20-F 1 a2171255z20-f.htm 20-F
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC. 20549

FORM 20-F

o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934


OR


ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended: December 31, 2005


OR


o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Date of event requiring this shell company report


Commission file number: 1-14870

Sanpaolo IMI S.p.A.


Italy

(Jurisdiction of incorporation of organization)


Piazza San Carlo 156, 10121 Turin, Italy

(Address of principal executive offices)


Securities registered or to be registered pursuant to Section 12(b) of the Act.


Title of each class

  Name of each
exchange on which registered

American Depositary Shares, each representing 2 Ordinary Shares
of €2.88 par value each
  The New York Stock Exchange
Ordinary Shares of €2.88 par value each (the "Shares")   The New York Stock Exchange*

*
Not for trading, but only in connection with the registration of American Depositary Shares representing such Shares pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

    None
   
    (Title of Class)    


Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

 

None

 

 
    (Title of Class)    


Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

 

 

Not applicable

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ý    No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý    Accelerated filer o    Non-accelerated filer o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ý    Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    ý No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

o Yes    o No





TABLE OF CONTENTS

 
  Page
Presentation of Information   1
Forward-Looking Statements   2
Risk Factors   3
PART I   7
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS   7
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE   7
ITEM 3. KEY INFORMATION   7
  A. Selected Financial Data   7
  B. Selected Statistical Information   12
ITEM 4. INFORMATION ON SANPAOLO IMI   56
  A. History and Development of Sanpaolo IMI   56
  B. Significant Developments During 2005   58
  C. Business Overview   59
  D. Organizational Structure   92
  E. Property, Plants and Equipment   92
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS   92
  A. Results of Operations for the Two Years Ended December 31, 2005   96
  B. Liquidity and Capital Resources   131
  C. Trend Information   137
  D. Critical Accounting Estimates   137
  E. Recent Accounting Developments   141
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   143
  A. Directors and Senior Management   143
  B. Compensation   153
  C. Board Practices   156
  D. Employees   163
  E. Share Ownership   167
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   167
  A. The Major Shareholders   167
  B. Related Party Transactions   169
ITEM 8. FINANCIAL INFORMATION   173
  A. Consolidated Statements and Other Financial Information   173
  B. Legal Proceedings   173
  C. Significant Changes   181
ITEM 9. LISTING DETAILS   181
  A. Performance of Sanpaolo IMI Share Prices   181
     

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  B. Markets   183
ITEM 10. ADDITIONAL INFORMATION   184
  A. Bylaws   184
  B. Foreign Investment   185
  C. Exchange Controls and Material Contracts   187
  D. Taxation   187
  E. Documents on Display   193
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   193
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   210
PART II   210
ITEM 13. DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES   210
ITEM 14. MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   210
ITEM 15. CONTROLS AND PROCEDURES   210
ITEM 16. RESERVED   211
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT   211
ITEM 16B. CODE OF ETHICS   211
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES   211
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE   212
ITEM 16E. PURCHASES OF EQUITY SECURITIES   212
PART III   213
ITEM 17. FINANCIAL STATEMENTS   213
ITEM 18. FINANCIAL STATEMENTS   213
ITEM 19. EXHIBITS   214
SIGNATURE   215
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT   216
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT   217
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT   218

ii



PRESENTATION OF INFORMATION

        Sanpaolo IMI S.p.A. publishes audited consolidated financial statements which are included elsewhere in this annual report (the "Consolidated Financial Statements") for Sanpaolo IMI S.p.A. and its consolidated subsidiaries constituting the Sanpaolo IMI Group (the "Sanpaolo IMI Group" or the "Group") in euro, the lawful currency of Italy and eleven other member states of the European Union ("EU"). References to "we" or "our" are to the Group on a consolidated basis. References to "Sanpaolo IMI" or the "Parent Bank" are to Sanpaolo IMI S.p.A. on an unconsolidated basis.

        In this annual report, references to "U.S. dollars", "dollars" or "$" are to the United States dollar; references to "euro", "Euro" or "€" are to the euro. For purposes of this annual report, "billion" means a thousand million. The noon buying rate in the City of New York for cable transfers in foreign currencies as announced by the Federal Reserve Bank of New York for customs purposes (the "Noon Buying Rate") for the euro in effect on June 12, 2006 was €1 = $1.2587.

        This annual report contains translations of certain euro amounts into U.S. dollars at specified rates. Unless otherwise specified, the translations of euro into U.S. dollars have been made at the Noon Buying Rate for the euro in effect on December 31, 2005, which was €1 = $1.1842. That rate may differ from the actual rates during the year used in the preparation of Sanpaolo IMI's Consolidated Financial Statements, and dollar amounts in this annual report may differ from the actual dollar amounts that were translated into euro in the preparation of the Consolidated Financial Statements.

        The Consolidated Financial Statements for the years ended December 31, 2005 and 2004 included in this annual report have been prepared in accordance with International Accounting Standards ("IAS") and International Financial Reporting Standards ("IFRS"), issued by the International Accounting Standards Board ("IASB") and endorsed by the European Commission on December 31, 2005 on the basis of the procedure set forth in EC Regulation no. 1606/2002 ("EU GAAP" or "IAS/IFRS"), pursuant to Article 3 (1) of Italian Legislative Decree No. 38/2005. In preparing the financial statements, we also referred to the Bank of Italy circular No. 262 of December 22, 2005 governing bank financial statements, and the provisional implementation measures issued by the Bank of Italy in that circular. EU GAAP differs in certain significant respects from generally accepted accounting principles in the United States ("U.S. GAAP"). The results at and for the year ended December 31, 2005 were prepared in accordance with EU GAAP. The comparable results at and for the year ended December 31, 2004 were also prepared in accordance with EU GAAP; however, as permitted by IFRS 1, these results excluded the application of IAS 32, IAS 39 (financial instruments) and IFRS 4 (insurance contracts), for which the transition date was January 1, 2005, and Italian GAAP continued to apply to the recognition of results, assets and liabilities to which IAS 32, IAS 39 and IFRS 4 would otherwise have applied.

        This annual report contains information that has been derived from the Consolidated Financial Statements for the years ended December 31, 2003, 2002 and 2001 not included in this annual report, but previously filed with the United States Securities and Exchange Commission, have been prepared in accordance with generally accepted accounting principles in Italy, including Legislative Decree No. 87 of January 27, 1992, which implemented European Commission ("EC") Directive 86/635, and the Bank of Italy regulations of January 16, 1995, supplemented by the accounting principles issued by the Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri (collectively, "Italian GAAP"), which differ in certain significant respects from U.S. GAAP.

        For a summary of the significant differences among IFRS, EU GAAP, and U.S. GAAP, please see: Part M, Section 1 and Section 2 on pages F-214 and F-215 of the Consolidated Financial Statements.

        In this annual report we also present, solely for purposes of management's Operating and Financial Review and Prospects, reclassified and pro forma income statement information. For an

1



explanation of the reconciliation between the audited and reclassified income statements, see: Item 5.A—."Operating and Financial Review and Prospects, Results of Operations by Business Sector for the Two Years Ended December 31, 2005, Reconciliation Between Audited and Reclassified Income Statements" on page 97 below.

        As used in this annual report, "Shares" means the ordinary shares of €2.88 par value of Sanpaolo IMI and excludes the Azioni Privilegiate (as defined below). The general shareholders' meeting of Sanpaolo IMI of April 29, 2006 resolved to increase the par value of the Shares from €2.80 to €2.88.

        From time to time, this annual report gives information concerning Sanpaolo IMI's market share in a particular market or segment. In such cases, the figures are derived from official sources, such as the Bank of Italy, or industry bodies, such as the Italian Banking Association.


FORWARD-LOOKING STATEMENTS

        The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This annual report contains forward-looking statements which reflect management's current views on Sanpaolo IMI Group's business, strategy and financial performance. Statements that are not about facts or events that have already occurred, including statements about the Group's or management's beliefs or expectations, are forward-looking statements. Words or phrases such as "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "target", "goal", "project" or similar expressions are intended to identify forward-looking statements but are not the exclusive means of doing so. Forward-looking statements include, but are not limited to, statements under the following headings:

Item 3. "Key Information—B. Selected Statistical Information" on page 7 below;

Item 4. "Information on Sanpaolo IMI—A. History and Development of Sanpaolo IMI" on page 56 below;

Item 4. "Information on Sanpaolo IMI—C. Business Overview" on page 59 below;

Item 5. "Operating and Financial Review and Prospects" on page 93 below;

Item 8. "Financial Information—A. Consolidated Statements and Other Financial Information—B. Legal Proceedings" on page 174 below, including statements regarding the likely effect of matters discussed therein; and

Item 11. "Quantitative and Qualitative Disclosures about Market Risk" on page 194 below.

        The following important factors could cause the Group's actual results to differ materially from those projected or implied in any forward-looking statements:

the impact of regulatory and judicial decisions and changes in the regulatory and legal environment;

the impact of political and economic developments in Italy and other countries in which the Group operates;

the impact of fluctuations in currency exchange rates, interest rates and stock market prices;

the Group's ability to successfully integrate the employees, products, services and systems of recent mergers and acquisitions;

the Group's ability to achieve the expected return on the investments and capital expenditures it has made in Italy and abroad;

the Group's ability to successfully implement the 2006-2008 Plan (as defined below);

2



the amount and timing of any future impairment charges related to the Group's equity holdings, goodwill and other assets; and

changes in the competitive environment, particularly in Italy.

        The foregoing factors should not be construed as exhaustive and speak only as of the date hereof. The Group undertakes no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in the Group's business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

        Certain forward-looking statements involve statements about risks and uncertainties that could significantly affect expected results and are based upon assumptions of future events which may not prove to be accurate. In particular, this document includes forward-looking statements relating, but not limited, to the Group's potential exposures to various types of market risk. Certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. See: Item 11. "Quantitative and Qualitative Disclosures about Market Risk" on page 194 below. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains and losses could differ materially from those that have been estimated and readers should not place undue reliance on such forward-looking statements, which speak only as of the date of this annual report. Sanpaolo IMI assumes no responsibility for updating such forward-looking statements.


RISK FACTORS

    The Group's financial results are affected by events which are difficult to anticipate.

        The Group's earnings and business are affected by general economic conditions, the performance of financial markets, interest rate levels, currency exchange rates, changes in laws and regulation, changes in the policies of central banks, particularly the Bank of Italy and the European Central Bank (the "ECB"), and competitive factors, in each case on a regional, national or international level. Each of these factors can change the level of demand for the Group's products and services, and change the risk to the Group of providing such products and services.

        For instance, changes in general economic conditions, the performance of financial markets, interest rate levels and the policies of central banks may affect, positively or negatively, the Group's financial performance by affecting the demand for the Group's products and services, the credit quality of borrowers and counterparties, the interest rate margin realized by the Group between its lending and borrowing costs, and the value of the Group's investment and trading portfolios. Changes in laws and regulations and government policies may affect, positively or negatively, the Group's ability to provide certain products and services, and the cost of complying with such laws and regulations. In addition, the process of cross-border banking consolidation globally and particularly in Italy may lead to increasing competition from financially stronger rivals and may also raise the level on systemic concentration risk.

        The Group has economic, financial market, credit, legal and other specialists who monitor economic and market conditions and government policies and actions. However, because it is difficult to predict with accuracy changes in economic or market conditions or in governmental policies and actions, it is difficult for the Group to anticipate the effects that such changes could have on its results of operations, financial condition and business activities.

        The Group may also be subject to claims arising from the sale of certain securities and saving products. See: Item 8 "Financial Information—Legal Proceedings" on page 174 below.

3



    The Group's financial results are affected by changes in interest rates.

        The Group's results of operations are dependent to a significant extent on the level of net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Interest rates are sensitive to many factors beyond the Group's control, such as monetary policies pursued by central banks and national governments, the liberalization of financial services and increased competition in the markets in which the Group operates, domestic and international economic and political conditions, and other factors.

        Changes in interest rates could affect the spread between interest rates charged on interest-earning assets and interest rates paid on interest-bearing liabilities, which in turn could affect the level of the Group's net interest income. Moreover, the composition of the Group's assets and liabilities, and any gap position resulting from the composition, causes the Group's net interest income to vary with changes in interest rates. A mismatch of interest-earning assets and interest-bearing liabilities in any given period may, in the event of changes in interest rates, have a material effect on the Group's net interest income and thereby on the Group's results of operations and financial condition.

    The Group is subject to credit and market risk.

        To the extent any of the instruments and strategies the Group uses to hedge or otherwise manage its exposure to credit or market risk are not effective, the Group may not be able to mitigate effectively the Group's risk exposures in particular market environments or against particular types of risk. The Group's trading revenues and interest rate risk are dependent upon its ability to identify properly, and mark to market, changes in the value of financial instruments caused by changes in market prices or interest rates. The Group's financial results are also dependent upon how effectively the Group determines and assesses the cost of credit and manages its credit risk and market risk concentrations. To the extent the Group's assessments of migrations in credit quality and of risk concentrations, or the Group's assumptions or estimates used in establishing its valuation models for the fair value of the Group's assets and liabilities or in determining the appropriate level of its loan loss allowances and other risk allowances prove inaccurate or not predictive of actual results, the Group could suffer higher than anticipated credit, trading or investment losses. This in turn could adversely affect the Group's results of operations and financial condition.

        For a discussion of the Group's credit and market risks and its management of such risks, please see: Item 11. "Quantitative and Qualitative Disclosures about Market Risk" on page 194 below.

    The Group is subject to operational risk.

        The Group, like all financial institutions, is exposed to many types of operational risk, including the risk of fraud or other misconduct by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or errors resulting from faulty computer or telecommunications systems. Given the Group's high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. In addition, the Group's dependence upon automated systems to record and process its transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Group may also be subject to disruptions of its operating systems, arising from events that are wholly or partially beyond the Group's control (including, for example, computer viruses or electrical or telecommunication outages), which may give rise to losses in service to customers and to loss or liability to the Group. The Group is further exposed to the risk that external vendors may be unable to fulfill their contractual obligations to the Group (or that external vendors will be subject to the risk of fraud or operational errors by their respective employees), and to the risk that its (or its vendors') business continuity and data security systems prove not to be sufficiently adequate. The Group also faces the risk that the design of its controls and

4


procedures prove inadequate, or are circumvented, thereby causing delays in detection or errors in information. Although the Group maintains a system of controls designed to keep operational risk at appropriate levels, the Group has suffered losses from operational risk and there can be no assurance that it will not suffer losses from operational risk in the future that may be material in amount.

        For a discussion of the Group's operational risk and its management of such risk, please see: Item 11. "Quantitative and Qualitative Disclosures about Market Risk" on page 194 below.

    The Group's risk management policies, procedures and methods may leave the Group exposed to unidentified or unanticipated risks, which could lead to material losses.

        The Group has devoted significant resources to developing its risk management policies, procedures and assessment methods and intends to continue to do so in the future. Nonetheless, the Group's risk management techniques and strategies may not be fully effective in mitigating the Group's risk exposure in all economic market environments or against all types of risk, including risks that the Group may fail to identify or anticipate. Some of the Group's qualitative tools and metrics for managing risk are based upon the Group's use of observed historical market behavior. The Group applies statistical and other tools to these observations to arrive at quantifications of its risk exposures. These tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors the Group did not anticipate or correctly evaluate in its statistical models. This would limit the Group's ability to manage its risks. The Group's losses thus could be significantly greater than the historical measures indicate. In addition, the Group's quantified modeling does not take all risks into account. The Group's more qualitative approach to managing those risks could prove insufficient, exposing it to material unanticipated losses. If existing or potential customers believe the Group's risk management is inadequate, they could take their business elsewhere. This could harm the Group's reputation, results of operations and financial condition.

    Market declines and volatility can materially adversely affect revenues and profits.

        Conditions in the financial markets in Italy and elsewhere materially affect the Group's businesses. Market declines and increased volatility can adversely affect the credit quality of the Group's assets and could increase the risk that a greater number of the Group's customers would default on their loans or other obligations. An overall market downturn or increased volatility in market conditions can adversely affect the Group's business, results of operations and financial condition.

    Protracted market declines can reduce liquidity in the markets, making it harder to sell assets and leading to material losses.

        In some of the Group's businesses, protracted adverse market movements, particularly asset price declines, can reduce the level of activity in the market or reduce market liquidity. These developments can lead to material losses if the Group cannot close out deteriorating positions in a timely way. This may especially be the case for assets of the Group for which there are not very liquid markets to begin with. Assets that are not traded on stock exchanges or other public trading markets, such as derivatives contracts between banks, may have values that the Group calculates using models other than publicly quoted prices. Monitoring the deterioration of prices of assets like these is difficult and failure to do so effectively could lead to losses that the Group did not anticipate or that were higher than those anticipated. This in turn could adversely affect the Group's results of operations and financial condition.

5


    Even where losses are for the accounts of clients of the Group, the clients may fail to repay the Group, leading to material losses for the Group and harm to the Group's business.

        While the Group's clients would be responsible for losses the Group incurs in taking positions for their accounts, the Group may be exposed to additional credit risk as a result of their need to cover the losses. The Group's business may also suffer if the Group's clients lose money and the Group loses the confidence of clients in its products and services. This in turn could adversely affect the Group's results of operations and financial condition.

    The Group's investment banking revenues may decline in adverse market or economic conditions.

        The Group's investment banking revenues, in the form of financial advisory and underwriting fees, directly relate to the number and size of the transactions in which the Group participates and are susceptible to adverse effects from sustained market downturns. These fees and other revenues are generally linked to the value of the underlying assets and therefore decline as asset values decline. In particular, the Group's revenues and profitability could sustain material adverse effects from a significant reduction in the number or size of debt and equity offerings and merger and acquisition transactions.

    The Group may generate lower revenues from brokerage, asset management and other commission- and fee-based businesses.

        Market downturns are likely to lead to declines in the volume of transactions that the Group executes for its customers and, therefore, to declines in the Group's non-interest revenues. In addition, because the fees that the Group charges for managing its clients' portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of the Group's clients' portfolios or increases the amount of withdrawals would reduce the revenues the Group receives from its asset management and custody businesses, among others.

        Even in the absence of a market downturn, below-market performance by the Group's mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenues the Group receives from its asset management business.

    Intense competition, especially in the Italian market, where the Group has the largest single concentration of its businesses, could materially hurt the Group's revenues and profitability.

        Competition is intense in all of the Group's primary business areas in Italy and the other countries in which the Group conducts its business, including other European countries and the United States. The Group derived approximately 89.3% of its net revenues in 2005 from Italy, a mature market where competitive pressures have increased and we believe will intensify. Downturns in the Italian economy could add to the competitive pressure, through, for example, increased price pressure and lower business volumes for Sanpaolo IMI and its competitors to try to capture. In addition, as a result of technological advances, the growth of e-commerce and the progressive liberalization of financial services in the European Union, we face increased competition for some of our products and services from non-bank competitors, such as mutual funds, pension funds and insurance companies. If the Group is unable to continue to respond to the competitive environment in Italy with attractive product and service offerings that are profitable for the Group, the Group may lose market share in important areas of its business or incur losses on some or all of its activities.

    The Group's insurance businesses are subject to inherent risks including claims.

        Future claims in the Group's life insurance business may be higher than expected as a result of changing trends in claims experience resulting from such factors as demographic developments, changes in mortality and other causes beyond the Group's control. These changes could adversely affect the profitability of the Group's insurance products and services. The Group intends to expand its insurance activities by the organic reorganization of its formerly separate businesses into Eurizon. This project has been initiated and is planned to be followed by the separate Italian stock market quotation of the company.

6



PART I

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

        Not applicable.

ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE

        Not applicable.

ITEM 3.    KEY INFORMATION

A.    Selected Financial Data

        The financial information set forth below has been selected from, and should be read in conjunction with, the audited Consolidated Financial Statements and notes thereto included elsewhere in this annual report.

