The macro-economic scenario. The speed of the changes occurring on the financial markets and in the real economy continues to surprise and shows no signs of slowdown.

Perhaps even more profound changes are happening in geopolitics, overturning balanced situations which have been unchanged for decades. Just think of the new role of Asian economies and companies and of countries which have made marked progress on the road to growth using models which are often untraditional and which use global resources en masse.

Nowadays we are unable to say whether the development models which we have become familiar with and which have helped us prosper will continue to represent the reference point in years to come.

In this extraordinarily dynamic and volatile scenario, according to data from the International Monetary Fund, the global economy rose by 5% in 2010, but this figure must be interpreted carefully as China grew by 10.3%, India by 9.7%, and Brazil by 7.5%, but the European Union grew just by 1.8%.

The close and, at times, difficult relationship between the USA and China, the size of some sovereign debts, and a general policy of easy debt are just some of the imbalances which these years bequeath to the future. More generally, the access to production and consumption of billions of people who were once forced just to survive on a low income is totally and unexpectedly changing the very concept of centrality and primacy of the West, which has now been called into question by new ways of working, consuming and investing. In short, there is a new world on the horizon, no longer a bipolar one focussed on Europe and the USA, but rather a multipolar world where the advantage will go to the individual, collectivity, company or country that can best adapt to the mobility and instability of the times to come.

In 2010 Europe and Italy saw some recovery following the heavy fall in GDP and employment occurred in the previous two years. According to the International Monetary Fund, data show an increase of 1.8% for the European Union, driven by Germany with +3.6%, and of 1% for Italy. In Europe there has been widespread concern over the size of public debt, with well-known tensions in the most southerly countries, and over the state of some banks and of entire financial segments of some countries, such as Ireland. There has been a lively debate on the case for overcoming such problems by using the lever of public spending to spur growth (an idea which is strongly supported by not disinterested players outside the European Union) or to contain debt and thus cutting less efficient forms of income distribution.

The European Central Bank has played an important role in supporting the financial systems of member states and has extinguished any possible hotbeds of tension by injecting abundant liquidity. Interest rates have therefore stayed very low, with ECB key interest rate steady at 1% and with inflation at times seeming to slide towards a negative figure, only to then recover in the second part of the year on the back of a more solid recovery and the spike in commodity prices.

The Italian general scenario is characterised by structural delays and unresolved problems which hold back the country’s growth. Above all there is public debt, whose cost is still contained for now due to low interest rates in the Eurozone, but which could prove to be much more burdensome should real interest rates increase. The country continues to debate the need for some reforms, with fairly modest concrete results.

Companies in Italy. In Italy the companies segment was still marked by planning difficulties due to the general climate of uncertainty. The impact of 2008-2009, followed by a small recovery in 2010, resulted in an unemployment rate of 8.6%, with many companies struggling and widespread tensions on the liquidity front. Manufacturing companies, especially those in the Centre and North, found themselves having to measure up against new competitors and were not always able to find adequate solutions.

Many Italian and European entrepreneurs have opted for innovation and have recorded solid results. To compete successfully on markets, it is necessary to be totally flexible in processes and company organisation, and it is essential to correctly interpret the speed of change.

The European-wide discussion on banks’ position and solidity also continues with regard to the role of the banking business and its impact on the economic activity. The new Basel 3 supervisory parameters, which will not be implemented immediately, will have an impact and will allow less risk for the same amount of capital, i.e. they will require more capital for the same level of risk, and this may cause a slowdown in the supply of credit by banks and/or a dilution in banking profits. The inevitable consequence is that it will be less attractive to make new investments in banking equity and hence banks will find it difficult to strengthen their capital. The recent indications from the authorities aim to spur banks towards an internal generation of capital, but it remains to be seen what consequences this solution might bring in the medium term, given that shareholders remuneration is a central element in the relationship between capital and companies, especially in the case of "special" companies, such as banks.

Against this background, in 2010 Italian banks saw their margins fall due to spread narrowing between lending and borrowing rates (also due to the absolute low reached by market rates), and the gradual erosion in commission items which had made a significant contribution to turnover in the years up to 2007.

