarantees. A reduction in Italy’s multibanking tradition is also likely • UBI’s service model, client segmentation and risk management capabilities put us in an ideal position to capture a more than proportional share of the new lending flows

  26. AGENDA • Francesco Giordano – Head of UBI Planning, Research and Strategy • Focus on Credit Quality

  27. Decaying rate (ex. Parmalat) Decaying rate AFTER A DETERIORATION – PARTLY DUE TO LARGE CORPORATE DEFAULTS – THE CREDIT ENVIRONMENT IS EXPECTED TO IMPROVE • The expected fall in the Italian corporate Non-Performing Loans (NPLs) rate relates to: • recovery in corporate earnings • only gradual increase in interest rates • debt to equity ratios stabilising or starting to fall • decreasing impact of major corporate defaults 3 • The stabilisation in the credit risk environment is confirmed by the most recent data: • Stocks of NPLs: up 16% in April, but unchanged from February • Watchlist loans (incagli) up 2.9% in December03, from 7.5% in 1H03 2.8 2.6 2.4 2.2 2 1.8 1.6 1.4 Note: the decaying rate is the ratio between the annualised NPLs flows and the stock of outstanding loans the year before 1.2 Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 Source: UBI on Bank of Italy

  28. 200,00 180,00 Monthly flows of Gross Doubtful Loans (GDLs)* 160,00 3-month moving average 140,00 120,00 100,00 80,00 60,00 40,00 20,00 0,00 jan-03 apr-03 jul-03 oct-03 feb-04 may-04 UBI’S GROSS DOUBTFUL LOANS*: LATEST DATA INDICATE A TREND INVERSION • The second quarter shows an improvement relative to the second half of 2003 which was heavily affected by large corporate defaults • The June 3-month moving average has reached the lowest level since Q1 2003 *Note: excluding the volatile component ‘restructured and to be restructured loans’ Source: UBI

  29. Monthly flows of Gross Doubtful Loans (GDLs)* ex. 2 largest positions 3-month moving average EXCLUDING THE TWO LARGEST POSITIONS, THE TREND INVERSION APPEARS TO BE CONFIRMED • Excluding the two single largest positions (each month), GDLs show early signs of a trend inversion • Current June levels, if confirmed by subsequent observations, would be below expectations based on economic forecasts 80,00 70,00 60,00 50,00 40,00 30,00 *Note: excluding the volatile component ‘restructured and to be restructured loans’ 20,00 10,00 0,00 jan-03 apr-03 jul-03 oct-03 feb-04 may-04 Source: UBI

  30. default rate 2003 default rate 2004 (annualised) Data as of June 2004 Rating 1 and 2 0.02% 0.18% Rating 3 and 4 0.17% 0.24% Rating 5 and 6 1.27% 0.98% Rating 7, 8 and 9 4.03% 3.57% 1.16% 1.03% Rating n.a. Total 1.68% 1.51% DEFAULT RATE IN LINE WITH 2003 EXCLUDING LARGE CORPORATES • Total default rate is lower than in 2003. Netting both years of largest corporate defaults, default rates are roughly equivalent • Ratings based on financial accounts show good forecasting ability • The performance is further improved when internal ratings are applied Source: UBI

  31. CONCENTRATION OF NEW GDLs SHOWS A GREATER IMPACT OF SMALL CORPORATES RELATIVE TO 2003 • Excluding the 10 biggest defaults in 2003 and 2004 the total shows that • in 2003 total defaults excluding the 10 biggest defaults represented 67.8% of total GDLs • in the first six months of 2004 this percentage rose to 72.1% 100% New GDLs 67,8% 100% New GDLs excluding the ten largest positions 72,1% 2003 2004 to-date Source: UBI