Consolidated Income Statement Data

        The following table shows consolidated data from our audited income statements for the periods indicated.

        As explained under "Presentation of Financial Information", the results at and for the year ended December 31, 2005 were prepared in accordance with EU GAAP. The comparable results at and for the year ended December 31, 2004 were also prepared in accordance with EU GAAP; however, as permitted by IFRS 1, these results excluded the application of IAS 32, IAS 39 and IFRS 4, for which the transition date was January 1, 2005, and Italian GAAP continued to apply to the recognition of results, assets and liabilities to which IAS 32, IAS 39 and IFRS 4 would otherwise have applied. In the table that follows, the line items for the year ended December 31, 2004 identified as "Italian GAAP" represents the line items on which IAS 32, IAS 39 and IFRS 4 had an impact that were prepared in accordance with Italian GAAP. All other line items were prepared in accordance with EU GAAP.

 
   
  Year ended December 31,
 
 
   
  2005
  2004
 
 
   
  (in millions of €)

 
10.   Interest income and similar revenues   8,235      
10. Italian GAAP   Interest income and similar revenues       7,196  
20.   Interest expense and similar charges   (3,786 )    
20. Italian GAAP   Interest expense and similar charges       (3,534 )
30.   Net interest income   4,449   3,662  
40.   Commissions receivable   4,166      
40. Italian GAAP   Commissions income       3,980  
50.   Commissions payable   (758 )    
50. Italian GAAP   Commission expense       (764 )
60.   Net commissions   3,408   3,216  
70.   Dividends and other revenues   475      
30. Italian GAAP   Dividends and other revenues       152  
80.   Net dealing income   104      
90.   Net results of hedging transactions   (4 )    
100.   Profit/(loss) on disposal or repurchase of   394      
        a) loans   57      
        b) available-for-sale investments   347      
        c) held-to-maturity investments        
        d) financial liabilities   (10 )    
110.   Net result of financial assets and liabilities recorded at fair value   219      

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60. Italian GAAP   Profit/(loss) in financial transactions       227  
    Life assurance business—technical account gross of administrative expenses       10  
    General insurance business—technical account gross of administrative expenses       (1,478 )
120.   Net interest and other income   9,045   5,789  
130.   Net adjustments for impairment of   (442 )    
        a) loans   (437 )    
        b) available-for-sale investments   (1 )    
        c) held-to-maturity investments        
        d) other financial transactions   (4 )    
140. Italian GAAP   Provisions to the allowance for probable loan losses       (17 )
120. Italian GAAP   Adjustments to loans and provisions for guarantees and commitments       (914 )
130. Italian GAAP   Writebacks of adjustments to loans and provisions for guarantees and commitments       410  
150. Italian GAAP   Adjustments to financial fixed assets       (106 )
160. Italian GAAP   Writebacks of adjustments to financial fixed assets       124  
140.   Net result of financial management activities   8,603   5,286  
150.   Net premiums   3,599      
160.   Balance of other income/charges arising on insurance management activities   (4,496 )    
170.   Net result of financial management and insurance management activities   7,706   5,286  
180.   Administrative expenses   (4,353 ) (4,346 )
        a) personnel expenses(1)   (2,839 ) (2,821 )
        b) other administrative expenses(1)   (1,514 ) (1,525 )
190.   Net accruals to provision for risks and charges   (53 ) (216 )
200.   Net adjustments to tangible assets(1)   (239 ) (242 )
210.   Net adjustments to intangible assets   (198 ) (230 )
220.   Other operating income/charges   74   29  
    Other net income from insurance business       1,838  
230.   Operating costs   (4,769 ) (3,167 )
240.   Profit/(loss) from investments carried at equity   70      
250.   Net fair value adjustment to tangible and intangible assets          
170. Italian GAAP   Profit/(loss) from investments carried at equity       26  
260.   Goodwill adjustments   (1 )    
270.   Profit/(loss) on disposal of investments   17      
280.   Operating profit/(loss) before taxation   3,023   2,145  
190. Italian GAAP   Other income       286  
200. Italian GAAP   Other expense       (138 )
230. Italian GAAP   Changes in reserve for general banking risks       (2 )
290.   Taxes for the period   (948 )    
240. Italian GAAP   Income taxes       (754 )
300.   Operating profit/(loss) after taxation   2,075   1,537  
310.   Profit/(loss) on discontinued operations net of taxes   (35 ) (35 )
320.   Profit/(loss) for the period   2,040   1,502  
330.   Profit/(loss) attributable to minority interests   (57 ) (55 )
340.   Parent Bank net profit/(loss)   1,983   1,447  
    Net income per share   1.06   0.79  
    Net diluted income per share   1.06   0.79  

(1)
Includes amounts related to the insurance business.

8


Per Share Data

        The following table shows selected per Share and other data for the years indicated:

EU GAAP

 
  Year ended December 31,
 
  2005
  2004
 
  (in €, except for number of shares)

Sanpaolo IMI Share price at year-end(1)   13.22   10.60
Dividend per Share at year-end(2)   0.57   0.47
Shareholders' equity per Shares outstanding at year-end(3)   7.22   6.62
Average number of Shares(4)(5)   1,474,881,099   1,446,634,694
 

U.S. GAAP

 
  Year ended December 31,
 
  2005
  2004
  2003
  2002
  2001
Basic earnings/loss per Share (in euro)(6)   0.85   0.31   0.41   0.68   0.41
Diluted earnings/loss per Share (in euro)(7)   0.85   0.30   0.41   0.68   0.41

(1)
Prices at closing of trading session. Source: Borsa Italiana (Italian Stock Exchange).

(2)
On June 1, 2002, 388,334,018 shares were converted into Azioni Privilegiate. Please see: Item 4. "A. History and Development of Sanpaolo IMI—The Merged Group" on page 57 below. The calculation of dividend per share at the end of 2002 includes the Azioni Privilegiate. Please see: Item 8. "B. Legal Proceedings—Dividends" on page 182 below, for the dividend per Share as of December, 31 2003, 2002 and 2001. The dividend per American Depositary Share (ADS) was U.S. $1.06 in 2005, U.S. $1.18 in 2004, U.S. $0.96 in 2003, U.S. $0.70 in 2002 and U.S. $1.06 in 2001.

(3)
Shares outstanding at year-end represent ordinary shares plus the Azioni Privilegiate minus treasury Shares at year-end.

(4)
The average has been calculated based on daily figures from January 1 to December 31 of each year.

(5)
Calculated on the average number of Shares, excluding the average number of Azioni Privilegiate (as defined above) and the average number of treasury Shares held by the Group.

(6)
Basic earnings represent net income after minority interests as a percentage of average number of Shares excluding the average number of Azioni Privilegiate and the average number of treasury Shares held by the Group.

(7)
Diluted earnings represent net income after minority interests as a percentage of average number of Shares excluding the average number of Azioni Privilegiate, the average number of treasury Shares held by the Group, plus the average number of Shares issuable on conversion of all potentially dilutive instruments into Shares.

Consolidated Balance Sheet and Other Data

        The following table shows selected consolidated balance sheet data and other data at the dates indicated. As explained in footnotes 1-3 following the table, the balance sheet data have been extracted from our audited consolidated balance sheet, which is presented in the Consolidated Financial Statements included in this annual report.

9



Consolidated Balance Sheet Data

EU GAAP

 
  At December 31,
 
  2005
  2004
 
  (millions of €, except percentages)

Total assets   263,258   252,760
Net loans(1)   168,343   147,143
  of which: securities   1,310   n.a.
Due to banks(2)   35,682   28,277
Marketable debt securities and subordinated debt(3)   53,066   54,941
Minority interests(4)   233   282
Capital   5,239   5,218
Other reserves   8,244   7,090
Shareholders' equity(5)   13,483   12,308
Consolidated Ratios        
Profitability Ratios        
Return on assets at year-end(6)   0.75%   0.57%
Return on shareholders' equity at year-end(7)   14.71%   11.76%
Capital Ratio        
Shareholders' equity to total assets at year-end   5.12%   4.87%

(1)
Represents the sum of Item 60. "loans to banks" and Item 70. "Loans to customers". Net loans are total loans net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of net loans is the loan amount that appears on the audited consolidated balance sheet.

(2)
Represents Item 10. "Due to banks".

(3)
Represents the sum of Item 30. "Securities issued" and "Subordinated liabilities".

(4)
Represents Item 210. "Minority interest".

(5)
Represents the sum of Item 140 "Valuation reserves", Item 160. "Capital instruments", Item 170. "Reserves", Item 180. "Additional paid-in capital", Item 190. "Capital", Item 200. "Own shares" and Item 220 "Income/(loss) for the period".

(6)
Return on assets at year-end is net income after minority interests as a percentage of total assets at year-end.

(7)
Return on shareholders' equity at year-end represents net income after minority interests as a percentage of shareholders' equity at year-end.

n.a. means not available.

10



Selected U.S. GAAP Data

        The following table shows, at the dates or for the periods indicated, selected balance sheet and income statement data calculated in accordance with U.S. GAAP. See "Summary of significant differences between EU GAAP, IFRS as published by IASB and U.S. GAAP" on page F-214 below.

 
  At or for the year ended December 31,
 
  2005
  2004
  2003
  2002
  2001
 
  (millions of €)

Total assets   264,574   253,732   238,317   231,814   191,378
Capital stock   5,226   5,204   5,135   5,130   3,884
Shareholders' equity   16,824   15,876   15,557   14,934   11,607
Net interest income   4,120   3,867   3,758   3,070   2,666
Income before taxes and minority interests   2,310   1,038   996   (800 ) 790
Net income   1,592   559   750   (1,120 ) 571

Exchange Rates

        The following table shows, for the periods indicated, information regarding the Noon Buying Rate for the euro, expressed in U.S. dollars per euro.

Year ended December 31,

  High
  Low
  Average(1)
  At Period End
2002   1.0485   0.8594   0.9495   1.0485
2003   1.2597   1.0361   1.1411   1.2597
2004   1.3625   1.1801   1.2478   1.3538
2005   1.3476   1.1667   1.2400   1.1842
2006 (through June 12, 2006)   1.2953   1.1860   1.2378   1.2587

(1)
Average of the rates for the last business day of each month in the period.

        The following table shows the high and low exchange rates between the euro and the U.S. dollar, expressed in U.S. dollars per euro, during the last six months:

Month

  High
  Low
January 2006   1.2287   1.1980
February 2006   1.2100   1.1860
March 2006   1.2197   1.1886
April 2006   1.2624   1.2091
May 2006   1.2888   1.2607
June 2006 (through June 12, 2006)   1.2953   1.2587

        The Shares trade on the mercato telematico azionario ("Telematico"), managed by Borsa Italiana S.p.A. ("Borsa Italiana") in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro price of the Shares and the price of the Sanpaolo IMI American Depositary Shares ("ADSs") listed on the New York Stock Exchange ("NYSE"). Cash dividends are paid by Sanpaolo IMI in euro, and exchange rate fluctuations also affect the U.S. dollar amounts received by owners of ADSs upon conversion by the depositary of dividends on the underlying Sanpaolo IMI Shares.

11



B.    Selected Statistical Information

        In the discussion that follows, we describe and discuss the assets and the liabilities related to the Group's banking activities. The financial information set forth in the following tables has been derived from the Consolidated Financial Statements and has been adjusted to exclude assets and liabilities related to the Group's insurance activities.

Assets

        The following tables set forth, at the dates indicated, the principal components of the assets related to our banking activities.

EU GAAP

 
  At December 31,
 
  2005
  2004
 
  Amount
  % of total assets
  Amount
  % of total assets
 
  (in millions of €, except percentages)

Loans and leases to non-credit institutions, net(1)(2)(3)   139,507   62.49%   123,201   57.78%
of which:                
Short-term loans   42,228   18.92%   37,409   17.55%
Medium- and long-term loans   95,887   42.95%   84,645   39.70%
Non-performing loans   1,080   0.48%   1,147   0.54%
Debt securities   312   0.14%   n.a.   n.a.
Non-performing debt securities   0   0.00%   n.a.   n.a.
Interest-earning deposits and loans to credit institutions, net(1)   28,771   12.89%   23,942   11.23%
of which:                
Reverse repurchase agreements   11,725   5.25%   12,576   5.90%
Dealing securities and investments   30,210   13.53%   29,340   13.76%
of which:                
Debt securities   23,111   10.35%   26,314   12.34%
Equity and others   7,099   3.18%   3,026   1.42%
Other assets   24,748   11.09%   36,730   17.23%
   
 
 
 
Total assets   223,236   100.00%   213,213   100.00%
   
 
 
 

12


Italian GAAP

 
  At December 31, 2003
 
  Amount
  % of total assets
 
  (in millions of €, except percentages)

Loans and leases to non-credit institutions, net(1)(2)(3)   124,599   61.51%
of which:        
Short-term loans   42,815   21.13%
Medium- and long-term loans   80,613   39.79%
Non-performing loans   1,171   0.58%
Interest-earning deposits and loans to credit institutions, net(1)   22,278   11.00%
of which:        
Reverse repurchase agreements   10,121   5.00%
Dealing securities and investments   25,258   12.47%
of which:        
Investment securities   2,935   1.45%
Dealing securities   22,323   11.02%
Other assets   30,445   15.03%
   
 
Total assets   202,580   100.00%
   
 

(1)
Net loans are total loans net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of net loans is the amount that appears on the balance sheet.

(2)
Includes reverse repurchase agreements in the amounts of €2,302 million, €2,808 million and €1,694 million at December 31, 2005, 2004 and 2003, respectively.

(3)
Includes loans to SGA. SGA is the company established to recover non-performing loans of Banco di Napoli. Loans to SGA amounted to €595 million, €814 million and €1,013 million at December 31, 2005, 2004 and 2003, respectively. See Part B, Section 7 of the Consolidated Financial Statements at page F-44 below.

n.a. means not available.

    Loans and Leases to Non-credit Institutions

        Our net loans and leases to non-credit institutions, which we also refer to as our loans to customers, totaled €139.5 billion at December 31, 2005, an increase of €16.3 billion, or 13.2%, from €123.2 billion at December 31, 2004. Medium—and long-term loans increased by €11.3 billion, or 13.3%, to €95.9 billion at December 31, 2005 from €84.6 billion at December 31, 2004, while short-term loans increased by €4.8 billion, or 12.8%, to €42.2 billion at December 31, 2005 from €37.4 billion at December 31, 2004. The increase in our loans to customers, and in particular the increased proportion of our loans to customers represented by medium- and long-term loans, reflected a continued trend on the part of our customers to lengthening the maturity profile of their bank debt. This trend was somewhat attenuated compared to previous years, however, as interest rates remained relatively favorable for short-term debt and the selective recovery in the performance of long-term investments reduced some borrowers' need to finance their working capital with bank debt.

        Breaking down our net loans to customers by counterparty, loans to households increased by €4.1 billion, or 14.7%, to €32.1 billion at December 31, 2005 from €28.0 billion at December 31, 2004; and loans to non-bank financial institutions increased by €1.5 billion, or 13%, to €12.9 billion at December 31, 2005 from €11.4 billion at December 31, 2004. Loans to non-financial businesses

13


increased by €10.7 billion, or 15.3%, to €81.03 billion at December 31, 2005 from €70.3 billion at December 31, 2004. Loans to governments and other public entities remained effectively stable, amounting to €13.56 billion at December 31, 2005 compared to €13.57 billion at December 31, 2004. See also "Item 3.B.—Loan Portfolio—Loans by Category of Borrower" at page 20 below.

        As of the end of December 2005, our market share in the domestic market was equal to 10.1% for total loans, a 0.1% increase compared to the end of 2004. The domestic market share in medium-/long-term loans to households and non-financial resident companies was 9.5% and that in short term loans was 8.8% (source: Bank of Italy).

    Interest-earning Deposits and Loans to Credit Institutions

        Interest-earning deposits, otherwise known as interbank deposits, and loans to credit institutions increased by €4.8 billion, or 20.2%, to €28.8 billion at December 31, 2005 from €23.9 billion at December 31, 2004. Of these totals, financings in the form of reverse repurchase agreements decreased by €0.9 billion, or 6.8%, to €11.7 billion at December 31, 2005 compared to €12.6 billion at December 31, 2004. For a discussion of the net effect of our lending to credit institutions and our funding from credit institutions, see "Item 3.B.—Liabilities and Funding Sources" on page 50 below and Item 5. "Operating and Financial Review and Prospects" on page 93 below.

    Securities portfolio

        At December 31, 2005, the book value of our securities portfolio totaled €30.2 billion, an increase of €0.9 billion, or 3.0%, from €29.3 billion at December 31, 2004. This increase was due to a €4.1 billion increase in our holdings of equities and similar securities, partially offset by a €3.2 billion decrease in debt securities.

        The securities portfolio of the Parent Bank, held for treasury requirements and investment purposes, amounted to €8.3 billion at December 31, 2005. Of the Parent Bank's securities portfolio, at year-end 2005, 59% of the amount consisted of EU member state government bonds, 35% consisted of securities issued by banks, other financial institutions and international organizations, and 4% consisted of corporate debt.

        The securities portfolio of Banca IMI, as of 31 December 2005, amounted to €11.7 billion, in line with the €11.9 billion held at the end of 2004; of the former amount, 73.8% consisted of debt securities, 25.6% of shares in OICR funds and the remaining 0.6% of equity of securities. Short positions in securities amounted to €2.31 billion a decrease of 5.7% compared to the value as of 31 December 2004 (€2.45 billion).

Average Balances and Interest Rates

        For information about the average balances and average yields of our interest-earning assets and the average balances and average costs of our interest-bearing liabilities, please see Item 5. "Operating and Financial Review and Prospects" on page 93 below.

Change in Net Interest Income—Volume and Rate Analysis

        For information about the allocation of changes in net interest income to changes in average volume, changes in average rate and changes in both volume and rate by category of our interest-earning assets and our interest-bearing liabilities, please see Item 5. "Operating and Financial Review and Prospects" on page 93 below.

14


Net Interest Margin and Interest Spread

        For information about our net interest margin and interest spread, please see Item 5. "Operating and Financial Review and Prospects" on page 93 below.

Loan Portfolio

        The Group's loan portfolio consists of loans and leases to non-credit institutions (which is the largest component of our loan portfolio), interbank deposits and loans to credit institutions, financings in the form of reverse repurchase agreements, and debt securities with fixed or determinable payments which are not listed on active markets and have not been classified as available for sale, held for trading or designated at fair value. In this section, we present a variety of information about the Group's loan portfolio, including the distribution of our loans by categories different from those shown on our average or year-end balance sheet, such as loans by type of facility, loans by category of borrower, domestic and international loans by category of borrower, and loans by geographic area.

        For purposes of our average and year-end balance sheet, as well as for purposes of this section, loans are stated, when they are first recorded on the balance sheet, at their fair value modified by any direct transaction costs or income, if tangible and determinable. At subsequent dates, loans are stated at their amortized cost using the effective interest rate criterion. The value at which loans are carried in the Consolidated Financial Statements is regularly tested for impairment to establish if, owing to any losses in value, the loans may have to be stated at their expected recovery amount. Impairment testing further takes into account any guarantee and collateral securing a loan.

        Any adjustments to the value of loans shown in the Consolidated Financial Statements are calculated taking into account the extent to which loans have become impaired, whether the loans are assessed for impairment on an individual or collective basis. See "Item 3.B.—Risk Elements in the Loan Portfolio" on page 27 below and Part A.2, Section 4 of the Consolidated Financial Statements on page F-20 below.

        When it has been determined that a loan is impaired, the Group either writes off the loan, with the amount written off being charged directly to income, or makes a provision, which is charged to income through the allowance for probable loan losses. Provisions, whether specific or general, are made by entering a "value adjustment" to reduce the value of the asset shown on the balance sheet, on the basis of the aforementioned criteria. These provisions, however, may be reversed by means of write-backs recorded in a caption included in the income statement where all net value adjustments on loans are recorded, in the event that the reasons for the provisions cease to apply or the amounts recovered on the loans are higher than the provisions made for those loans.