The already reduced margins were often hit by the downturn in the quality of lending, which has been a real problem over the last two years. The attention paid to overheads cannot in itself offset the trend in the highest items of banks’ income statements.

Some problems have also emerged with regard to debt capital funding. As regards this specific parameter, it is necessary to highlight that the unsecured interbank deposit market has largely maintained operations only for maturities of less than a month. In order to obtain financing for a longer period banks must use the Collateralised Interbank Market – providing high quality securities as a guarantee – in its various technical forms, or turn to the retail or institutional markets which have markedly higher costs. Italian sovereign debt has also played an important role and presumably will continue to act as a benchmark. Given its size such debt operates on the market by systematically "competing" with bank funding and, on the short end of maturities, it benefits from the "unfair competition" of the subsidised withholding tax on Ordinary Treasury Bills (BOT) compared to the withholding tax on deposits. Those banks which can operate on the medium term market, had no other choice but to tag along and agree to pay interest which is higher than that on sovereign debt.

The position of Banca IFIS. Banca IFIS is characterised by its company support activity. The Bank finances the working capital of companies, mitigating credit risk through the use of contracts transferring trade receivables claimed by companies from their own customers. The factoring market in Italy is highly developed due to both the propensity of companies and Public Administrations to settle outstanding accounts much later than the European average and to the solid legal and regulatory framework existing in the country.

The traditional segment in which Banca IFIS operates is represented by small enterprises, whose receivables are due from reliable customers; this segment is characterized by a higher client counterparty risk - although the credit risk is moved to the customer portfolio, thus being heavily mitigated - and a much higher profitability. This segment can offer solutions to financial requirements also through local commercial banks which satisfy customer needs using traditional technical instruments, such as advances against invoices. The main innovation introduced by Banca IFIS is also to offer smaller size customers a sophisticated product allowing them to obtain much more financial and operational support with respect to traditional forms of advances. The virtuous transfer of the credit risk from the customer to its customer, which is an essential element of factoring, allows the Bank to help companies by affirming the creditworthiness of the whole operation. In essence, Banca IFIS finances the work of companies, the capacity to generate sound receivables, intelligent operations, vitality and a healthy sense of enterprise. Banca IFIS provides due support to virtuous entrepreneurs.

The new segment of operations for Banca IFIS’s loans is represented by medium and large companies which supply the Public Administration.

This sector has a relatively limited number of operators (mainly but not exclusively companies in the pharma industrial industry) generally of significant size, sometimes as part of leading multinational groups. Operations are based on the purchase of portfolios of receivables generated by these companies with regard to public healthcare entities, in consideration of the need demonstrated by these companies to receive payment for their supplies over short time spans. As is well-known, the Public Administration is affected by marked delays in payments, which are taken into consideration in establishing the prices for the portfolios. Banca IFIS generally takes on the risk of late payment by the Public Administration entity and immediately pays the amount to the client company. The activity requires close management action on administrations, on which the positive outcome of the overall transaction depends. Credit risks are largely irrelevant, both on the side of the transferred debtor (the Public Administration), and in terms of the risks of recourse on the transferring customer should the receivable not exist.

The activity, on the other hand, entails some risks in the case of delays in payments by the public debtor which are longer than estimated and included in the all-inclusive purchase commission; moreover, it should be noted that the implicit risk connected to a possible longer delay in payment is normally addressed by applying interest on arrears to the public debtor.

The Bank’s international calling remains a very important element. In Banca IFIS there is deeply held belief that meeting customer needs means making services which are in line with companies’ activities available to the market. The gradual integration of European economies both inside and outside the Eurozone, and the multipolarity of the global economy have for some years led to an intensification in commercial transactions between partners located in different countries which may be very far apart.

Banca IFIS therefore decided to develop its own international presence, well in advance of the pace of its own growth and company size, in full knowledge of the difficulties (legislative, regulatory, operating, and linguistic) but also of the opportunities offered by being able to call on a global network of contacts.