  32. Cyclical activities FOOD / BEVERAGES / AND TOBACCO PRODUCTS 3.8% 3.0% 2.3% PAPER / PRESS AND EDITORIAL PRODUCTS 1.4% Anti-cyclical activities MINERAL AND NOT FERROUS MINERAL PRODUCTS 2.7% 2.0% MINERALS AND FERROUS METALS AND NON FERROUS ONES 2.2% 0.5% Other activities DEFAULT RATES ARE OVER-REPRESENTED IN CYCLICAL SECTORS Branch of economic activity Volume Share Default Share Strongly cyclical activities TEXTILE / LEATHER / FOOTWEAR / AND CLOTHES PRODUCTION 4.7% 7.9% AGRICULTURAL AND INDUSTRIAL MACHINERY PRODUCTION 3.8% 7.3% METAL PRODUCTS EXCLUDING MACHINERY / TRANSPORT 3.5% 5.3% ELECTRICAL MATERIAL AND SUPPLIES 3.3% 3.8% OTHER INDUSTRIAL PRODUCTS 3.3% 4.4% TRANSPORT PRODUCTS 1.3% 3.7% CHEMICAL PRODUCTS 2.0% 2.6% RUBBER AND PLASTIC 1.5% 2.0% OFFICE MACHINERY FOR DATA ELABORATION / AND PRECISION MACHINERY 1.2% 0.9% ENERGY PRODUCTS 3.7% 0.1% BUILDING AND PUBLIC WORKS 7.7% 9.6% AGRICULTURE/ SILVICOLTURE / AND FISH 1.3% 0.7% Services SERVICES CONNECTED TO TRANSPORTS 2.6% 12.9% COMMERCE / RECOVERIES / REPAIRS SERVICES 12.6% 13.3% OTHER SALE ORIENTED SERVICES 14.4% 13.9% SERVICES OF INNER TRANSPORTATIONS 0.8% 1.1% HOTEL SERVICES / OTHER PUBLICS EXERCISES 1.2% 0.6% TRANSPORT MARINE AND AERIAL SERVICES 0.6% 0.4% COMMUNICATIONS SERVICES 1.1% 0.0% Source: UBI

  33. COST OF RISK INCREASES SLIGHTLY NET OF PARMALAT • Growth of Gross Doubtful loans reflects the weak macroeconomic environment mln, where not specified % ch. vs 2003 1Q04 Gross Doubtful Loans 1,847 +15.3% • GDLs are inflated by a conservative reclassification of around 152 mln from performing to “loans being restructured”, for which almost complete recovery is expected Weight on Gross Loans 3.95% +66 bp Coverage ratio 30.7% -393 bp Gross Non Performing Loans 990 +10.2% • Coverages drop due to the high level of collateralisation of new doubtful loans and to the severe NPLs write-off policy Weight on Gross Loans 2.12% +27 bp Coverage ratio 36.0% -200 bp • +3.1% increase in provisions on performing loans, with a high 1.04% coverage ratio, resulting from 28 mln provisions on the automotive sector Provisions on performing loans 467 +3.1% Coverage ratio 1.04% +8 bp 87 bp -18 bp Cost of risk (including Parmalat) • Slight increase of cost of risk vs FY03 net of extraordinary provisions on Parmalat 87 bp 7 bp1 Cost of risk (net of Parmalat) (1)Calculated on FY03 cost of risk net of extraordinary provisions on Parmalat (25 bp) Source: UBI

  34. COVERAGE LEVELS EXPLAINED BY CONSERVATIVE RECLASSIFICATION AND WRITE-OFFS Net of new restructured loans 1Q04 • Conservative “loans being restructured” reclassification of around 152 mln in 1Q04 weighed on the GDLs coverage ratio mln, where not specified Gross Doubtful Loans 1,847 1,695 • Net of this effect, the ratio improved by around 250 bp Coverage ratio 30.7% 33.2% 1Q04 (including write-offs) 1Q03 (including write-offs) • Write-offs of highly covered positions have a negative impact on coverage figures mln, where not specified Gross Non Performing Loans 2,418 2,226 • Summing up write-offs both to NPLs stock and provisions, NPLs coverage gross of write-offs shows a very conservative provision policy Coverage ratio 73.9% 75.9% Source: UBI

  35. AGENDA • Ferdinando Samaria – UBM Chief Financial Officer • Focus on Revenue Diversification and Financial Risk Management

  36. KEY FACTS – UBM AS OF 31 DEC 2003 • Conceived in 1998, formally spun off in 2000 • 569 employees, average age 35 • S&P Rating: AA- • Gross Revenues: EUR 770m • Net income: EUR 340m • Average daily VaR: EUR 4.4m • ROE: 61% • Net income/employee: EUR 598k COMPANY PROFILE • Derivatives portfolio’s outstanding notional > €1000b • Outstanding trades > 200,000 • Total risk factors > 40,000 • Total web transactions on capital guaranteed products > 500,000 • Number of daily trade revaluations > 15m SOME TRADING BOOK STATISTICS