        In this section, the term "net loans" refers to the amount of loans shown on the balance sheet. Net loans are net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks; see Part A.2, Section 4 of the Consolidated Financial Statements on page F-20 below). The term "total loans" refers to loans net of any write-offs, but before any deduction for the allowance for probable loan losses. Total loans do not appear on the balance sheet, but are set forth under "Total loans to customers" and "Total loans to banks" in Part E, Section 1, Quantitative Information, of the Consolidated Financial Statements on page F-122 below.

15



    Loans by Type of Facility

        The following tables show, at the dates indicated, the distribution of the Group's net loans related to banking activities by type of facility.


 


 

At December 31,

 
  2005
  2004
EU GAAP
Net loans(1)

  Amount
  % of net loans
  Amount
  % of net loans
 
  (millions of €, except percentages)

Installment loans   74,893   44.51%   67,672   45.99%
Other fixed-term loans   19,930   11.84%   17,142   11.65%
Loans to banks(2)   16,048   9.54%   11,356   7.72%
Current account overdrafts   17,311   10.29%   16,199   11.01%
Reverse repurchase agreements(3)   14,027   8.34%   15,384   10.46%
Advances with recourse   5,334   3.17%   2,288   1.55%
Import-export loans   3,201   1.90%   2,922   1.99%
Finance leases   6,607   3.93%   5,370   3.65%
Personal loans   4,748   2.82%   3,837   2.61%
Discounted notes   0   0%   749   0.51%
Factoring loans   1,449   0.86%   2,916   1.98%
Subordinated loans(3)   0   0%   161   0.11%
Non-performing loans(4)   1,080   0.64%   1,147   0.78%
Debt securities   1,310   0.78%   n.a.   n.a.
Other   2,340   1.39%   n.a.   n.a.
   
 
 
 
Total net loans(3)   168,278   100.00%   147,143   100.00%
   
 
 
 

 


 

At December 31,

 
  2003
  2002
  2001
Italian GAAP
Net loans(1)

  Amount
  % of net
loans

  Amount
  % of net
loans

  Amount
  % of net
loans

 
  (millions of €, except percentages)

Installment loans   64,642   44.01%   59,651   40.11%   45,760   38.6%
Other fixed-term loans   22,791   15.52%   28,024   18.85%   25,509   21.5%
Loans to banks(2)   12,147   8.27%   10,326   6.94%   14,800   12.5%
Current account overdrafts   17,492   11.91%   17,574   11.82%   10,581   8.9%
Reverse repurchase agreements(3)   11,815   8.04%   14,262   9.59%   10,482   8.8%
Advances with recourse   2,557   1.74%   3,484   2.34%   2,781   2.3%
Import-export loans   3,111   2.12%   3,090   2.08%   2,465   2.1%
Finance leases   4,594   3.13%   4,266   2.87%   2,253   1.9%
Personal loans   3,433   2.34%   3,782   2.54%   1,250   1.1%
Discounted notes   943   0.64%   1,067   0.72%   968   0.8%
Factoring loans   2,105   1.43%   1,717   1.15%   798   0.7%
Subordinated loans(3)   76   0.05%   123   0.08%   49   0.0%
Non-performing loans(4)   1,171   0.80%   1,335   0.90%   931   0.8%
   
 
 
 
 
 
Total net loans   146,877   100.00%   148,701   100.00%   118,627   100.00%
   
 
 
 
 
 

(1)
Net loans are total loans net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of net loans is the loan amount that appears on the balance sheet.

16


(2)
Excludes reverse repurchase agreements with and subordinated loans to banks.

(3)
Includes such loans to banks.

(4)
Includes non-performing loans to banks. These numbers refer only to net loans and therefore differ from the figures for non-performing loans shown under "Item 3.B.—Risk Elements in the Loan Portfolio" on page 27 below in the table setting forth our classified loans on a total loan basis.

n.a. means not available.

    Remaining Maturities of Loans by Type of Facility

        The following table shows the maturities, based upon contract terms, of the Group's net loans related to banking activities by type of facility at December 31, 2005. To the extent loans are rolled over at maturity, they are treated as new loans for credit approval purposes and are included in the table below at their new maturities.


 


 

At December 31, 2005

 
   
   
  Between one and five years
   
   
   
   
 
  Within one year
  More than five years
  Total
EU GAAP
Net loans(1)

  Amount
  % of total
  Amount
  % of total
  Amount
  % of total
  Amount
  % of total
 
  (millions of €, except percentages)

Installment loans   11,079   13.31%   30,795   67.56%   33,019   83.75%   74,893   44.51%
Other fixed-term loans   13,381   16.07%   3,636   7.98%   2,913   7.39%   19,930   11.84%
Loans to banks(2)   13,851   16.63%   1,446   3.17%   750   1.90%   16,047   9.54%
Current account overdrafts   16,477   19.79%   665   1.46%   169   0.43%   17,311   10.29%
Reverse repurchase agreements(3)   14,027   16.85%     0.00%     0.00%   14,027   8.34%
Advances with recourse   4,675   5.61%   659   1.45%     0.00%   5,334   3.17%
Import-export loans   3,111   3.74%   90   0.20%     0.00%   3,201   1.90%
Finance leases   1,533   1.84%   3,417   7.50%   1,657   4.20%   6,607   3.93%
Personal loans   1,709   2.05%   2,629   5.77%   410   1.04%   4,748   2.82%
Discounted notes     0.00%     0.00%     0.00%     0.00%
Factoring loans   695   0.83%   495   1.09%   259   0.66%   1,449   0.86%
Subordinated loans(3)     0.00%     0.00%     0.00%     0.00%
Non-performing loans(4)     0.00%   1,080   2.37%     0.00%   1,080   0.64%
Debt securities   771   0.93%   458   1.00%   82   0.21%   1,311   0.78%
Other   1,960   2.35%   212   0.47%   168   0.43%   2,340   1.39%
   
 
 
 
 
 
 
 
Total net loans   83,269   100.00%   45,582   100.00%   39,427   100.00%   168,278   100.00%
   
 
 
 
 
 
 
 

(1)
Net loans are total loans net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of net loans is the loan amount that appears on the balance sheet.

(2)
Excludes reverse repurchase agreements with and subordinated loans to banks.

(3)
Includes such loans to banks.

(4)
Includes non-performing loans to banks. For purposes of this table, all non-performing loans are included in the column "Between one and five years". These numbers refer only to net loans and therefore differ from the figures for non-performing loans shown under "Item 3.B.—Risk Elements in the Loan Portfolio" on page 27 below in the table setting forth our classified loans on a total loan basis.

        A brief description of the facility classifications reflected in the foregoing tables follows.

        Installment loans include mortgage loans to individuals and private entities, and loans to government and other public entities and to non-financial businesses.

17



        Mortgage loans consist primarily of (1) residential mortgages to individuals for private residences, (2) loans to co-operative institutions in the housing industry, and (3) commercial construction loans, all of which are secured by the underlying real property. Residential mortgages to individuals for private residences are typically repaid in monthly installments. Loans to co-operative institutions and small building companies in the housing industry and commercial construction loans secured by the underlying real property are usually repaid in six-month installments. Retail residential mortgages generally have a maximum loan-to-value ratio of 80% (as recommended by current Italian regulations) with maturities of up to 30 years, at fixed or floating rates of interest (or a combination of the two, at the customer's option). However, it is possible to have a maximum loan-to-value ratio of 100% with insurance guarantees. See Item 4. "Information on Sanpaolo IMI" on page 56 below.

        The process for recovering against collateral through the Italian legal system often consists of a series of judicial auctions, which successively reduce the ultimate potential recovery and which currently last an average of five and one-half years. Sanpaolo IMI's policy is generally to limit the value of each loan to 80% of the value of the premises. In the case of mortgages to individuals, of loans to co-operative institutions, small building companies in the housing industry, commercial or industrial construction loans and mortgage loans to finance renovation costs Sanpaolo IMI limits the amount of each loan up to 80% of capital expenditure. These limits are reduced if appropriate in light of credit analyses performed on each borrower. Sanpaolo IMI believes that the value of the collateral on its mortgage loans covers its exposure, and makes a provision or write-off whenever such coverage is no longer deemed to be sufficient.

        The other categories of installment loans—loans to governments and other public entities, and loans to non-financial businesses—are medium- and long-term loans, primarily at variable rates and primarily in euro. Loans to governments and other public entities are made almost exclusively by Sanpaolo IMI's subsidiary, Banca OPI S.p.A. ("Banca OPI"), with a particular concentration on financing investments and infrastructure projects. Loans to governments consist primarily of loans to the Italian government and, to a lesser extent, other governments (mostly OECD members). Loans to other public entities consist primarily of loans to Italian regional, provincial and municipal governments.

        Other fixed-term loans represent single, fixed-term extensions of credit, at fixed rates, with interest payable at reimbursement of the loan. These loans are generally extended in euro to counterparties in Italy with initial maturities of less than one year, and may be secured by collateral with a value commensurate with that of the loan. This type of facility is primarily extended to large corporates, small- and medium-sized enterprises, small businesses and, to a lesser extent, the Italian government and other public entities.

        Loans to banks include all types of loans to banking and credit institutions, with the exception of repurchase agreements and, to a lesser extent, subordinated loans. These loans consist almost exclusively of interbank time deposits with terms of less than one year, with the remainder being demand deposits. These facilities are unsecured.

        Current account overdrafts are facilities whereby Sanpaolo IMI agrees on a revocable basis to extend credit up to a specified limit through a current account of the borrower. The borrower may use this facility on a revolving basis, making periodic payments and further drawdowns. Although not generally the case, Sanpaolo IMI may require the current account overdraft to be secured. These facilities are at variable rates, with interest payments debited quarterly to the current account. They are extended almost exclusively in euro to companies (large corporates, small- and medium-sized enterprises, and small businesses) and households primarily in Italy and, to a lesser extent, other OECD countries.

        Reverse repurchase agreements are agreements whereby the customer sells securities to Sanpaolo IMI and agrees to repurchase from Sanpaolo IMI equivalent securities at an agreed price and on a

18



stated date. The securities generally consist of Italian government or other high-grade securities. This type of financing is secured by virtue of Sanpaolo IMI having the property rights in the purchased securities. These reverse repurchase transactions are primarily in euro and generally with a duration of 120 days or less. Counterparties are primarily OECD banking and credit institutions and secondarily other financial institutions.

        Advances with recourse are extensions of credit on current accounts to non-financial businesses (large corporates, small- and medium-sized enterprises, and small businesses) on presentation of checks, promissory notes or other negotiable instruments, subject to Sanpaolo IMI's right to revoke the extension of credit in the event it is unable to obtain payment on the relevant negotiable instrument. The instruments presented for payment generally have a maturity of not longer than 12 months. Interest is fixed-rate and paid in advance. The majority of these extensions of credit are in euro to counterparties resident in Italy.

        Import-export loans consist of letters of credit and other forms of credit documentation typically used in foreign trade. These facilities generally are in euro, with a maturity of one year or less at fixed rates, and are secured by irrevocable assignments of the borrower's related receivables. Counterparties are generally non-financial businesses (large corporates, small- and medium-sized enterprises, and small businesses) primarily resident in Italy.

        Finance leases are extensions of credit which, measured by value, primarily relate to real estate and industrial machinery, and measured by number of transactions, primarily relate to means of transportation. Finance leases are primarily in euro with an initial maturity greater than 24 months and are secured by the asset that is the subject of the lease. Counterparties are non-financial businesses (large corporates, small- and medium-sized enterprises, and small businesses) primarily resident in Italy. These extensions of credit are made through specialized subsidiaries of Sanpaolo IMI.

        Personal loans are loans in euro with maturities generally between one and three years and occasionally up to five years, primarily to individuals resident in Italy for consumer and personal use. Consumer credit loans are generally unsecured.

        Discounted notes are extensions of credit in which Sanpaolo IMI in effect purchases at a discounted rate from the borrower outstanding debt owed to the borrower by a third party. These are short-term exposures, primarily less than one year, at fixed rates in euro to non-financial businesses (large corporates, small- and medium-sized enterprises, and small businesses) resident in Italy.

        Factoring loans include both factoring in the strict sense as well as assignments of receivables. Factoring is a type of financial service whereby a firm sells or transfers title to its accounts receivable to another party (the factor), which then acts as principal, not as agent. The receivables are sold without recourse, meaning that the factor must bear the risk of collection. The purchase is made at a discount to the account's value. Assignments of receivables represented by invoices or cash orders are essentially advances on current accounts (with or without recourse) to non-financial businesses (large corporates, small- and medium-sized enterprises, and small businesses) upon presentation of the relevant documents. The majority of these exposures are in euro at fixed rates, primarily with maturities of less than one year, to companies resident in Italy.

        Subordinated loans are junior in priority to other debt, i.e., repayable only after other debts with a higher claim on assets of the debtor have been satisfied. A subordinated creditor thus assumes more risk than a non-subordinated creditor. Subordinated loans are made in euro, primarily at variable rates and with a maturity of not less than five years, to Italian and other European banks and financial institutions.

        Non-performing loans (sofferenze) are loans to borrowers who are bankrupt (even in the absence of a court ruling to that effect) or in substantially equivalent condition, without regard to any financial loss projections prepared by the borrower. Non-performing loan exposures are primarily in euro to

19



counterparties resident in Italy, primarily non-financial businesses (large corporates, small- and medium-sized enterprises, and small businesses).

        Debt securities are securities with fixed or determinable payments, which are not listed on active markets and have not been classified from the day of acquisition as available for sale, held for trading or designated at fair value.

    Loans by Category of Borrower

        The following tables show, at the dates indicated, the distribution of the Group's net loans related to banking activities by category of borrower.


 


 

At December 31,

 
  2005
  2004
EU GAAP
Net Loans(1)

  Amount
  % of total
  Amount
  % of total
 
  (millions of €, except percentages)

Governments and other public entities(2)   13,557   8.06%   13,567   9.22%
Banks and credit institutions   28,771   17.10%   23,942   16.27%
Non-financial businesses   81,033   48.15%   70,276   47.76%
Non-bank financial institutions   12,850   7.64%   11,394   7.74%
Households and other   32,067   19.06%   27,964   19.00%
   
 
 
 
Total   168,278   100.00%   147,143   100.00%
   
 
 
 

 


 

At December 31,

 
  2003
  2002
  2001
ITALIAN GAAP
Net Loans(1)

  Amount
  % of total
  Amount
  % of total
  Amount
  % of total
 
  (millions of €, except percentages)

Governments and other public entities(2)   13,826   9.41%   13,481   9.07%   12,535   10.57%
Banks and credit institutions   22,277   15.17%   22,000   14.79%   21,571   18.18%
Non-financial businesses   74,732   50.88%   73,680   49.55%   54,978   46.35%
Non-bank financial institutions   10,221   6.96%   13,985   9.40%   13,669   11.52%
Households and other   25,821   17.58%   25,555   17.19%   15,874   13.38%
   
 
 
 
 
 
Total   146,877   100.00%   148,701   100.00%   118,627   100.00%
   
 
 
 
 
 

(1)
Net loans are total loans net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of net loans is the loan amount that appears on the balance sheet.

(2)
Excludes loans to municipal companies made by Banca OPI (Public Authorities and Entities Business Sector), which are included in loans to non-financial businesses.

        For purposes of its loan and credit risk management policy, Sanpaolo IMI groups borrowers into five main categories: (i) governments and other public entities; (ii) banks and credit institutions; (iii) non-financial businesses; (iv) non-bank financial institutions; and (v) households and others. A brief description of these categories of borrowers follows. For a summary of Sanpaolo IMI's loan and credit risk management policy, see Item 11. "Quantitative and Qualitative Disclosures about Market Risk—Credit risk management policies" on page 195 below.

20



    Governments and Other Public Entities

        This category consists of two sub-categories, "governments" and "other public entities". Governments consist of the Republic of Italy, which accounts for the majority of the exposure to this sub-category, and foreign countries, primarily OECD members. Other public entities consist of Italian regions, provinces and cities.

        Sanpaolo IMI extends credit to governments and other public entities almost exclusively through its subsidiary, Banca OPI, with a particular focus on financing investments and infrastructure projects.

        The primary type of facility for this category of borrowers is installment loans and, to a much lesser extent, other fixed-term loans. Both types of credit extensions to governments and other public entities are in the majority of cases secured by guarantees of the Republic of Italy or other forms of security, such as pledges of or escrow arrangements with respect to such receivables as, typically, tax receipts. Loans to this category of borrowers are generally considered to present a very low credit risk.

    Banks and Credit Institutions

        Borrowers in this category include Italian and foreign institutions that take deposits and extend credit. In the last few years, loans to banks and credit institutions have been made primarily to foreign institutions in the euro zone. The principal types of facility extended to this category of borrowers are interbank deposits and reverse repurchase agreements.

    Non-financial Businesses

        This category consists of large corporates, small- and medium-sized enterprises, and small businesses, and is divided into seven sub-categories of economic activity: (i) building and construction industry, (ii) wholesale and retail, (iii) manufacturing, (iv) communications, (v) transportation, (vi) agriculture and (vii) foreign non-financial businesses.

        Building and construction includes residential and commercial real estate developments, and public works project and engineering companies. Loans to the latter sector are made by Banca OPI and are considered to present a greater credit risk than Banca OPI's other main category of borrowers.

        Wholesale and retail includes wholesale and retail trading companies as well as commercial agents and other intermediaries.

        Manufacturing includes companies in the energy, mining and extraction, chemical, industrial machinery and transport production, food, textiles, paper, plastic, rubber and lumber sectors and, to a limited extent, the electronic information technology sectors.

        Communications includes telecommunications companies.

        Transportation includes road transport and railway companies, maritime and internal shipping lines, passenger and cargo airlines, oil and gas pipelines, and related transportation services such as travel agencies, and warehouse and custody services.

        Agriculture includes livestock farming, fishing and forestry.

        Foreign non-financial businesses are grouped into a single category of borrowers. Extensions of credit to this category consist primarily of import-export loans.

        Extensions of credit to non-financial businesses are made in the form of installment loans, discounted notes, finance leases, other fixed-term loans, advances with recourse and factoring.

21



    Non-bank Financial Institutions

        This category includes securities firms (broker-dealers), insurance, leasing and factoring companies. Extensions of credit to non-bank financial institutions consist primarily of reverse repurchase agreements and other fixed-term loans.

    Households and Other

        This category includes loans to households, by which we mean loans to individuals and to families for non-commercial purposes, as well as to non-profit organizations. Extensions of credit to this category consist primarily of installment loans, current account overdrafts and personal loans.

    Borrower Concentrations and Significant Risk Exposures

        At December 31, 2005, the Group's largest credit exposure to a single borrower represented 1.54% of the amount of our net loans, while the Group's aggregate credit exposure to its ten largest borrowers represented 9.77% of our net loans.

        Our largest exposure relates to loans made to the Italian government. Loans to the Italian government at December 31, 2005 totaled €2.6 billion, increasing to €13.6 billion if guarantees of governments provided to Sanpaolo IMI in respect of borrowers other than governmental entities are taken into account.

        At December 31, 2005, the Group had three "significant risk exposures", defined by the Bank of Italy as positions that exceeded 10% of consolidated shareholders' equity for supervisory purposes. These three "significant risk exposures" amounted to a total of €6.90 billion and related to major Italian groups in the oil and gas and transportation industries, and to a major U.S. conglomerate.

    Domestic and International Loans by Category of Borrower

        The following tables show, at the dates indicated, the distribution of the Group's net loans related to banking activities divided by domestic and international loans, based on the location of the borrower, broken down by loans to the public sector, banks and other private sector customers.