The Bank’s presence outside of Italy started in 1999 with the establishment of representative offices in Hungary and Romania, to serve local companies which export to other European counterparts. The dealings, based around the Head Office in Mestre, are characterized by high quality and limited risk since the risk largely refers to transferred debtors, which are normally Italian, and usually relates to confirmed receivables. In Poland, IFIS Finance Sp.z o.o., based in Warsaw, has been active since 2006 as a financial intermediary specialising in the development of factoring. In France, a direct branch has been opened to support the exports and imports of Italian and French operators engaged in transactions between the two countries.

Since 2002 Banca IFIS has been a member of Factor Chain International, an organisation which brings together banks and financial institutions operating in the factoring sector and which are based in 66 countries. The activity is based on bilateral trade relationship between companies in which two operators swap receivables and each deals with the receivable in its own country. Factor Chain International is also an excellent platform on which to build bilateral relations between operators. To date the Bank has signed 167 agreements with an equal number of operators in 56 countries.

In 2010 further progress was made with a view to consolidating the Bank’s international presence. Work continued to support the Indian initiative in which Banca IFIS has a minority stake but with an important role on the international scene. The capital of the subsidiary India Factoring and Finance Solutions Private Limited comprises not only Banca IFIS, holding a 10% stake, but also Punjab National Bank, the third biggest Indian bank, and FIM Bank. Work started in January 2011 following the authorisation obtained from the Reserve Bank of India and the prospects for cooperation and development seem very enticing, also in light of the country’s growth and the intensification of trade between Europe and India.

The domestic network. Significant innovations have been introduced to the Bank’s distribution model. Alongside the traditional local presence which remains a cornerstone for being close to companies (25 branches in Italy with 95 staff dedicated to direct development, with the prospect of a further 5 branches opening over the next 18 months), there is now a rapid intensification in dealings with medium and large size credit institutions which, lacking a “product factory” in factoring, have decided to make use of Banca IFIS to provide better support for their customers. During 2010 and in the first few weeks of the current year commercial agreements were signed with Banca Popolare di Vicenza and Gruppo Credito Valtellinese. The plans which are shared with partners aim to effectively support customers who have limited creditworthiness but are capable of doing a good job for their own customers who are of good standing, and to optimise the extent of the Bank’s direct risk. On the other hand, it must be noted that Banca IFIS has decided to terminate most of its cooperation with credit intermediaries, in order to insource the direct relationship with customers and make it more professional. It is worth noting that work generated by the Bank’s direct distribution network was 76% of total turnover.

Funding. In terms of funding, 2010 was the year which saw the final abandonment of the Bank’s dependency on the interbank market, although this continues to be active mainly in a form which is largely backed by securities in order to stabilise flows and optimise the operating conditions for treasury management. The difficulties on the interbank deposit market have been widespread for all operators; the request from the supervisory authorities to monitor one-month interbank liquidity for the purposes of prudent management had the side effect of reducing the willingness of institutes to exchange interbank liquidity in an unsecured form for longer maturities. Banca IFIS, like most operators, has been able, and has had, to rely above all on its own direct funding capacity. Driven by the significant funding capacity of the Rendimax online savings account, which has been very successful, Banca IFIS can now count on a ratio of business loans as part of the institute’s main activity to retail funding of close to 1. This means that direct retail funding can ensure almost complete coverage of the lending requirement for customers.

A lot of retail funding is undertaken in a fixed form with maturities from one to twelve months; in 2011 a new 18-month deposit was launched which was an immediate and significant success. Rendimax customers were also offered the chance to use their deposited sums with a payment card which can be used as a point of sale or cash point card.

The unfixed share of deposits made by Rendimax customers represents an aspect which should be adequately considered in terms of liquidity, but at the same time is a good opportunity for the Bank. Free funding is managed through a portfolio of assets which are eligible within the Eurosystem and which are represented by Italian Government bonds and bank bonds. The profile of securities, in keeping with their purpose, sees short or at most medium term maturities, at a fixed rate for short-term operations (Ordinary Treasury Bills (BOT) and Zero-Coupon Treasury Certificates (CTZ)) and an index-linked rate for medium-term transactions. It is confirmed that Banca IFIS has neither direct nor indirect exposure to some categories of financial assets which are considered of higher risk (subprime, derivatives).