  37. UBM AFTER MERGER WITH TRADINGLAB • UBM has completed the merger with TradingLab, the bank dedicated to providing UniCredito retail customers with financial products and services • The merged trading book, particularly in equity derivatives, becomes one of Europe’s largest • Synergies in terms of pricing capability and risk management • Some savings in infrastructure costs • Negotiating with regulators extension of internal model to TradingLab books • Increased overall ability to generate diversified revenues

  38. REVENUE BREAKDOWN IN THE NEW UBM 2003 (pro-forma) Investment Banking 10.8% Financial Products 89.2% of which: Derivatives 74.8% Main derivative classes of risk: • Interest rates • Equity • FX • Almost 90% of UBM’s gross revenues are generated from Financial Products – sales & trading (FP) • FP include institutional, retail and corporate derivatives as well as fixed income and equity cash trading • The bulk of FP’s gross revenues are generated from derivatives • In total approximately 75% of UBM’s gross revenues are generated from derivatives

  39. FOCUS ON FINANCIAL PRODUCTS • UBM has completed the merger with TradingLab, the bank dedicated to providing UniCredito retail • From the beginning of operations, market risk management has been a distinctive element in UBM • Derivative products are traded on all asset classes • Ability to address a broad segment of corporate and institutional customers with innovative financial products • Core skills in pricing, hedging and trading • Products are unbundled into elementary risk components by proprietary pricing models and hedged through wholesale markets • Limited back-to-back trading • Industrial approach: large volumes, high throughput, efficient time-to-market • UBM transforms derivatives risks into market, model, counterparty and operational risks

  40. THE RISK MANAGEMENT STAGES DERIVATIVE PRODUCT OPERATIONAL RISK MARKET RISK MODEL RISK COUNTERPARTY RISK CTPY1 CLIENT1 UBM CTPY2 CLIENT2 CTPY3 CLIENTn CTPYm SALES RISK MANAGEMENT TRADING

  41. MARKET RISK • UBM’s portfolio affected by more than 40,000 risk factors • VaR calculated daily through a proprietary VaR engine via historical simulation • VaR parameters: 99% double-tail confidence level, 1-day holding period, daily update of time series • VaR model has been validated by Italian regulators for capital requirement purposes • UBM daily VaR limit is €7m, against a one-year average of €4.4m (max €6.6m) • Daily back-testing against “clean” P&L series as well as crash/stress tests

  42. Market Surface 25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 1 10% 3 5 3.0% 3.5% 4.0% 7 4.5% Maturity 4.8% 9 5.0% 5.5% 6.0% 12 7.0% 8.0% Strike 9.0% 10.0% MODEL RISK • Team of dedicated professionals developing and implementing pricing models for exotic derivatives • Implementation and maintenance of a large, high-throughput risk management system • Over 200 proprietary pricing models deployed • Dedicated Model Testing team based in London • Front-office booking system with over 200,000 trades • Proprietary technology for capital guaranteed products with more than 500,000 web-based transactions executed, with real time tracking and stress tests • Ubiquitous computing: Enterprise-wide Parallel Processing (over 500 CPUs) • Skew/smile proprietary pricing models based on stochastic volatility

  43. COUNTERPARTY RISK • MEASURING COUNTERPARTY RISK • Derivative portfolio size > €1,000b • Market risks are hedged through OTC trades with other market counterparties • Traditionally counterparty risk has been monitored using fixed coefficients • Need to quantify the effective cost of substitution • The cost of substitution is the value of each trade increased by the potential variation that may occur • Estimate the cost of substitution as the marked-to-market valuation plus a simple add-on METHOD’S ADVANTAGES • Quantifies more accurately the real counterparty risk • Uses standard product control techniques • Can be used with risk mitigation tools such as close-out netting and collateral agreements • When using netting, portfolio diversification is captured • Dynamic methodology in line with market variations • More in line with market practice and central bank models • Can bring in market risk techniques (substitution of the simple add-on with VaR)

  44. OPERATIONAL RISK • ASSESSING AND CONTROLLING OPERATIONAL RISK • Operational risk is defined as the risk of losses resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk (Basel, September 2001) • Risk control is achieved through process mapping, risk assessment and business process reengineering • The “Operational risk control” project is an on-going activity that advances by gradual improvements • Main steps: • Definition of roles and responsibility • Implementation of techniques of process analysis and representation • Application development to support historical loss data collection • Study of risk assessment methodology to influence business process and control reengineering

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