 


 

At December 31,

 
  2005
  2004
EU GAAP

  Net loans(1)
  % of Total
  Net loans(1)
  % of Total
 
  (millions of €, except percentages)

Domestic:                
Governments and other public entities(2)   13,289   7.90%   13,296   9.04%
Banks and credit institutions   9,308   5.53%   7,602   5.17%
Domestic non-financial businesses:                
  Building and construction industry   8,001   4.75%   7,075   4.81%
  Wholesale and retail   28,170   16.74%   25,876   17.59%
  Manufacturing   24,200   14.38%   23,276   15.82%
  Transportation   8,258   4.91%   5,409   3.68%
  Agriculture   2,126   1.26%   2,000   1.36%
  Communications(3)   2,670   1.59%   990   0.67%
   
     
   
Total domestic non-financial businesses   73,425   43.63%   64,626   43.92%
   
     
   
Non-bank financial institutions   8,246   4.90%   6,991   4.75%
Households and other   31,134   18.50%   27,505   18.69%
   
     
   
Total domestic   135,402   80.46%   120,020   81.57%
   
     
   

22


International:                
Governments and other public entities   268   0.16%   272   0.18%
Banks and credit institutions   19,463   11.57%   16,339   11.10%
International non-financial businesses:                
Building and construction industry   551   0.33%   n.a.   n.a.
Wholesale and retail   1,464   0.87%   n.a.   n.a.
Manufacturing   4,753   2.82%   n.a.   n.a.
Transportation   323   0.19%   n.a.   n.a.
Agriculture   51   0.03%   n.a.   n.a.
Communications(3)   466   0.28%   n.a.   n.a.
   
     
   
Total international non-financial businesses   7,608   4.52%   5,650   3.84%
   
     
   
Non-bank financial institutions   4,604   2.74%   4,403   2.99%
Households and other   933   0.55%   459   0.31%
   
     
   
Total International   32,876   19.54%   27,123   18.43%
   
 
 
 
Total Domestic and International   168,278   100.00%   147,143   100.00%
   
 
 
 

(1)
Net loans are total loans net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of net loans is the loan amount that appears on the balance sheet.

(2)
Excludes loans by Banca OPI (Public Authorities and Entities sector) to municipal companies which are accounted for under loans to "Non-financial businesses."

(3)
Includes telecommunications.

n.a. means not available.


 


 

At December 31,

 
  2003
  2002
  2001
ITALIAN GAAP

  Net loans(1)
  % of Total
  Net loans(1)
  % of Total
  Net loans(1)
  % of Total
 
  (millions of €, except percentages)

Domestic:                        
Building and construction industry   7,098   4.83%   6,558   4.41%   3,832   3.23%
Wholesale and retail   25,588   17.42%   21,802   14.66%   13,334   11.24%
Manufacturing   27,385   18.64%   28,306   19.04%   21,376   18.02%
Transportation   4,715   3.21%   4,790   3.22%   2,912   2.45%
Agriculture   2,106   1.43%   2,043   1.37%   1,264   1.07%
Communications(3)   1,729   1.18%   1,171   0.79%   1,308   1.10%
   
     
     
   
Total non-financial businesses   68,621   46.72%   64,670   43.49%   44,026   37.11%
   
     
     
   
Non-bank financial institutions   6,638   4.52%   9,916   6.67%   10,035   8.46%
Governments and other public entities(2)   13,432   9.15%   13,050   8.78%   11,948   10.07%
Banks and credit institutions   6,872   4.68%   5,130   3.45%   8,717   7.35%
Households and other   25,437   17.32%   24,171   16.25%   14,608   12.31%
   
     
     
   
Total domestic   121,000   82.38%   116,937   78.64%   89,334   75.31%
   
     
     
   

23


International:                        
Non-financial businesses   6,111   4.16%   9,010   6.06%   10,952   9.23%
Non-bank financial institutions   3,583   2.44%   4,069   2.74%   3,633   3.06%
Governments and other public entities   394   0.27%   431   0.29%   587   0.49%
Banks and credit institutions   15,405   10.49%   16,870   11.34%   12,855   10.84%
Households and other   384   0.26%   1,384   0.93%   1,266   1.07%
   
     
     
   
Total International   25,877   17.62%   31,764   21.36%   29,293   24.69%
   
 
 
 
 
 
Total Domestic and International   146,877   100.00%   148,701   100.00%   118,627   100.00%
   
 
 
 
 
 

(1)
Net loans are total loans net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of net loans is the loan amount that appears on the balance sheet.

(2)
Excludes loans by Banca OPI (Public Authorities and Entities sector) to municipal companies which are accounted for under loans to "Non-financial businesses."

(3)
Includes telecommunications.

    Interest Rate Sensitivity

        The following tables show, at the dates indicated, a breakdown between fixed rate and floating rate loans of the Group's domestic and international net loans (based on the location of the borrower) due after one year.

 
  At December 31, 2005
EU GAAP
Net loans(1)

  Domestic
  International
  Total
 
  (millions of €)

Fixed rate   23,907   555   24,462
Floating rate   53,303   6,998   60,301
   
 
 
Total(2)   77,210   7,553   84,763
   
 
 

(1)
Net loans are total loans net of any write-offs and any allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of net loans is the loan amount that appears on the balance sheet.

(2)
Excludes €246 million of non-interest-earning loans made by Gest Line.

    Foreign Country Outstandings

        For the years ended December 31, 2005, 2004 and 2003, foreign country outstandings are those outstandings (i) to residents outside of Italy in euros or in a currency different from the currency of the borrower and (ii) in the local currency of the borrower but not hedged or funded in such currency by a counterparty resident in the same country. Foreign country outstandings include outstandings in euro in countries (other than Italy) which have adopted the euro as their currency, and which have been funded, in euro, in a country different from the country in which the amounts are outstanding. The outstandings include net loans to customers and to banks, other advances, securities and other

24


monetary assets, but exclude loans guaranteed by SACE (an Italian government agency which provides export credit insurance), and loans made to or guaranteed by supranational organizations.

        The following table shows, at the dates indicated, the aggregate amount of the Group's cross-border outstandings where outstandings in the borrower's country exceeded 1% of the Group's total assets. The geographic breakdown is based on the country of the borrower or guarantor of ultimate risk.


 


 

At December 31,

 
  2005
  2004
  2003
Net loans and monetary assets

  Amount
  % of total
assets

  Amount
  % of total
assets

  Amount
  % of total
assets

 
  (millions of €, except percentages)

United Kingdom   4,362   1.95%   3,831   1.80%   3,936   1.94%
Luxembourg(1)   3,435   1.54%   3,420   1.60%   2,532   1.25%
Spain(1)   3,241   1.45%   849   0.40%   455   0.22%

(1)
These are countries which have adopted the euro. The outstanding amounts have been funded in euro in Italy or in other countries which have adopted the euro.

        The following tables show, at the dates indicated, the total amount for each type of borrower and the aggregate amount of the Group's cross-border outstandings where outstandings in the borrower's country exceeded 0.75% of the Group's total assets. Undrawn lines of credit are disclosed to the extent that management considers them to be material. The geographic breakdown is based on the country of the borrower or the guarantor of ultimate risk.


 


 

At December 31, 2005

Net loans and
monetary assets

  Governments(1)
  Banks and other
financial institutions(1)

  Commercial,
industrial and
others(1)

  Net local
country
claims(2)

  Total
  Guarantees and commitments(3)
 
  (millions of €)

United Kingdom   0   3,919   382   61   4,362   6,494
Luxembourg(4)   0   305   175   2,955   3,435   508
Spain(4)   0   0   19   3,222   3,241   932
France(4)   0   247   134   1,767   2,148   1,264
Belgium(4)   0   449   15   1,306   1,770   111
   
 
 
 
 
 
Total   0   4,920   725   9,311   14,956   9,309
   
 
 
 
 
 
 

 


 

At December 31, 2004

Net loans and
monetary assets

  Governments(1)
  Banks and other
financial institutions(1)

  Commercial,
industrial and
others(1)

  Net local country
claims(2)

  Total
  Guarantees and commitments(3)
 
  (millions of €)

United Kingdom   3   2,281   1,547   0   3,831   2,655
Luxembourg(4)   0   20   458   2,942   3,420   302
Spain(4)   0   186   3   660   849   174
France(4)   0   841   21   2,310   3,172   1,320
Belgium(4)   0   870   8   2,602   3,480   230
   
 
 
 
 
 
Total   3   4,198   2,037   8,514   14,752   4,681
   
 
 
 
 
 

25


 

 


 

At December 31, 2003

Net loans and
monetary assets

  Governments(1)
  Banks and other
financial institutions(1)

  Commercial,
industrial and
others(1)

  Net local
country
claims(2)

  Total
  Guarantees and commitments(3)
 
  (millions of €)

United Kingdom   0   3,070   695   171   3,936   2,295
Luxembourg(4)   0   243   42   2,247   2,532   530
Spain(4)   0   2   3   449   454   357
France(4)   0   226   34   4,339   4,599   1,805
Belgium(4)   0   79   17   1,529   1,625   75
   
 
 
 
 
 
Total   0   3,620   791   8,735   13,146   5,062
   
 
 
 
 
 

(1)
Represents net loans and monetary assets to borrowers in these categories denominated in currencies other than the local currency.

(2)
Represents net loans and monetary assets net of liabilities denominated in the local currency.

(3)
Represents guarantees and commitments to residents outside of Italy, excluding supranational organizations.

(4)
These are countries which have adopted the euro. The outstanding amounts have been funded in euros in Italy or in other countries which have adopted the euro.

    Loans to Iran

        We participate in syndicated credit facilities to Iranian banks and issue letters of credit to our clients for the purchase of goods in Iran. Iran is designated by the U.S. Department of State as a state that sponsors terrorism.

    Participations in Syndicated Credit Facilities to Iranian Banks

        We participate in three syndicated credit facilities to Iranian banks. The purpose of these facilities, which were granted in the 1990s, was to finance the exports of three Italian companies to Iran. The facilities are fully guaranteed by the Republic of Iran and are insured, for amounts ranging between 90% and 95% of the facility amounts, by SACE, Servizi Assicurativi del Commercio Estero S.p.A. SACE is an export credit and investment insurance company owned by the Italian government. The portion of the facilities not covered by SACE's insurance is either wholly or partially secured by guarantees or collateral from another Italian bank or from the relevant Italian exporter.

        The details of the three facilities and our participations therein are as follows:

    This facility comprises two tranches, one granted in March 1996 and one in April 2000, for a total of US$601 million or €509.4 million, of which our participation is US$43 million or €36.3 million (or 7.1% of the total amount of the facility), and expires in 2009. The facility relates to the construction of four steel mills in Iran by an Italian company which is a client of ours.

    This facility was granted in October 1999 and comprises two tranches, one for €50 million and one for US$7.7 million or €6.5 million, for a total of €56.5 million, of which our participation is €7.9 million (or 14% of the total amount of the facility), and expires in 2012. This facility relates to the construction of a plant for the production of polypropylene in Iran by an Italian company which is a client of ours.

    This facility was granted in December 1999 for a total of €304.5 million, of which our participation is €33.5 million (or 11% of the total amount of the facility), and expires in 2011.

26


      This facility relates to the sale of 12 gas turbines for electrical power generation to Iran by an Italian company which is a client of ours.

        Our aggregate gross and net (of SACE insurance and other Italian security) outstanding exposures on these facilities were, respectively, €60 million and €1.5 million at December 31, 2005, €64.6 million and €1.8 million at December 31, 2004, and €61.9 million and €1.1 million at December 31, 2003. Each of these loans is classified as performing.

    Letters of Credit for Iranian Payees

        We issue letters of credit at the request of our clients to enable them to, among other things, purchase goods in Italy or abroad. Pursuant to a letter of credit, we make a payment to a third party, on the basis of our client's credit, and then obtain repayment from our client. Our credit exposure under a letter of credit is to our client, not to the recipient of the payment. On April 12, 2005, we exchanged tested telex messages with the National Iranian Oil Company, or NIOC, and thus became accredited by NIOC for purposes of allowing NIOC to accept letters of credit issued by us as payment for purchases made by our clients. At December 31, 2005, 2004 and 2003 our outstanding exposures to letters of credit for Iranian payees were, respectively, €24 million, €3 million and €1 million.

    Guarantees

        We guarantee exposures to Iranian payees of our clients who have entered into business transactions with Iranian counterparties. At December 31, 2005, the aggregate amount of such guarantees was approximately €6.5 million.

    Risk Elements in the Loan Portfolio

        The Group analyzes the risk elements in its loan portfolio in accordance with EU GAAP, applicable Italian regulations (or other local regulations) and industry practice. The Group's loan classification policies and procedures differ in significant respects from those followed by banks in the United States.

    Loan Classifications

        The Group divides its loan portfolio into six broad categories:

    in bonis, or performing loans;

    restructured loans;

    scaduti, or expired loans;

    incagli, or problem loans;

    sofferenze, or non-performing loans; and

    unsecured loans exposed to country risk.

        All loans classified as anything other than in bonis and unsecured loans exposed to country risk are referred to, for purposes of this annual report, as "impaired loans". Potential problem loans are included among problem loans or expired loans.

        The six classifications above are currently used within the Sanpaolo IMI Group and the classified loans are reported in the Consolidated Financial Statements (see: Part B, Section 7 and Part E, Section 1.A on page F-44 and page F-122 of the Consolidated Financial Statements, respectively) in accordance with the classification criteria in effect as of the relevant date. The Group reports the

27



amounts of loans falling within these classifications to the Bank of Italy in accordance with its regulations.

        Our loan portfolio is monitored on an ongoing basis both centrally and at branch or subsidiary level in order to identify potential problems as early as possible and to evaluate the prospects of recovery and estimated losses with respect to problem, expired and non-performing loans. See Item 11. "Quantitative and Qualitative Disclosures about Market Risk—Credit risk management policies" on page 195 below.

        Loans, including principal not yet due and principal and interest due but not yet collected, are stated at their net carrying amount, taking into account the financial condition of borrowers in difficulty and any debt servicing problems faced by individual industrial sectors or the country in which such borrowers are residents. For a description of how we determine the net carrying amount of our classified loans, please see Part A.2, Section 4 of the Consolidated Financial Statements at page F-20 below.

        Any adjustments to the value of loans shown in the Consolidated Financial Statements are calculated taking into account the extent to which loans have become impaired, whether they are assessed for impairment on an individual basis or on a collective basis, as described under "Part A.2, Section 4" of the Consolidated Financial Statements on page F-20 below.

28


        The following discussion and tables show, at the dates indicated, the Group's total classified loans related to banking activities by category of loan classification.

 
  At December 31,
EU GAAP
Total loans(1)

  2005
  2004
 
  (millions of €, except percentages)

Loans past due by more than 90 and less than 180 days (but still classificated as in bonis)(2)        
Domestic   921   n.a.
International   2   n.a.
   
 
Total   923   n.a.
   
 
Loans past due by more than 180 days        
Domestic   1,247   1,099
International   6   5
   
 
Total   1,253   1,104
   
 
Restructured loans        
Domestic   107   n.a.
International   21   n.a.
   
 
Total   128   193
   
 
Problem loans (incagli)        
Domestic   1,418   1,570
International   156   73
   
 
Total   1,574   1,643
   
 
Non-performing loans (sofferenze)        
Domestic   4,240   4,483
International   84   130
   
 
Total   4,324   4,613
   
 
Total impaired loans(3)   7,279   7,553
As a percentage of total loans   4.20%   4.96%
Unsecured loans exposed to country risk   80   62
   
 
Total impaired loans, loans exposed to country risk and loans overdue by more than 90 days and less than 180 days   8,282   n.a.
As a percentage of total loans   4.78%   n.a.

(1)
Total loans are loans net of any write-offs but before any deduction for the allowance for probable loan losses.

(2)
We are unable to present loans past due by more than 90 days and less than 180 days at December 31, 2004. Prior to 2005, there was no Bank of Italy requirement to classify loans as being overdue by more than 90 days, by more than 90 days and less than 180 days, or by more than 180 days. Consequently, prior to 2005, we classified loans as overdue by more than 90 days solely for internal purposes and for purposes of our annual reports on Form 20-F based on internally developed procedures which recorded only installment loans overdue by more than 90 days. In 2005, the Bank of Italy introduced requirements in its instructions for the preparation of financial statements to classify loans past due by more than 180 days and in its supervisory instructions to classify loans past due by more than 90 days and less than 180 days. As a result, we developed and implemented new procedures allowing us to record and classify all loans that fall

29


    into these two categories at December 31, 2005. In addition, to comply with Bank of Italy requirements, we have reconstructed the amount of loans classified as past due by more than 180 days at December 31, 2004. The loans past due by more 90 days and less than 180 days are not classified as impaired loans according to the Bank of Italy rules.

(3)
Consists of loans past due by more than 180 days, restructured loans, problem loans and non-performing loans.

n.a. means not available.

 
  At December 31,
ITALIAN GAAP
Total loans(1)

  2003
  2002
  2001
 
  (millions of €, except percentages)

Loans past due by more than 90 days (but still classified as in bonis)(2)            
Domestic   876   837   581
  —Outstanding principal(3)   759   718   497
  —Unpaid installments(4)   117   119   84
International   8   2   9
  —Outstanding principal(3)   8       8
  —Unpaid installments(4)     2   1
   
 
 
Total   884   839   590
   
 
 
Doubtful loans:            
Restructured loans and loans in course of restructuring            
Domestic   195   295   182
International   22   8   5
   
 
 
Total   217   303   187
   
 
 
Problem loans (incagli)            
Domestic   1,691   1,644   987
International   131   123   103
   
 
 
Total   1,822   1,767   1,090
   
 
 
Non-performing loans (sofferenze)            
Domestic   4,203   3,856   2,730
International   167   449   350
   
 
 
Total   4,370   4,305   3,080
   
 
 
Unsecured loans exposed to country risk   70   149   120
   
 
 
Total doubtful loans   6,479   6,524   4,477
As a percentage of total loans   4.3%   4.3%   3.7%
Total loans overdue by more than 90 days and doubtful loans   7,363   7,363   5,067
As a percentage of total loans   4.9%   4.8%   4.2%

(1)
Total loans are loans net of any write-offs but before any deduction for the allowance for probable loan losses.

(2)
Installment loans only.

(3)
Outstanding principal consists of installments of principal (but not interest) which have not yet come due.

(4)
Unpaid installments consist of installments of principal and interest (including default interest) which have come due but have not been paid.

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        The quality of our loan portfolio remained substantially stable at December 31, 2005 compared to December 31, 2004. Total impaired loans decreased by €274 million, or 3.6%, to €7,279 million at December 31, 2005 from €7,553 million at December 31, 2004, and our impaired loan ratio decreased to 4.20% from 4.96% at the same dates. This decrease was due to the securitization and sale, on a non-recourse basis, of €278 million of non-performing loans, none of which exceeded €50,000 in net book value. We also experienced decreases of €65 million and €69 million in restructured loans and problem loans, respectively, reflecting an overall improvement in the credit environment in Italy generally. This trend was offset by an increase of €149 million, or 13.5%, in our loans past due by more than 180 days, which was in line with the overall growth of our loan portfolio, as such loans as a percentage of our total loan portfolio remained stable at 0.72% from December 31, 2004 to December 31, 2005. The amount of loans past due by more than 90 days at December 31, 2005, reconstructed with the internally developed procedures we applied before 2005 in the absence of specific Bank of Italy requirements, shows an increase of 19% consistent with the inrease in loans past by more than 180 days at December 31, 2005, calculated in accordance with the newly enacted Bank of Italy requirements.

        The following is a description of the loan classifications and criteria for determining whether a loan should be classified in the relevant category applied by the banking networks of Sanpaolo IMI, Cassa di Risparmio di Padova e Rovigo, Cassa di Risparmio in Bologna, Cassa di Venezia, Friulcassa, Banca Popolare dell'Adriatico, Sanpaolo Banco di Napoli, Neos Banca, Farbanca, Sanpaolo IMI-International, Sanpaolo IMI Bank Ireland and Sanpaolo IMI Internazionale, Banca IMI, Banca OPI, Fin. OPI, Sanpaolo IMI Private Equity, Sanpaolo Leasint, IMI Investimenti, GEST Line (collectively, the "Banking Activities and Entities Network"). The Banking Activities and Entities Network account for, in the aggregate, up to 94% of total Group loans. The loans attributable to Group companies other than the Banking Activities and Entities Network are classified, taking into consideration their respective Business Area (as described in Item 4. "Information on Sanpaolo IMI—C. Business Overview" on page 59 below) and jurisdiction of incorporation, pursuant to standards comparable to those applied by the Banking Activities and Entities Network.

    In bonis, or Performing Loans

        These loans include loans past due by more than 90 days and less than 180 days which are not otherwise classified. In accordance with the Bank of Italy definition, a loan whose principal and/or interest are past due between 90 and 180 days may, in the absence of other factors, be considered as performing or "in bonis". This is because the historical trend of collections in Italy shows that loans that are past due between 90 and 180 days generally recover their current payment status. Since these loans are past due and therefore would be considered to be impaired for accounting purposes a loan loss provision is assessed on loans which are past due by between 90 and 180 days by looking at the historical losses that arise from these group of loans and adjusting the loss factors for current conditions. Under these circumstances, the loan is still in bonis, but it generates default interest. The Banking Activities and Entities Network makes a specific provision for the entire amount of such default interest, regardless of the possibility of the default interest being paid.

        The Banking Activities and Entities Network classifies loans past due by more than 90 days and less than 180 days as in bonis if:

    in its discretion, the relevant bank believes that the borrower does not have debt servicing problems;

    the Bank of Italy regulations do not require the relevant bank to consider the loan as a problem loan (incagli) in view of the nature of the transaction (the term of the delay in the payment is shorter than prescribed by the Italian regulators); and

31


    in management's view, the borrower is not experiencing financial difficulties, whether temporary or not.

        If a loan that is overdue by more than 90 days and less than 180 days fails to satisfy one or more of the above criteria, it will be classified among the incagli or the sofferenze, as the case may be.

    Restructured Loans

        Under the Bank of Italy guidelines, as implemented by the Banking Activities and Entities Network, the Banking Activities and Entities Network classifies a loan as restructured when a syndicate of banks (or a single bank) agrees to a delay in payment of the loan or re-negotiates the loan at below market rates.

    Expired Loans

        Under the Bank of Italy guidelines, as implemented by the Banking Activities and Entities Network, the Banking Activities and Entities Network classifies a loan as expired (scaduti) if it is not classified as a restructured loan and is overdue by more than 180 days. The assessment for impairment is made on a historical statistical basis.

    Problem Loans

        Under the Bank of Italy guidelines, as implemented by the Banking Activities and Entities Network's policies, the Banking Activities and Entities Network classifies a loan as a problem loan (incagli) when the borrower is experiencing financial difficulties that are likely to be temporary and which can be resolved within a reasonable time. A "reasonable time" is generally defined as a maximum of 12 months unless the applicable bank of the Banking Activities and Entities Network has agreed with the borrower on a rescheduling of payments and the borrower is making payments in accordance with that schedule. A current account overdraft may be classified as a problem loan if the borrower has exceeded the established credit limit for a period of time that would suggest that the borrower is experiencing financial difficulties.

        Installment loans are classified as problem loans based on a variety of criteria, including as a result of a borrower's non-installment loan being classified as a problem loan; conversely, a non-installment loan may be classified as a problem loan, among other reasons, as a result of a borrower's installment loan being classified as a problem loan.

        In addition, the Banking Activities and Entities Network's policy has been to classify installment loans, whether amortizing or not, as problem loans when both (i) a borrower fails to pay a specified number of installments when due and (ii) the amount of the overdue payments, net of default interest, is equal to or above 20% of the exposure of the applicable bank of the Banking Activities and Entities Network to the borrower (net of default interest).

        The number of missed installments that will cause a loan to be treated as a problem loan depends upon the number of installments required contractually and the term of the loan, as follows:

Installment period

  Term of 36 months or less
  Term of over 36 months
Monthly   5   7
Quarterly   3   5
Semi-annually   2   3
Annually   6 months after 1   6 months after 1

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    Non-performing Loans

        Under the Bank of Italy regulations, as implemented by the Banking Activities and Entities Network's policies, the Banking Activities and Entities Network classifies a loan as non-performing (sofferenze):

    when the borrower is subject to insolvency proceedings;

    once Sanpaolo IMI or any other creditor initiates legal proceedings in respect of the debt of that borrower; or

    if the borrower is experiencing serious financial difficulties that are not likely to be temporary, even if Sanpaolo IMI has not yet initiated legal proceedings.

        In addition, the Banking Activities and Entities Network's policy, which is derived from the Bank of Italy regulations (see Item 4. "Information on Sanpaolo IMI—C. Business Overview—Italian Banking Regulations" on page 79 below), has been to classify all loans with periodic payments, whether amortizing or not, as non-performing when both (i) a borrower fails to pay a specified number of installments when due and (ii) the amount of the overdue payments, net of default interest, is equal to or above 20% of Sanpaolo IMI's exposure to the borrower (net of default interest).

        The number of missed installments that will cause a loan to be treated as non-performing depends upon the number of installments required contractually and the term of the loan, as follows:

Installment period

  Term of 36 months or less
  Term of over 36 months
Monthly   8(1)   10(2)
Quarterly   5          7     
Semi-annually   3          4     
Annually   6 months after 2   6 months after 2

(1)
12 monthly installments in the case of Finemiro Banca and Finemiro Finance because of their focus on consumer credit, leasing and factoring.

(2)
14 monthly installments in the case of Finemiro Banca and Finemiro Finance because of their focus on consumer credit, leasing and factoring.

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        The following tables show, at the dates indicated, the amount of our non-performing loans by customer group and economic sector and as a percentage of total non-performing loans.

 

 


 

At December 31,

 
  2005
  2004
EU GAAP
Total Loans(1)

  Amount
  % of total
non-performing
loans

  Amount
  % of total
non-performing
loans

 
  (millions of €, except percentages)

Governments and other public entities   5   0.12%   3   0.1%
Banks and credit institutions   3   0.07%   3   0.1%
Domestic non-financial businesses:                
  Building and construction industry   668   15.45%   722   15.7%
  Wholesale and retail   1,090   25.21%   1,162   25.2%
  Manufacturing   960   22.20%   1,301   28.2%
  Transportation   76   1.76%   83   1.8%
  Agriculture   261   6.04%   272   5.9%
  Communications   5   0.12%   5   0.1%
Total domestic non-financial businesses   3,060   70.77%   3,545   76.8%
Total foreign non-financial businesses   46   1.06%   84   1.8%
   
     
   
Total non-financial businesses   3,106   71.83%   3,629   78.7%
   
     
   
Non-bank financial institutions   105   2.43%   119   2.6%
Households and other   1,105   25.56%   859   18.6%
   
 
 
 
Total   4,324   100.00%   4,613   100.00%
   
 
 
 
 

 


 

At December 31,

 
  2003
  2002
  2001
ITALIAN GAAP
Total Loans(1)

  Amount
  % of total
non-performing
loans

  Amount
  % of total
non-performing
loans

  Amount
  % of total
non-performing
loans

 
  (millions of €, except percentages)

Governments and other public entities   9   0.2%   4   0.1%   8   0.3%
Banks and credit institutions   6   0.1%   10   0.2%   11   0.4%
Domestic non-financial businesses:                        
  Building and construction industry   744   17.0%   786   18.3%   636   20.6%
  Wholesale and retail   1,154   26.4%   1,147   26.6%   818   26.6%
  Manufacturing   1,227   28.1%   815   18.9%   491   15.9%
  Transportation   69   1.6%   55   1.3%   39   1.3%
  Agriculture   258   5.9%   274   6.4%   206   6.7%
  Communications   3   0.1%   1   0.0%   2   0.1%
Total domestic non-financial businesses   3,455   79.1%   3,078   71.5%   2,192   71.2%
Foreign non-financial businesses   115   2.6%   297   6.9%   267   8.7%
   
     
     
   
Total non-financial businesses   3,570   81.7%   3,375   78.4%   2,459   79.8%
   
     
     
   
Non-bank financial institutions   120   2.7%   151   3.5%   131   4.3%
Households and other   665   15.2%   765   17.8%   471   15.3%
   
 
 
 
 
 
Total   4,370   100.00%   4,305   100.00%   3,080   100.00%
   
 
 
 
 
 

(1)
Total loans are loans net of any write-offs but before any deduction for the allowance for probable loan losses (including, for performing loans, any allowance for general risks).

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    Non-Accrual of Interest

        Problem loans.    Problem loans and expired loans are not classified as non-accrual loans. In accordance with Italian civil and tax law, upon enforcement of loan contracts, the Group is required to continue to accrue contractual interest on the non-overdue principal portion until such time as repayment of the entire amount outstanding on the loans is accelerated (i.e., until the loans are classified as non-performing). Such accrued but unpaid contractual interest is capitalized and included in the loan balances. The Group policy provides that allowances for probable losses on problem loans are based on the total loan value, which includes both principal and accrued but unpaid interest. On an aggregate basis, the allowance for probable losses on problem loans thus covers the total amount of interest capitalized as part of the total loan value of such loans. On an individual loan basis, the provision for the period does not necessarily match the related interest accrued in the year.

        The amount of unpaid contractual interest with respect to problem and non-performing installment loans included in income before the related provision was €49 million, €38 million, €56 million, €105 million and €69 million for the years ended December 31, 2005 through 2001, respectively. Sanpaolo IMI does not separately track the amount of unpaid contractual interest accrued with respect to problem non-installment loans because interest is generally capitalized and becomes part of the principal amount of such loans on a more frequent (i.e., quarterly) basis than is the case for problem installment loans.

        In accordance with Italian law, the Group is not entitled to, and therefore does not accrue, contractual interest on loans for which repayment has been accelerated. However, the Group is entitled to, and accrues, default interest on these loans as indicated below.

        For installment loans, default interest (interessi di mora) is calculated at a penalty rate on all past due payments of principal and contractual interest. For non-installment loans, default interest is calculated at the contractual interest rate. The Group's policy is to treat all default interest—whether on installment loans or non-installment loans—as unrecoverable and, accordingly, provides for the full amount of such interest through a matching specific provision in the same income statement line item. Accrual of default interest, therefore, has no net effect on Sanpaolo IMI's income statement or balance sheet.

        Payments of default interest are accounted for on a cash basis. The amount of default interest collected by Sanpaolo IMI in 2005 and 2004 was, respectively, €44 million and €41 million.

        Neither contractual interest nor default interest is calculated on loans to borrowers that have been declared bankrupt or are subject to bankruptcy proceedings. At December 31, 2005, approximately 63.9% of Sanpaolo IMI Group's total non-performing loans were to such borrowers.

    Non-performing loans

        Pursuant to the methodology used to calculate the writedowns of impaired exposures, the mere passage of time, and the fact that the expected repayment dates are, as a result, brought closer, implies an automatic reduction of the implicit financial charges previously deducted from the value of the loans. This effect is recorded in the financial statements under net adjustments/write-backs.

    Unsecured Loans Exposed to Country Risk

        These are loans to borrowers resident in countries that the Italian Banking Association has determined, under the Bank of Italy guidelines, present country risk. Exceptions are made for exposures valued taking into consideration the risk covered by underlying guarantees. The category of loans exposed to country risk does not include exposures which are classified under restructured loans or loans in course of restructuring, problem loans (incagli) and non-performing loans (sofferenze).

35


Consequently, this category consists of performing loans that are classified solely because of the country risk they present.

        Country risk is classified in seven categories by the Bank of Italy, focusing in particular on credit history, access to the international markets, ratios of debt to gross national product and to exports, debt service ratio and potential and actual extraordinary events for each country. At December 31, 2005, the Group's net exposure in all countries classified as presenting some risk by the Italian Banking Association was €64 million.

        Our total loan exposure to borrowers in countries at risk was €250 million at December 31, 2005, an increase of €39 million, or 18.5%, from €211 million at December 31, 2004. The result was primarily due to the increase of loans to the Cayman Islands, Brazil and Azerbaijan.

 
  At December 31, 2005
Loans exposed to country risk

  Total
book value

  Book value
(net of secured
loans)

  Total adjustments
  Net loan value
  Adjustment percentage (ABI/
Bank of Italy)

  Adjustment percentage (Sanpaolo IMI)
 
  (millions of €, except percentages)

Argentina   26   3   3   0   60%   80%
Azerbaijan   50   16   5   11   30%   30%
Brazil   86   58   8   50   15%   15%
Cayman Islands   72   1     1   15%  
Dominican Republic   10         30%  
Lebanon   1         20%  
Netherlands Antilles   1         25%  
Serbia and Montenegro   1         20%  
Uruguay   2         20%  
Other   1   2     2        
   
 
 
 
       
Total   250   80   16   64        
   
 
 
 
       
 
 
  At December 31, 2004
Loans exposed to country risk

  Total
book value

  Book value
(net of secured
loans)

  Total adjustments
  Net
loan value

  Adjustment percentage (ABI/
Bank of Italy)

  Adjustment percentage (Sanpaolo IMI)
 
  (millions of €, except percentages)

Argentina   51   3   3     80%   80%
Azerbaijan   37   12   4   8   30%   30%
Brazil   51   30   6   24   20%   20%
Cayman Islands   18         15%  
Costa Rica   1   1     1   30%  
Dominican Republic   9         30%  
Lebanon   11         15%  
Pakistan   6         25%  
Philippines   4         15%  
Serbia and Montenegro   2   2   2     25%   100%
Trinidad-Tobago   4   4   1   3   30%   30%
Venezuela   13   8   1   7   15%   15%
Other   4   2     2        
   
 
 
 
       
Total   211   62   17   45        
   
 
 
 
       

36


 
 
  At December 31, 2003
Loans exposed to country risk

  Total
book value

  Book value
(net of secured
loans)

  Total adjustments
  Net
loan value

  Adjustment percentage (ABI/
Bank of Italy)

  Adjustment percentage (Sanpaolo IMI)
 
  (millions of €, except percentages)

Algeria   17   2     2   15%   15%
Angola   12   2   1   1   30%   30%
Argentina   73   4   3   1   60%   75%
Brazil   62   38   8   30   20%   20%
Costa Rica   2   2     2   30%  
Lebanon   19         20%  
Pakistan   12         25%  
Peru   2   2   1   1   20%   20%
Philippines   9   2     2   15%   15%
Russia   261   5   1   4   15%   15%
Serbia and Montenegro   4   2   2     30%   100%
Venezuela   11   10   2   8   20%   20%
Other   15   1     1    
   
 
 
 
       
Total   499   70   18   52        
   
 
 
 
       
 
 
  At December 31, 2002
Loans exposed to country risk

  Total
book value

  Book value
(net of secured
loans)

  Total adjustments
  Net
loan value

  Adjustment percentage (ABI/
Bank of Italy)

  Adjustment percentage (Sanpaolo IMI)
 
  (millions of €, except percentages)

Algeria   8   4   1   3   15%   15%
Argentina   95   8   6   2   60%   75%
Brazil   75   40   12   28   30%   30%
Cameroon   2   2   2     30%   100%
Costa Rica   2   2     2   30%  
Egypt   54   26   4   22   15%   15%
Iran(1)   60   1     1   15%   15%
Lebanon   32   1     1   30%   30%
Morocco   70   15   2   13   15%   15%
Pakistan   32         30%  
Philippines   11   1     1   15%   15%
Romania   33   28   6   22   15%   20%
Russia   363   1     1   20%   20%
Tunisia   8   6     6   15%  
Venezuela   14   12   4   8   25%   25%
Yugoslavia   1   1   1     30%   100%
Other   43   1   1          
   
 
 
 
       
Total   903   149   39   110        
   
 
 
 
       

(1)
For a discussion of the Group's operations relating to Iran, see: Item 3.B. "Participations in Syndicated Credit Facilities to Iranian Banks" on page 26.

37


 
  At December 31, 2001
Loans exposed to country risk

  Total
book value

  Book value
(net of secured
loans)

  Total adjustments
  Net
loan value

  Adjustment percentage (ABI/
Bank of Italy)

  Adjustment percentage (Sanpaolo IMI)
 
  (millions of € except percentages)

Algeria   9   6   1   5   20%   20%
Argentina   78   6   5   1   40%   83%
Bermuda   30         20%  
Brazil   128   66   16   50   25%   25%
Cameroon   2   2   2     60%   100%
Cayman   34         15%  
Egypt   16   11   2   9   15%   15%
Indonesia   1   1     1   30%   30%
Iran(1)   59         20%  
Lebanon   49   1     1   15%   15%
Morocco   95   7   1   6   15%   15%
Philippines   20   1     1   15%   15%
Russia   381   1     1   25%   25%
Venezuela   19   15   3   12   20%   20%
Yugoslavia   1   1   1     30%   100%
Other   104   2     2        
   
 
 
 
       
Total   1,026   120   31   89        
   
 
 
 
       

(1)
For a discussion of the Group's operations relating to Iran, see: Item 3.B. "Participations in Syndicated Credit Facilities to Iranian Banks" on page 26.

    Allowance for Probable Loan Losses and Write-offs

        Since we present net loans on the balance sheet, the allowance for probable loan losses is shown in a note to the balance sheet. Write-offs made directly to the carrying amount of loans are not separately noted, except for write-offs related to the current year. Guarantees and commitments (which are not considered as derivatives) are subject to valuation by the Group using the same criteria applicable to loans (taking into account IAS 39, IAS 18 and IAS 37) and, if necessary, a provision for probable losses is recorded in the income statement and the related allowance for probable losses is shown in the "other liabilities" line item.

        Loans are assessed for impairment on an individual basis or on a collective basis.

        The following loans are assessed for impairment on an individual basis:

    restructured loans;

    problem loans; and

    non-performing loans.

        The following loans are assessed for impairment on a collective basis:

    expired loans. The assessment is made on a historical statistical basis;

    loans exposed to country risk. These loans are usually assessed on a lump-sum basis, taking each country separately, by applying provisioning percentages that are no lower than those specified by the Italian Banking Association. These loans do not include expired loans or loans listed above that are assessed for impairment on an individual basis; and

38


    performing loans. General provisions for performing loans are calculated by applying a model developed on the basis of risk management methodologies used by banks in the Group to assess the credit impairment that it is believed to have occurred at the reference date ("incurred" as defined by IAS 39), the extent of which is not known at the time the assessment is made. The entire performing loan portfolio is assessed for impairment every three months on a collective basis.

        For a more detailed description of how we assess loans, guarantees and commitments for impairment, see Part A.2, Section 4 of the Consolidated Financial Statements at page F-20.

        The following table shows, for the years indicated, details of the changes in the Group's allowance for probable loan losses as it affected the balance sheet and statement of income.

 
  At and for the year ended December 31,
 
EU GAAP

 
  2005
  2004
 
 
  (millions of €)

 
Opening balance(1)   5,131   4,941  
Provisions   808   874  
  of which:          
  loans to banks   2   1  
  loans to customers   806   873  
Write-offs charged directly to income   13   5  
   
 
 
Total provisions and write-offs(2)   821   879  
   
 
 
Writebacks(3):          
  Revaluations   (142 ) (88 )
  Collections   (242 ) (301 )
   
 
 
Total writebacks   (384 ) (389 )
   
 
 
Net adjustments   437   490  
Other charges:          
  Charge-offs(4)   (389 ) (379 )
  Acquisitions and disposals   (241 ) (64 )
  Default interest   163   167  
  Other(5)   (42 ) 52  
   
 
 
Total other charges   (509 ) (224 )
   
 
 
Ending balance(1)   5,059   5,207  
   
 
 

(1)
The ending balance at December 31, 2004 is different from the opening balance for the year ended December 31, 2005, because of the effects of the application of IAS 32 and 39.

(2)
Provisions are the total of additional provisions for loan losses charged to the income statement during the period for those loans where a higher allowance for loan losses was recognized at the end of the period. Write-offs charged directly to income reflect adjustments to loans charged directly to the income statement during the period. The amount of total provisions and write-offs is included in the total amount recorded in line item 130. a) "Impairment losses/write-backs to loans" of the audited income statement. A reconciliation of this line item is provided in Part C, Section 8 of the Consolidated Financial Statements on page F-104 below.

(3)
Revaluations of loans are the total of reversals of provisions credited to the income statement during the period for those loans where a lower allowance for loan losses was recognized at the

39


    end of the period, and the reinstatement of loans previously written off. Collections represent receipts of amounts in excess of amounts previously expected to be collected. Such amounts are recorded in line item 130. a) "Impairment losses/write-backs to loans" of the audited income statement. A reconciliation of this line item is provided in Part C, Section 8 of the Consolidated Financial Statements on page F-104 below.

(4)
Charge-offs represent write-offs of loans which are no longer expected to be collected, based on events occurring during the year.

(5)
Primarily represents foreign exchange differences.

 
  At and for the year ended December 31,
 
ITALIAN GAAP

 
  2003
  2002
  2001
 
 
  (millions of €)

 
Opening balance   4,636   3,271   3,666  
Provisions and write-offs to loans(1):              
Provisions   1,107   791   607  
Write-offs charged directly to income   5   12   15  
   
 
 
 
Total provisions and write-offs to loans   1,112   803   622  
Writebacks to loans(2):              
Revaluations of loans   (154 ) (96 ) (134 )
Collections   (242 ) (206 ) (142 )
   
 
 
 
Total writebacks to loans   (396 ) (302 ) (276 )
   
 
 
 
Net adjustments to loans   716   501   346  
Other charges:              
Charge-offs(3)   (260 ) (363 ) (187 )
Acquisitions and disposals   (307 ) 1,029   (698 )
Gross-up to reflect default interest   157   184   143  
Other(4)   (12 ) 14   1  
   
 
 
 
Total other charges   (422 ) 864   (741 )
   
 
 
 
Ending balance   4,930   4,636   3,271  

(1)
Provisions are the total of additional provisions for loan losses charged to the income statement during the period for those loans where a higher allowance for loan losses was recognized at the end of the period. Write-offs charged directly to income reflect adjustments to loans charged directly to the income statement during the period.

(2)
Revaluations of loans are the total of reversals of provisions credited to the income statement during the period for those loans where a lower allowance for loan losses was recognized at the end of the period, and the reinstatement of loans previously written off. Collections represent receipts of amounts in excess of amounts previously expected to be collected.

(3)
Charge-offs represent write-offs of loans which are no longer expected to be collected, based on events occurring during the year.

(4)
Primarily represents foreign exchange differences.

2005

        The allowance for loan losses at December 31, 2005 was €5,059 million, a net decrease of €72 million, or 1.4%, from the opening balance for the year of €5,131 million as a result of the

40



reduction of net adjustments and the increase of other charges, due to the non recourse sale of non performing loans.

        Total provisions and write-offs in 2005 were €821 million, a decrease of €58 million, or 6.6%, compared to €879 million in 2004. This decrease was primarily attributable to an overall improvement in the quality of our loan portfolio, while in 2004 we wrote-off certain major exposures.

        Total write-backs to loans in 2005 were €384 million, a decrease of €5 million, or 1.3%, compared to €389 million in 2004.

        Other charges in 2005 represented a net increase of €285 million in the allowance, primarily attributable to the increase of €177 million in disposal of non-performing loans and a positive foreign exchange difference of €94 million compared to a negative difference of €52 million in 2004.

        At December 31, 2005, the allowance for loan losses on loans exposed to country risk amounted to €16 million. The allowance for loan losses on loans exposed to country risk as a percentage of total loans exposed to country risk at December 31, 2005 decreased by €1 million compared to December 31, 2004. The decrease is due to decreases in exposures to Serbia and Montenegro, Trinidad-Tobago and Venezuela, partially offset by increases in the exposures to Brazil.

        Our non-performing loan coverage ratio, representing our loan loss allowance for non-performing loans as a percentage of our total non-performing loans, remained stable at 75.02% at December 31, 2005 compared to 75.11% at December 31, 2004.

2004

        The allowance for loan losses at December 31, 2004 was €5,207 million, a net increase of €266 million, or 5.4%, from €4,941 million at the beginning of the year. This represented a decrease in the rate of growth of the allowance compared to the prior period, both in absolute and percentage terms.

        Total provisions and write-offs to loans in 2004 were €879 million. The decrease compared to 2003 was primarily attributable to the fact that provisions in 2003 had been adversely affected by provisions relating to loans to Parmalat and Cirio. Of the €879 million of total provisions and adjustments to loans in 2004, €399 million related to non-performing loans, €217 million to problem loans, €61 million to restructured and loans in course of restructuring, €4 million to unsecured loans exposed to country risk and €198 million to performing loans.

        Total write-backs to loans in 2004 were €389 million. The net decrease compared to 2003 resulted from a decrease in revaluations of loans, which was partially offset by an increase in collections.

        Other charges in 2004 reduced the allowance by €224 million. The net decrease compared to 2003 was primarily attributable to a decrease in acquisitions and disposals, principally because there were no material changes in our scope of consolidation compared to 2003. This was partially offset by an increase in charge-offs compared to 2003.

        The allowance for probable loan losses includes an allowance for general risks on our performing loan portfolio with particular reference to large exposures to certain specific industrial sectors, including the automotive sector. At December 31, 2004, the amount of this allowance was €1,178 million, representing 0.98% of our performing loans (excluding loans to SGA), a coverage ratio unchanged from year-end 2003.

        At December 31, 2004, the allowance for loan losses on loans exposed to country risk remained stable at €17 million. The allowance for loan losses as a percentage of total loans exposed to country risk at December 31, 2004 increased by 1.7% compared to December 31, of 2003.

41



2003

        The allowance for loan losses at December 31, 2003 was €4.9 billion, 6.3% higher than the €4.6 billion at the end of 2002, primarily due to an allowance for net adjustments to loans of €716 million. This increase was attributable to an increase in total provisions and adjustments to loans, as a result of adverse economic trends and industry conditions. The effect of the increase in net adjustments to loans was partially offset by a decrease of €307 million for acquisitions and disposals, which included €179 million (€150 million in non-performing loans and €29 million in performing loans) relating to the deconsolidation of Banque Sanpaolo and its subsidiaries Sanpaolo Bail and Sanpaolo Mur, as well as Finconsumo Banca and its subsidiary FC Factor. For a summary of the main changes in the scope of consolidation in 2003, see: Item 5. "A. Results of Operations for the Three Years Ended December 31, 2004—Changes in the Scope of Consolidation" on page 97 below. Loans to the Parmalat group were classified as non-performing and, after a provision of €273 million, resulted in a charge-off of approximately €33 million, (corresponding to 90% of the Group's gross exposure to Parmalat). The loans to the Cirio group (gross exposure of €25 million) were also classified as non-performing and were fully provisioned.

        The total provisions and adjustments to loans of the Group grew to €1,112 million in 2003, an increase of €309 million, or 38.5%, compared to 2002, as a result of an increase in specific adjustments to the carrying amount of doubtful loans of €316 million, or 35.7%, as well as a decrease in accruals for probable incurred losses on performing loans of €7 million, or 3.0%. The ratio of gross doubtful loans to gross loans to customers remained stable at 5%, the same level shown in 2002, confirming the substantial stability of the quality of the Group's credit portfolio. A general reserve covers the risk inherent in the performing loan portfolio. At year-end of 2003, this reserve was equal to €1,102 million, corresponding to 0.09% of the performing loan portfolio (excluding loans to SGA), in line with 2002. This reserve is intended to cover the risk of deterioration in creditworthiness inherent in the Group's loan portfolio, with particular reference to larger exposures to certain specific industrial sectors, including the automotive sector.

        Of the €1,112 million of total provisions and adjustments to loans in 2003, €498 million related to non-performing loans, €331 million to problem loans, €12 million to restructured and loans in course of restructuring and €228 million to performing loans.

        Total write-backs of adjustments to loans in 2003 were €396 million, an increase of €94 million, or 31%, compared to 2002. The increase is primarily the result of an increase in collections of loans of 17.5%, combined with an increase of €58 million, in the amount of loans revalued in 2003, as compared to 2002. Write-backs of adjustments refer to downward revisions in the expected impairment in loan value which consequently result in an adjustment to the overall allowance for loan losses.

        At December 31, 2003, the allowance for loan losses on loans exposed to country risk decreased to €18 million from €39 million in 2002, a decrease of 53.85%. The decrease is principally due to the decrease in the gross value of loans exposed to country risk to €70 million from €149 million in 2002, a 53% decrease. The allowance for loan losses as a percentage of total gross loans exposed to country risk at the end of 2003 increased less than 1% compared to the end of 2002. The total gross loan exposure towards banking and non-banking institutions resident in countries at risk decreased from €903 million in 2002 to €499 million in 2003. The decrease was principally due to the reimbursement of loans in Russia, Egypt, Morocco, Romania, Iran and Argentina.

2002

        The allowance for loan losses at December 31, 2002 was €4.6 billion, 39.4% higher than the €3.3 billion at the end of 2001. The increase in the allowance for loan losses was due primarily to the consolidation of €970 million of allowance for loan losses from the former Cardine Group, which was acquired by Sanpaolo IMI in 2002. Such amount is included entirely in "Other changes" in the line

42



item "Acquisitions and disposals" in the table above. Of the €970 million, €611 million relates to non-performing loans, €161 million to problem loans, €25 million to restructured loans, €1 million to unsecured loans exposed to country risk and €172 million to performing loans. The overall increase in the allowance balance can also be attributed to the increase in total provision and adjustments to loans, as a result of negative national and local economic trends and industry conditions.

        The total provisions and adjustments to loans of the Group grew to €803 million in 2002, an increase of €181 million, or 29.1%, compared to 2001, as a result of an increase in specific adjustments to the carrying amount of doubtful loans of €157 million (of which €51 million relates to additional provisions for Rawhide, an affiliate of Enron, Marconi Plc and the Cirio group), or 38.2%, as well as an increase in accruals for probable incurred losses on performing loans of €24 million, or 11.4%. The relatively greater increase in specific adjustments with respect to accruals for performing loans reflects a further weakening of an already lackluster economy, which resulted in continued deterioration in credit quality of outstanding loans. The additional accruals for losses on performing loans resulted in an increase in the non-specific allowance to 0.9% of the net performing loan portfolio for a total amount at year-end 2002 of €1,075 million, of which €1,064 million relates to non-bank institutions, compared to an amount of €783 million at the end of 2001.

        Of the €803 million of total provisions and adjustments to loans in 2002, €330 million related to non-performing loans, €220 million to problem loans, €11 million to restructured and loans in course of restructuring, €7 million to unsecured loans exposed to country risk and €235 million to performing loans.

        Total write-backs of adjustments to loans in 2002 were €302 million, an increase of €26 million, or 9%, compared to 2001. The increase is primarily the result of an increase in collections of loans of 45%, combined with a decrease in the amount of loans revalued in 2002 of €38 million as compared to 2001. Write-backs of adjustments refer to downward revisions in the expected impairment in loan value which consequently result in an adjustment to the overall allowance for loan losses. The decrease in loan revaluations of 28% is attributable to the same economic reasons outlined above for the provisions and adjustments to loans.

        At December 31, 2002, the allowance for loan losses on loans exposed to country risk increased to €39 million from €31 million in 2001, an increase of 25.8%, principally related to the increase in the gross value of loans exposed to country risk to €149 million from €120 million in 2001, an increase of 24.2%. The allowance for loan losses as a percentage of total gross loans exposed to country risk at year-end 2002 increased less than 1% compared to year-end 2001. This minor change reflects the effect of the redistribution of the portfolio of loans among countries with different risk coverage ratios. Loans in countries in Latin America (Brazil, Argentina and Venezuela) decreased while new loans in other countries (primarily Romania, Egypt and Morocco) increased.

2001

        The allowance for loan losses at December 31, 2001 was €3.3 billion, 10.8% lower than the €3.7 billion at the end of 2000. The decrease was due principally to the sale by Sanpaolo IMI of 18,577 non-performing short-term positions. Such loans had a gross value of €640 million and a related allowance for losses of €529 million. The overall decrease was due also to the deconsolidation of Sanpaolo Immobiliare S.p.A. (sold on July 2, 2001) for €175 million. Such decreases are recorded in the caption Acquisitions and disposals in the table above.

        The total provisions and adjustments to loans amounted to €622 million in 2001, a decrease of €12 million, or 1.9%, compared to 2000. The decrease is primarily the result of two different contributing factors: the decline in the accrual of specific provisions and adjustments of €69 million, or 14.4%, due partly to the sale of non-performing loans; and the increase in adjustments with respect to the non-specific allowance to cover the probable risk of loss inherent in loans classified as performing.

43



As a result of the deterioration in the economic environment, adjustments totaling €211 million were made in 2001 compared to €154 million in 2000, or an increase of 37%. Such adjustments covered 0.8% of net performing loans. The Group's non-specific allowance for coverage of such risks totaled €783 million at December 31, 2001, of which €774 million related to non-bank institutions, compared to a non-specific allowance of €629 million at the end of 2000.

        Of the €622 million of total provisions and adjustments to loans in 2001, €218 million related to non-performing loans—this amount includes specific adjustments made to the position in Enron for €52 million, which raised the coverage of the non-guaranteed portion of the loans to Enron to €60 million—€159 million to problem loans, €21 million to restructured and loans in course of restructuring, €13 million to unsecured loans exposed to country risk and €211 million to performing loans.

        Total writebacks of adjustments to loans in 2001 were €276 million, a decrease of €139 million, or 33.5%, compared to 2000. The decrease was due primarily to significantly lower collections of loans in 2001 (€142 million) compared to 2000 (€307 million) as a result of the above-mentioned sale of loans.

        The total allowance for loan losses included €192 million related to the impairment due to the discounting of classified loans, a decrease of €117 million, or 37.9%, compared to 2000. In particular, write-downs for the same kind of impairment totaled €164 million (compared to €235 million in 2000) on non-performing loans, €21 million (compared to €64 million in 2000) on problem loans and €7 million (compared to €10 million in 2000) on restructured and loans in course of restructuring.

        At December 31, 2001, the allowance for loan losses on loans exposed to country risk decreased by 8.8% from €34 million at year-end 2000, to €31 million, as a result of a 37.8% decrease in the amount of gross positions in loans exposed to country risk from €193 million at year-end 2000 to €120 million at year-end 2001. The allowance for loan losses as a percentage of total gross loans exposed to country risk at year-end 2001 of 25.8% increased considerably compared to 17.6% at year-end 2000, primarily due to the economic crisis in Latin America where the gross positions increased (to 72.5% of total loans exposed to country risk, compared to 63.2% at December 31, 2000), resulting in a risk coverage ratio higher than in the previous year.

    Allowance for Probable Loan Losses by Category of Borrower

        The following tables show, at the dates indicated, the distribution of the Group's allowance for probable loan losses by category of borrower using the Bank of Italy's borrower categories. The line item identified as "unallocated" refers to the amount of the allowance for loans assessed for impairment on a collective basis, namely, performing loans, expired loans and loans exposed to country risk.

44


 
  Allowance
  % allowance(1)
  % total loans(2)
  Allowance
  % allowance(1)
  % total loans(2)
EU GAAP

  2005
  2004
  At December 31,
 
  (millions of €, except percentages)

Domestic:                        
Government and other public entities   11   0.22%   7.67%   6   0.12%   8.73%
Banks and credit institutions   2   0.04%   5.37%   2   0.04%   4.99%
Non-financial businesses:                        
  Building and construction industry   563   11.13%   4.94%   590   11.33%   5.03%
  Wholesale and retail   976   19.29%   16.81%   1,166   22.39%   17.75%
  Manufacturing   884   17.47%   14.47%   1,155   22.18%   16.04%
  Transportation   91   1.80%   4.82%   97   1.86%   3.61%
  Agriculture   213   4.21%   1.35%   217   4.17%   1.46%
  Communications   5   0.10%   1.54%   10   0.19%   0.66%
   
         
       
Total domestic non-financial businesses   2,732   54.00%   43.94%   3,235   62.13%   44.54%
   
         
       
Households and Other(3)   1,103   21.80%   23.36%   870   16.71%   23.21%
Unallocated(4)   1,015   20.06%     896   17.20%  
   
 
 
 
 
 
Total Domestic   4,863   96.13%   80.92%   5,009   96.20%   82.07%
   
 
 
 
 
 
International:                        
Government and other public entities   3   0.06%   0.16%   n.a.   n.a.   n.a.
Banks and credit institutions   1   0.02%   11.23%   n.a.   n.a.   n.a.
Non-financial businesses   68   1.34%   4.43%   n.a.   n.a.   n.a.
Households and Other(3)   23   0.45%   3.27%   n.a.   n.a.   n.a.
Unallocated(4)   101   2.00%        
   
         
       
Total International   196   3.87%   19.08%   198   3.80%   17.93%
   
         
       
Total   5,059   100.00%   100.00%   5,207   100.00%   100.00%
   
 
 
 
 
 

45


 
 
  At December 31,
 
  2003
  2002
  2001
ITALIAN GAAP

  Allowance
  %
allowance(1)

  % total
loans(2)

  Allowance
  %
allowance(1)

  % total
loans(2)

  Allowance
  %
allowance(1)

  % total
loans(2)

 
  (millions of €, except percentages)

Domestic:                                    
Building and construction industry   592   12.01%   5.12%   602   12.99%   4.72%   483   14.77%   3.57%
Wholesale and retail   972   19.72%   17.66%   944   20.36%   15.02%   683   20.88%   11.62%
Manufacturing   1,064   21.58%   18.97%   707   15.25%   19.10%   436   13.33%   18.19%
Transportation   71   1.44%   3.19%   55   1.19%   3.18%   35   1.07%   2.44%
Agriculture   207   4.20%   1.54%   208   4.49%   1.48%   159   4.86%   1.18%
Communications   11   0.22%   1.15%   2   0.04%   0.77%   1   0.03%   1.1%
   
         
         
       
Total domestic non- financial business   2,917   59.17%   47.63%   2,518   54.31%   44.27%   1,797   54.94%   38.10%
   
         
         
       
Government and other public entities   11   0.22%   8.88%   6   0.13%   8.52%   9   0.28%   9.81%
Banks and credit institutions   2   0.04%   4.53%   2   0.04%   3.35%   1   0.03%   7.15%
Households and Other   798   16.19%   21.75%   755   16.29%   22.84%   423   12.93%   20.60%
   
         
         
       
Total Domestic   3,728   75.62%   82.79%   3,281   70.77%   78.98%   2,230   68.17%   75.66%
   
         
         
       
Unallocated   978   19.84%   0.00%   948   20.45%   0.00%   699   21.37%   0.00%
International   224   4.54%   17.21%   407   8.78%   21.02%   342   10.46%   24.35%
   
 
 
 
 
 
 
 
 
Total   4,930   100.00%   100.00%   4,636   100.00%   100.00%   3,271   100.00%   100.00%
   
 
 
 
 
 
 
 
 

(1)
Allowance in category as percentage of total allowance.

(2)
Loans in category as percentage of total loans.

(3)
Consists of loans to households and other and to non-bank financial institutions.

(4)
At December 31, 2004, the amount of the allowance is for loans to both domestic and international borrowers.

n.a. means not available.

46



    Credit Quality

        The following tables show, at the dates indicated, certain credit quality ratios. For total impaired loans as a percentage of total loans, see: "Risk Elements in the Loan Portfolio, Loan Classifications" above.

 
  At December 31,
EU GAAP

  2005
  2004
 
  (percentages)

Loan loss allowance for non-performing loans as percentage of total non-performing loans   75.02%   75.11%
Loan loss allowance for problem loans as percentage of total problem loans   31.77%   32.14%
Loan loss allowance for all loans as percentage of total loans   2.92%   3.42%
Non-performing loans as percentage of loans:        
  Total loans   2.49%   3.03%
  Net loans   0.62%   0.75%
Problem loans as percentage of loans:        
  Total loans   0.91%   1.08%
  Net loans   0.62%   0.73%
 
 
  At December 31,
ITALIAN GAAP

  2003
  2002
  2001
 
  (percentages)

Loan loss allowance for non-performing loans as percentage of total non-performing loans   73.20%   68.99%   69.77%
Loan loss allowance for problem loans as percentage of total problem loans   35.46%   31.98%   26.88%
Loan loss allowance for all loans as percentage of total loans   3.25%   3.02%   2.68%
Non-performing loans as percentage of loans:            
  Total loans   2.88%   2.81%   2.53%
  Net loans   0.77%   0.87%   0.76%
Problem loans as percentage of loans:            
  Total loans   1.20%   1.15%   0.89%
  Net loans   0.77%   0.78%   0.65%

        The following tables show, at the dates indicated, net adjustments to loans as a percentage of total loans.

 
  At December 31,
EU GAAP
Total loans(1)

  2005
  2004
 
  (millions of €, except percentages)

Total loans   173,337   152,350
Net adjustments to loans as a percentage of total loans   0.25%   0.32%

(1)
Total loans are loans net of any write-offs but before any deduction for the allowance for probable loan losses (including, for performing loans, any allowance for general risks). The amount of total loans does not appear on the balance sheet, but is set forth in Part E, Section 1.A "Credit Quality".

47


 
  At December 31,
ITALIAN GAAP
Total loans(1)

  2003
  2002
  2001
 
  (millions of €, except percentages)

Total loans   151,807   153,337   121,898
Net adjustments to loans as a percentage of total loans   0.47%   0.33%   0.28%

(1)
Total loans are loans net of any write-offs but before any deduction for the allowance for probable loan losses (including, for performing loans, any allowance for general risks).

Securities Portfolio

        At December 31, 2005, securities held by the Group related to banking activities were carried on our consolidated balance sheet at a book value of €30.210 million, representing 13.5% of our total assets. The aggregate book value and the aggregate market value of securities held by the Group issued by the Italian government and Italian government agencies were €17,019 million and €17,017 million, respectively, at December 31, 2005, and €11,942 million and €12,134 million, respectively, at December 31, 2004. In our banking activities, we do not otherwise hold securities issued or guaranteed by any one entity or obligor, other than the Italian government, whose carrying value represents more than 10% of our consolidated shareholders' equity determined in accordance with EU GAAP. If the Gruop's insurance activities are taken into consideration, we also hold securities issued or guaranteed by the French government, whose carrying value represents more than 10% of consolidated shareholders' equity.

    Book and Fair Value

        The following tables show the book value and the fair value of the Group's securities related to banking activities by type and domicile of issuer at the dates indicated. For a discussion of how the Group values its securities, see Part A.3 and Part B, Appendix to Part B on page F-34 and page F-96 of the Consolidated Financial Statements, respectively.

 
  At December 31,
 
  2005
  2004
EU GAAP

  Book Value
  Fair Value
  Book Value
  Fair Value
 
  (millions of €)

Domestic:                
Government   17,019   17,017   11,942   12,134
Corporate and other securities   2,014   2,014   6,925   7,065
Equities and others   1,472   1,472   644   644
   
 
 
 
Total domestic   20,505   20,503   19,511   19,843
   
 
 
 
International:                
Government   2,250   2,250   3,487   3,498
Corporate and other securities   1,828   1,828   3,960   3,978
Equities and others   5,627   5,627   2,382   2,383
   
 
 
 
Total international   9,705   9,705   9,829   9,859
   
 
 
 
Total Securities   30,210   30,208   29,340   29,702
   
 
 
 

48


 
  At December 31,
 
  2003
ITALIAN GAAP

  Book Value
  Fair Value
Domestic:        
Government   12,519   12,583
Corporate and other securities   5,299   5,325
Equities and others(1)   1,210   1,210
   
 
Total domestic   19,028   19,118
   
 
International:        
Government   1,319   1,322
Corporate and other securities   3,374   3,385
Equities and others(1)   1,537   1,542
   
 
Total international   6,230   6,249
   
 
Total securities   25,258   25,367
   
 

(1)
This line item excludes treasury Shares held by the Group at December 31, 2004 and 2003 with a book value of €54 million and €34 million, respectively, and a fair value of €54 million and €34 million, respectively.

    Remaining Maturities and Weighted Average Yield

        The following table shows the maturities and weighted average yield of the securities held by the Group related to banking activities by type and domicile of issuer at December 31, 2005. The yield on tax-exempt obligations has not been calculated on a tax-equivalent basis because the effect of such a calculation would not be material.

 
  At December 31, 2005
 
  Amount(1)
   
 
  Maturing within one year
  Maturing between one year and five years
  Maturing between five years and ten years
  Maturing after ten years
  Total amount
 
  (millions of €)

Domestic:                    
Government   5,415   6,563   4,734   307   17,019
Corporate and other securities   292   732   952   38   2,014
Equities and others   1,472         1,472
   
 
 
 
 
Total domestic   7,179   7,295   5,686   345   20,505
   
 
 
 
 
International:                    
Government   341   678   933   298   2,250
Corporate and other securities   792   605   368   63   1,828
Equities and others(2)   5,627         5,627
   
 
 
 
 
Total international   6,760   1,283   1,301   361   9,705
   
 
 
 
 
Total Securities   13,939   8,578   6,987   706   30,210
   
 
 
 
 
Total Securities (market value)   13,939   8,578   6,987   706   30,208
   
 
 
 
 
Weighted average yield(3)   2.68%   2.66%   2.94%   3.93%   2.79%
   
 
 
 
 

(1)
Based on book value unless otherwise indicated.

(2)
Not subject to maturity. Customarily classified as maturing within one year.

(3)
Based on book value as of December 31, 2005.

49


Liabilities and Funding Sources

        The following tables set forth, at the dates indicated, the principal components of our liabilities.

 
  At December 31,
 
  2005
  2004
EU GAAP

  Amount
  % of total
liabilities

  Amount
  % of total
liabilities

 
  (millions of €, except percentages)

Deposits, short-term borrowings and medium- and long-term debt from non-credit institutions   94,430   42.30%   89,313   41.89%
Demand deposits:   74,562   33.40%   58,826   27.59%
  interest-bearing   74,355   33.31%   n.a.   n.a.
  non- interest-bearing   207   0.09%   n.a.   n.a.
Savings deposits   5,734   2.57%   14,410   6.76%
Repurchase agreements   10,545   4.72%   11,664   5.47%
Other(1)   3,589   1.61%   4,413   2.07%

Securities and subordinated liabilities

 

49,388

 

22.12%

 

54,287

 

25.46%
CDs   4,336   1.94%   2,904   1.36%
Bonds   32,414   14.52%   41,076   19.27%
Commercial paper   6,297   2.82%   3,352   1.57%
Subordinated liabilities   6,341   2.84%   6,955   3.26%

Short-term borrowings and medium- and long-term debt from credit institutions

 

35,831

 

16.05%

 

28,277

 

13.26%
Central banks   3,210   1.44%   3,078   1.44%
  of which: Repurchase agreements   750   0.34%   551   0.26%
Other banks   32,621   14.61%   25,199   11.82%
Demand deposits:   4,853   2.17%   848   0.40%
  interest-bearing   4,850   2.17%   n.a.   n.a.
  non-interest-bearing   3   0.00%   n.a.   n.a.
Savings deposits   11,793   5.28%   7,155   3.36%
Repurchase agreements   6,078   2.72%   7,960   3.73%
Other   9,897   4.43%   9,236   4.33%
   
 
 
 
Total   179,649   80.47%   171,877   80.61%
   
 
 
 
Other liabilities   28,404   12.72%   28,745   13.48%
Minority interests   244   0.10%   282   0.13%
Shareholders' equity   14,959   6.70%   12,308   5.77%
   
 
 
 
Total liabilities and shareholders' equity   223,236   100.00%   213,212   100.00%
   
 
 
 

(1)
Represents primarily (i) short positions on securities as part of Banca IMI's securities trading activities and (ii) public funds we administer for the Italian government and regional public agencies.

50


 
  At December 31,
 
  2003
ITALIAN GAAP

  Amount
  % of total
liabilities

 
  (in millions of €, except percentages)

Deposits, short-term borrowings and medium- and long-term debt from non-credit institutions   80,827   39.90%
Current accounts   53,968   26.64%
Savings accounts   14,405   7.11%
Repurchase agreements   10,073   4.97%
Other(1)   2,381   1.18%
Securities and subordinated liabilities   57,308   28.29%
CDs   7,149   3.53%
Bonds   39,979   19.73%
Commercial paper   3,766   1.86%
Subordinated liabilities   6,414   3.17%
Short-term borrowings and medium- and long-term debt from credit institutions   28,534   14.09%
Central banks   3,977   1.96%
  of which: Repurchase agreements   1,704   0.84%
Other banks   24,557   12.12%
  of which: Repurchase agreements   5,998   2.96%
Total   166,669   82.27%
Other liabilities   24,645   12.17%
Minority interests   271   0.13%
Shareholders' equity   10,995   5.43%
   
 
Total liabilities and shareholders' equity   202,580   100.00%
   
 

(1)
Represents primarily (i) short positions on securities as part of Banca IMI's securities dealing activities and (ii) public funds we administer for the Italian government and regional public agencies.

    Customer Deposits, Securities and Interbank Borrowings

        The principal components of our funding are customer deposits (current accounts, or demand deposits, and savings accounts); repurchase agreements; certificates of deposit ("CDs"); bonds; subordinated debt; and interbank funding. Domestic current and savings accounts are primarily interest-bearing accounts. CDs and bonds are issued both by Sanpaolo IMI, its international branches, Sanpaolo IMI Bank (International) and Banca IMI Group, and have maturities ranging from three months to 10 years. The Group's retail customers are the main source of our funding.

    Deposits and Other Funding from Non-credit Institutions

        Our deposits and other funding from non-credit institutions totaled €94.4 billion at December 31, 2005, an increase of €5.1 billion, or 5.7%, from €89.3 billion at December 31, 2004. This was primarily due to an increase of €15.7 billion, or 26.75%, in demand deposits to €74.6 billion at year-end 2005 from €58.8 billion at year-end 2004, reflecting the reallocation of customer funds towards greater liquidity. This reallocation was the primary reason for the decrease in savings deposits by €8.7 billion, or 60.4%, compared to year-end 2004.

51


    Securities and Subordinated Liabilities

        At December 31, 2005, our funding from securities and subordinated liabilities was €49.4 billion, a decrease of €4.9 billion, or 9.02%, from €54.3 billion at December 31, 2004. This was primarily due to a decrease of €8.7 billion, or 21.09%, in bonds due to the maturity of some bonds, partially offset by increases in commercial paper and CDs of €2.9 billion, or 87.86% and €1.4 billion, or 49.31%, respectively, from December 31, 2004. The increase in commercial paper and in CDs primarily reflected increased funding in foreign currencies by our foreign branches.

    Short-term Borrowings and Other Funding from Credit Institutions

        At December 31, 2005, our funding from credit institutions totaled €35.8 billion, an increase of €7.5 billion or 26.5%, compared to €28.3 billion at December 31, 2004, primarily due to increased funding from inter-bank demand and savings deposits. See "Item 5.A.2 Operating and Financial Review and Prospectus—Year Ended December 31, 2005 Compared with Year Ended December 31, 2004—Net Interest Income" on page 98 below.

    Domestic and International Deposits by Type of Deposit

        The following tables show, for the periods presented, the Group's domestic and international deposits, based on location of the branch taking the deposit, by type of deposit:

 
  For the year ended December 31,
 
  2005
  2004
EU GAAP

  Average Balance
  Average Rate
  Average Balance
  Average Rate
 
  (millions of €, except percentages)

Domestic:                
Non-interest-bearing demand deposits   241     163  
Interest-bearing demand deposits   58,224   0.89%   54,683   0.82%
Savings deposits   16,023   1.43%   13,047   1.24%
Certificates of deposit   1,440   1.40%   2,230   1.43%

International:

 

 

 

 

 

 

 

 
Foreign demand deposits with governments and other public entities and with banks and credit institutions   2,724   2.41%   98   1.72%
Other foreign demand deposits   3,895   2.07%   2,146   1.34%
Other foreign savings deposits and certificates of deposit   1,221   2.57%   9,952   2.14%
 
 
  For the year ended December 31, 2003
ITALIAN GAAP

  Average Balance
  Average Rate
 
  (millions of €, except percentages)

Domestic:        
Non-interest-bearing demand deposits   145  
Interest-bearing demand deposits   55,998   0.96%
Savings deposits   17,510   1.50%
Certificates of deposit   3,457   1.97%

International:

 

 

 

 
Foreign demand deposits with governments and other public entities and with banks and credit institutions   131   2.25%
Other foreign demand deposits   2,194   2.23%
Other foreign savings deposits and certificates of deposits   13,955   2.24%

52


    Funding by Remaining Maturity

        As a financial institution, Sanpaolo IMI's sources of funding and certain off-balance-sheet transactions are the principal components of its obligations and future commitments to make future payments under contracts.

        The majority of our funding is short-term: demand and short-term funding (up to three months' maturity) together make up approximately 66% of our funding, while the balance is composed of fixed- and floating-rate funding, including subordinated debt.

        The following table sets forth, at the date indicated, the principal components of our sources of funding and off-balance-sheet transactions by remaining maturity.

 
  Remaining maturity at December 31, 2005
EU GAAP

  On demand
  Up to 3 months
  Between 3
and 12 months

  Between 1 and 5 years
  Beyond 5 years
  Unspecified
  Total
 
  (millions of €)

Sources of funding                            
Due to customers   73,377   16,922   3,244   618   252   2   94,415
Due to banks   6,535   14,861   4,576   2,942   6,852     35,766
Securities issued   1,992   9,723   6,472   25,361   8,021     51,569
Financial liabilities held for trading   34   24   453   942   549   339   2,341
Financial liabilities at fair value     143   383   2,999   3     3,528
   
 
 
 
 
 
 
Total funding   81,938   41,673   15,128   32,862   15,677   341   187,619

Off-balance sheet transactions

 

50,832

 

162,497

 

107,463

 

87,663

 

486,946

 

300,262

 

1,195,663

    Subordinated Debt

        In the course of 2005, Sanpaolo IMI made substantial investments to develop its business. To ensure the maintenance of solvency ratios appropriate to our business, Sanpaolo IMI issued subordinated debt in a total amount of €6,081 million in 2005.

        The following table shows, at the dates indicated, our outstanding subordinated debt by currency and maturity.

EU GAAP
Loans

  Book value at 12/31/05
  Amount at inception(*)
  Interest rate
  Issue date
  Maturity date
  Book value at 12/31/04
 
  (millions of €)

  (millions)

   
   
   
   
   
  (millions of €)

Preferred Securities in Euro   1,000   1,000   8.126%   (a)   11/10/2000     (b)   1,000
Total innovative capital instruments (Tier 1)   1,000                   1,000
  Subordinated loan in Euro   132   150   5.75%       09/15/1999   09/15/2009       136
  Subordinated loan in Euro   200   200   floating       10/01/1999   10/01/2009       200
  Notes in Euro   500   500   6.375%       04/06/2000   04/06/2010       500
  Subordinated loan in Euro   6   20   1.00%       04/27/2001   04/27/2006       6
  Subordinated loan in Euro   299   300   5.55%       07/31/2001   07/31/2008       299
  Loan in Euro   1   1   floating       09/20/2001   09/20/2006        
  Subordinated loan in Euro   199   200   5.16%       10/02/2001   10/02/2008       199
  Notes in Euro   500   500   floating       06/28/2002   06/28/2012       499
  Subordinated loan in Euro   47   54   4.9%   (c)   07/15/2002   07/15/2012       48
  Subordinated loan in Euro   127   147   4.32%   (d)   12/04/2002   12/04/2012       133
  Notes in Euro   299   300   5.375%       12/13/2002   12/13/2012       300
  Notes in Euro   350   350   3.75%   (e)   06/09/2003   06/09/2015       346
                                 

53


  Notes in Euro   150   158   floating       07/01/2003   07/01/2013       150
  Notes in Euro   62   75   floating       09/29/2003   09/29/2013       62
  Notes In GBP   241   165   5.625%   (f)   03/18/2004   03/18/2024       234
  Notes in Euro   700   700   floating       06/28/2004   06/28/2016       700
  Subordinated loan in Euro   127   134   3.72%   (g)   08/03/2004   08/03/2014       132
  Notes in Euro   500   500   3.75%   (h)   03/02/2005   03/02/2020      
  Notes in Euro   25   21   floating       06/10/2005   06/10/2015      
  Subordinated loan in Euro   16   20   2.90%   (i)   08/01/2005   08/01/2015      
Total subordinated liabilities (Tier 2)   4,481                    
  Notes in Euro   50   50   1.5%   (j)   06/26/2003   11/15/2007       50
  Notes in Euro   550   550   floating       12/20/2005   01/07/2008      
                       
       
Total subordinated liabilities (Tier 3)   600                    
                       
       
Total   6,081                    
                       
       

(a)
The remuneration of the preferred securities is fixed at 8.126% up to November 10, 2010. After that date, a floating coupon will be paid at 12 months Euribor increased by 350 basis points.

(b)
The securities cannot be redeemed. Only Sanpaolo IMI has the right to redeem the Securities, totally or partially, and this right can be exercised after November 10, 2010.

(c)
Remuneration is paid on presentation of half-yearly coupons with a fixed rate of 2.45% for the first five years. Subsequently, a floating coupon will be paid.

(d)
Remuneration is paid on presentation of half-yearly coupons with a fixed rate of 2.16% for the first five years. Subsequently, a floating coupon will be paid.

(e)
Remuneration is paid on presentation of yearly coupons with a fixed rate of 3.75% for the first seven years. Subsequently, a floating coupon will be paid.

(f)
Remuneration is paid on presentation of yearly coupons with a fixed rate of 5.63% for the first fifteen years. Subsequently a floating coupon will be paid.

(g)
Remuneration is paid on presentation of yearly coupons with a fixed rate of 3.72% for the first five years. Subsequently a floating coupon will be paid.

(h)
Remuneration is paid on presentation of yearly coupons with a fixed rate of 3.75% for the first ten years. Subsequently a floating coupon will be paid.

(i)
Remuneration is paid on presentation of yearly coupons with a fixed rate of 2.90% for the first five years. Subsequently a floating coupon will be paid.

(j)
The first coupon is 1.44%.

(*)
Reported in original currency.

54


    Funding by Geographic Area

        The following table sets forth, at the date indicated, the principal sources of funding for the Group by geographical distribution.

 
  At December 31, 2005
EU GAAP

  Italy
  Other EU countries
  United States
  Asia
  Rest of the world
 
  (millions of €)

Principal sources of funding                    
  Due to customers   80,307   7,389   3,168   656   784
  Due to banks   11,838   8,146   1,964   2,812   10,922
  Securities issued   37,588   7,578   2,028   4,223  
  Financial liabilities held for trading   678   1,363   164     18
  Financial liabilities at fair value   3,527        
   
 
 
 
 
Total   133,938   24,476   7,324   7,691   11,724
   
 
 
 
 

    Funding by Sector

        The following table sets forth, at the date indicated, the principal sources of funding for the Group by economic sector.

 
  At December 31, 2005
EU GAAP
Sector

  Government and Central Banks
  Other public entities
  Financial Business
  Banks
  Insurance
  Non-financial Business
  Other
 
  (millions of €)

Due to customers   1,888   2,204   11,828     1,188   23,161   52,035
Securities issued       2,832   505     4,179   43,901
Financial liabilities held for trading   557   1,313   88   156     111   2
Financial liabilities at fair value       3   3,524      
   
 
 
 
 
 
 
Total   2,445   3,517   14,751   4,185   1,188   27,451   95,938
   
 
 
 
 
 
 

55


    Short-Term Borrowings

        The following tables show, at the dates indicated, the Group's short-term borrowings by type of borrowing:

 
  At December 31, 2005
EU GAAP

  Repurchase agreements
  Commercial papers
 
  (millions of €, except percentages)

Amount outstanding at year-end   17,373   6,297
Weighted average interest rate of the amount outstanding at year-end   2.34%   3.82%
Maximum amount outstanding at month-end during the year   30,490   6,354
Average amount outstanding during the year   25,179   3,699
Weighted average interest rate during the year   2.08%   3.23%
 
 
  At December 31, 2004
EU GAAP

  Repurchase agreements
  Commercial papers
 
  (millions of €, except percentages)

Amount outstanding at year-end   20,207   3,352
Weighted average interest rate of the amount outstanding at year-end   2.19%   2.23%
Maximum amount outstanding at month-end during the year   29,540   3,848
Average amount outstanding during the year   22,762   2,787
Weighted average interest rate during the year   2.10%   1.65%

ITEM 4. INFORMATION ON SANPAOLO IMI

A.    History and Development of Sanpaolo IMI

Incorporation, Length of Life and Domicile

        Sanpaolo IMI is incorporated as a limited liability company (Società per Azioni or S.p.A.) under the laws of Italy. Sanpaolo IMI was established on November 1, 1998 by the merger of Istituto Bancario San Paolo di Torino S.p.A. ("Sanpaolo") and Istituto Mobiliare Italiano S.p.A. ("IMI"). Sanpaolo IMI is the legal successor of both Sanpaolo and IMI. The life of Sanpaolo IMI, according to its charter, will last until December 31, 2050.

        Sanpaolo IMI is registered with the company registrar under number 06210280019 and with the Bank of Italy as a bank and, together with its subsidiaries, as a banking group under numbers 1025.6 and 5084.9.0, respectively. Sanpaolo IMI is the reporting bank ("capogruppo") of the Sanpaolo IMI Group for regulatory purposes and, as capogruppo, is responsible for monitoring the Group's activities and maintaining the relationship with the Bank of Italy.

        Sanpaolo IMI's registered office is located at Piazza San Carlo 156, Turin and its secondary offices are at Viale dell'Arte 25, Rome, and Via Farini 22, Bologna. Sanpaolo IMI can be contacted by telephone at +39-011 5551. Sanpaolo IMI's website is www.grupposanpaoloimi.com.

History and Development

        IMI was established as a public law entity (Ente di Diritto Pubblico) in 1931 and Sanpaolo became a public law credit institution (Istituto di Credito di Diritto Pubblico) in 1932. In the 1990s, certain reforms were introduced and the Bank of Italy relaxed certain restrictions on the opening of new branches and Sanpaolo was thus encouraged to continue to expand beyond Piedmont. The Italian government sought to encourage greater private sector involvement in banking through the conversion of charitable foundations with banking businesses (such as Sanpaolo) into separate charities and

56



businesses and through the sale of stakes in state-controlled banks (such as IMI). These developments were encouraged through a series of measures, including tax incentives, to strengthen the capital structure of the banking sector (Law No. 218 of July 30, 1990, the "Amato Law") and through direct sales by the Italian government of state-controlled holding companies.

        Pursuant to the Amato Law, Sanpaolo was established as a Società per Azioni as of December 31, 1991, under the name Istituto Bancario San Paolo di Torino Società per Azioni. In 1992, approximately 21% of Sanpaolo's share capital was floated in Italy and the shares traded on the Stock Exchange Automated Quotation International System of the London Stock Exchange Limited ("SEAQ International").

        The charitable foundation, Compagnia di San Paolo, indirectly remained majority shareholder of Sanpaolo until 1997, when six long-term shareholders and four medium-term shareholders purchased 22% of Sanpaolo's share capital, while a further 31% of Sanpaolo's share capital was sold in an Italian public offering and a global institutional offering. Following the Bank of Italy's approval, Sanpaolo became capogruppo.

        IMI became a Società per Azioni in 1991. There was no public market for IMI's shares prior to 1994. In that year, as part of the Italian government's direct privatization campaign, the Ministry of Treasury and several other IMI shareholders took part in a global offering (the "Global Offering") of more than one-third of IMI's share capital. In connection with the Global Offering, IMI's shares were listed on the Italian Stock Exchange and its American Depository Shares (each ADS representing three shares) were listed on the New York Stock Exchange. IMI shares were also listed on SEAQ International. In 1995, IMI shares held by the Ministry of Treasury were privately placed with Italian and European financial institutions and private industrial companies. In July 1996, IMI lead-managed the third offering of its own shares by the Ministry of Treasury to institutional investors in Italy, Europe and the United States.

The Merged Group

        During the second half of the 1990s, the banking sector in Italy and worldwide went through a phase of rationalization and consolidation. In Europe, this consolidation was also influenced by the introduction of the euro. In light of these developments, new Italian banking groups were created or consolidated. The Italian government and the Bank of Italy encouraged such developments. The managements of both Sanpaolo and IMI determined that, to compete effectively in the changing Italian and European banking environments, a larger size and an appropriate merger partner would be a positive development and agreed to merge.

        The merger between Sanpaolo and IMI was completed as of November 1, 1998. For accounting and tax purposes, the merger became effective as of January 1, 1998. Sanpaolo IMI's Shares and ADSs (each ADS representing two Shares) are listed on, respectively, the Mercato Telematico Azionario in Italy and the New York Stock Exchange. The ADS depository is JPMorgan Chase Bank.

        In 1999, in the context of the increasing consolidation of banking and financial services in Italy, Sanpaolo IMI reached an agreement with Assicurazioni Generali S.p.A. ("Generali"), an insurance company, whereby Sanpaolo IMI would acquire control of the Banco di Napoli S.p.A. ("Banco di Napoli") group, while Generali would take over the insurance business of Istituto Nazionale delle Assicurazioni S.p.A. ("INA").

        During 2000, Sanpaolo IMI acquired control of the Banco di Napoli group. In 2002, Banco di Napoli was merged into Sanpaolo IMI. The merger with Banco di Napoli became effective, for corporate law purposes, as of December 31, 2002 and, for accounting purposes, as of January 1, 2002. In 2003 the Sanpaolo and the Banco di Napoli networks were integrated and Sanpaolo Banco di Napoli S.p.A. was incorporated.

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        In January 2001, Sanpaolo IMI acquired a stake of approximately 11% in Cardine S.p.A ("Cardine"), the savings bank resulting from the merger of the Casse Venete and CAER S.p.A., both operating in the north east of Italy. In 2002, Cardine was merged into Sanpaolo IMI. The merger became effective, for corporate law purposes, as of June 1, 2002 and, for accounting purposes, as of January 1, 2002.

        In connection with the Cardine merger, the Compagnia di San Paolo and the two largest shareholders of Cardine, the Fondazione Cassa di Risparmio di Padova e Rovigo and the Fondazione Cassa di Risparmio in Bologna (collectively, the "Foundations") agreed to the voluntary conversion (the "Conversion") of Shares held by the Foundations into preferred shares of a special class (the "Azioni Privilegiate").

        The Conversion was made pursuant to Law 461 of December 23, 1998, enacted by legislative decree 153 of May 17, 1999 (collectively, the "Ciampi Law"), which allows the ordinary shares of banking institutions, such as Sanpaolo IMI, held by charitable banking foundations, such as the Foundations, to be converted into preferred shares of a special class. The Azioni Privilegiate have priority over the Shares in respect of dividends and are currently entitled to vote only at extraordinary shareholders' meetings. In 2012, the Azioni Privilegiate held by the Foundations are scheduled to be converted back into Shares with full voting rights. The Azioni Privilegiate will be converted into Shares, by operation of law, if they are transferred to a different beneficial owner. If such a transfer occurred, the Azioni Privilegiate would be converted into Shares at a ratio of one Azione Privilegiata to one Share.

B.    Significant Developments During 2005

2006-2008 Business Plan

        On October 25, 2005 the Board of Directors of Sanpaolo IMI approved a new business plan (the "2006-2008 Business Plan"), which sets the economic targets for 2008 as well as the strategic guidelines for the next three years. The following financial measures used herein projected return on equity or RoE and cost/income ratio are projections and as such are neither envisaged nor derived from measures envisaged by IAS/IFRS. Such measures are, therefore, non-GAAP financial measures. Management believes that there are no meaningful comparable financial measures and that such non-GAAP financial measures provide meaningful information because it is on such measures that Sanpaolo IMI developed its strategies and such measures are commonly used by financial institutions and market practice.

        The financial objectives of the 2006-2008 Business Plan are based on a macroeconomic scenario which is not favorable but, nevertheless, we believe offers growth opportunities for banks in Europe and in Italy. The Group targets for 2008 may be summarized by a return on equity, (the conventional non-GAAP measure used by stock market analysts) or RoE, calculated as net profit on year-end on shareholders' equity less net profit which, calculated in accordance with IAS/IFRS, is forecasted to reach 18%. Simultaneous actions on revenues and costs are planned to improve the Group's cost/income ratio, which is targeted at 52% in 2008.

        We plan to achieve these targets by, among other things, increasing financial assets and loans. Achieving these targets will also require us to focus on our capital adequacy ratios for which we target a core Tier I ratio not lower than 7% by 2008; cost control, as we plan not to increase costs in real terms; and the cost of credit, for which the 2006–2008 Business Plan targets a potential increase in the ratio of expected losses to total loans of not more than 4 basis points.

Public Tender Offers

        No public tender offer in respect of Sanpaolo IMI's Shares has been made from January 1, 2005 to date.

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C.    Business Overview

        At December 31, 2005, the Group was one of the leading banking groups in Italy with total assets of €263.3 billion, loans to customers totalling €139.5 billion and deposits from customers totalling €165.2 billion. In addition, at December 31, 2005, assets under management amounted to €158 billion and assets under custody amounted to €104.2 billion. At the same date, the Group had 3,172 branches in Italy, together with 117 branches and 19 representative offices abroad.

        The Group is a full service banking group which provides a broad range of credit and financial products and services to its customers in Italy and abroad. The Group's business consists of banking, asset management and capital markets activities, as well as certain other banking-related services. The Group's principal banking operations are retail banking, corporate banking, mortgage lending, medium-and long-term lending, investment banking (including advisory, structured finance and merchant banking), asset management and insurance. In addition, the Group is active in treasury and trading operations. Sanpaolo IMI's capital markets activities include participating as a specialist in the Italian government bond market, and participating as a leading underwriter and trader in the Italian domestic equity market, and as lead manager in Eurobond issues and warrants.

Business Sectors

        The Group is organized for operational, management and budget purposes by Business Sector.

        Effective on July 18, 2005, the Sanpaolo IMI Group has adopted a new organizational model whereby the previous six Business Sectors (Commercial Banking, Asset Management, Investment Banking, Personal Financial Services, Insurance Activities, Public Authorities and Entities) were replaced by the following Business Sectors:

    Banking,

    Savings and Assurance,

    Asset Management and International Private Banking, and

    Central Functions.

        Each Business Sector comprises different Business Areas. Each Business Area has, within the Group, a certain level of autonomy and is subject to individual monitoring and budgeting activities.

Business Sector

Business Sectors

  Business Areas

Banking   Retail & Private
    Corporate
    Other Activities

Savings and Assurance

 

Banca Fideuram
    A.I.P.

Asset Management and International Private Banking

 

Asset Management
Investment Management Advisory and International Private Banking

        In addition, to these Business Sectors, the Group also has a corporate center known as Central Functions, which is responsible for and includes the following activities:

    holding activities;

    the management of equity investments;

    finance and treasury functions; and

    the Macchina Operativa Integrata ("MOI" or integrated operating vehicle).

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        The following chart provides an overview of the internal operational organization of the Sanpaolo IMI Group as of December 31, 2005:

GRAPHIC


(1)
On January 24, 2006 the concentration of Sanpaolo IMI Asset Management into the Savings and Assurance sector was decided by Sanpaolo IMI Board of Directors. The shareholdings in Banca Fideuram, A.I.P. and Sanpaolo IMI Asset Management are part of the Eurizon group.

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        The main differences compared to the prior organizational structure are:

    the subdivision of Banking Business Sector (previously Commercial Banking Business Sector) into the Business Areas "Retail & Private", "Corporate" and "Other Activities";

    the incorporation of Public Authorities and Entities, dedicated to the support of local government structures and public bodies, Investment Banking, which operate through Banca IMI, the Group investment bank, and Sanpaolo IMI Private Equity, responsible for the Group's private equity activities into the Banking Business Sector;

    the concentration of the insurance activities of A.I.P. and the asset gathering activities of Banca Fideuram into the Savings and Assurance Business Sector; and

    the incorporation of investment management advisory and international private banking activities into the Asset Management and International Private Banking Business Sector.

    Banking Business Sector

        The Banking Business Sector constitutes the Group's core business and represents the reference point for the definition, development and co-ordination of the commercial strategies of all the networks of the Group. It comprises the following business areas:

    Retail & Private, which operates through the branches of the Parent Bank, Cassa di Risparmio di Padova e Rovigo, Cassa di Risparmio in Bologna, Cassa di Risparmio di Venezia, Friulcassa, Banca Popolare dell'Adriatico and Sanpaolo Banco di Napoli to serve customers made up of households, small businesses and private clients. It also comprises Neos Banca, the company specialized in consumer credit, and Farbanca, the electronic bank for the pharmaceutical and health sector;

    Corporate, which operates to serve corporate customers; it includes the following divisions: Companies, which manages relations with small- and medium-sized businesses through the network of the Parent Bank, Cassa di Risparmio di Padova e Rovigo, Cassa di Risparmio in Bologna, Cassa di Risparmio di Venezia, Friulcassa, Banca Popolare dell'Adriatico and Sanpaolo Banco di Napoli; Large Groups, which is responsible for managing relations with the major groups of domestic and international importance; International, which includes the Parent Bank's foreign network with focus on corporate lending, the Irish subsidiary Sanpaolo IMI Bank Ireland and Sanpaolo IMI Internazionale supervises the group's activities in Central Eastern Europe; Public Authorities and Entities, dedicated to developing relations with reference to organizations and institutions. Banca IMI, the Group's investment bank, Sanpaolo IMI Private Equity, responsible for private equity activities, Sanpaolo Leasint, active in the leasing compartment, and the Structured Finance unit, which is dedicated to project financing and specialized structured lending, are also part of the Corporate business area; and

    Other activities which include: IMI Investimenti, which is dedicated to the management of major industrial shareholdings; and GEST Line, which manages the Group's tax collection activities.

        The implementation of the plan to rationalize the Group's distribution network was continued in 2005. It involved the transfer of operating points between commercial banks based on the principle that the branches within a reference territory with a specific historical brand, such as Cassa di Risparmio di Padova e Rovigo, Cassa di Risparmio in Bologna, Cassa di Risparmio di Venezia and Friulcassa (referred to as the "North East Networks"), should belong to the bank holding that brand. In January 2005, nine Cassa di Risparmio di Padova e Rovigo operating points and 21 Cassa di Risparmio in Bologna operating points were transferred to the Parent Bank and 10 Parent Bank operating points were transferred to Cassa di Risparmio di Venezia and a further 10 to Friulcassa. In the second half of 2005, the implementation of the Parent Bank network organizational and commercial model (which

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consists of several territorial areas, each of which supervises its respective territory and coordinates the branches operating in that territory by market segment) in other banking networks was completed.

        A second wave of rationalization is expected to be completed in 2006 and will involve the banks in the North East and Emilia as well as the branches of Banca Popolare dell'Adriatico and the Parent Bank in the territorial re-ordering of the Adriatic region. On May 16, 2006, Sanpaolo IMI Board of Directors approved the merger of Banca Popolare dell'Adriatico into Sanpaolo IMI. The merger was completed on June 17, 2006. In connection with the merger the Group's branches in the Adriatic region will be conferred to Sanpaolo Banca dell'Adriatico, a new entity. In June 2006, Sanpaolo Banca dell'Adriatico has increased its capital from €6.3 million to €254.3 million. The capital increase was entirely subscribed by Sanpaolo IMI.

        A further phase foreseen for 2007 is the integration of the Group's distribution networks in Romagna with those of Cassa dei Risparmi di Forlì, as part of the Romagna project jointly run by Sanpaolo IMI and the Fondazione Cassa dei Risparmi di Forlì. On December 29, 2005, Sanpaolo IMI acquired a further 8.5% stake in the share capital of Cassa dei Risparmi di Forlì, for €65.7 million. The investment increases the Group's overall equity interest in Cassa dei Risparmi di Forlì to 38.3% and follows the exercise of a put option by the Fondazione Cassa dei Risparmi di Forlì, provided for in the contract of November 29, 2000 among the Fondazione Cassa dei Risparmi di Forlì, Sanpaolo IMI and Cassa di Risparmio di Firenze. With the conferral of the branches in the Romagna area in 2007, Sanpaolo IMI will acquire control of Cassa dei Risparmi di Forlì. The completion of this project, which is in line with the Italian local bank model, is aimed at strengthening the Group's competitive position in the area.

    Retail & Private Business Area

        Initiatives were taken in 2005 to facilitate access to loans for small businesses. A program was set up to support investments aimed at promoting the competitiveness and quality of products and services with the support of major guarantee consortia, such as Unionfidi, Eurofidi and Confidi, providing guarantees to the financings provided by the banks of the Group active in this Business Area. The program is characterized by the offer from retail branches of specific medium-term financing with a maximum duration of five years at favorable terms and conditions, and prompt and streamlined response. Assistance will also be available through agreements with leading consultancy operators and university faculties. Moreover, the Group has established agreements with the small business associations such as Confartigianato and Coldiretti Piemonte aimed at improving mutual collaboration and easing access to financing.

        In an effort to increase market shares in the retail and private sector, innovative residential mortgage and consumer credit products have been introduced. With reference to residential mortgages, the range of products has been broadened with the launch of a mortgage financing the purchase of property for up to 100% of the property value. The offer of this product was made possible through an agreement with Genworth Financial, a leading U.S. insurance company specializing in residential real-estate mortgages, which provides specific insurance coverage for credit risks exceeding 80% of the value of the property. Moreover, an agreement was defined with Banca Fideuram for the placement of residential mortgages to private clients through financial planners. The agreement is designed to strengthen the distribution capacity of the Group with cross-selling of products previously exclusively placed by the operating points.

        In consumer credit, the growing trend for family debt and the continuing growth potential of this area prompted the simplification and rationalization of the organizational structure of Neos Banca (formerly Finemiro Banca), the company that, together with its subsidiaries, is active in consumer banking. The Neos Banca group's identity was renewed in July 2005 through its new name, followed by a simplification and rationalization of the organizational structure which was concluded in

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September 2005. Finally, the strategic importance assigned to this area led to the acquisition by the Group of a 2.7% share in Neos Banca formerly held by Cassa di Risparmio di San Marino. The transaction increased Sanpaolo IMI's overall equity interest in Neos Banca to 99.5%, further concentrating the value of Neos Banca's business for the Group.

        In connection with the Turin 2006 Olympic Winter Games, Sanpaolo IMI initiated a number of commercial activities aimed at exploiting the role played by the Group as one of the Game's main sponsor, such as the offer of Olympic-themed credit, pre-paid and revolving cards, ticketing and a greater presence in the Olympic areas through a strengthening of the service, including through the creation of temporary branches.

    Corporate Business Area

        Confirming the importance given to developing transactions with the small- and medium-size enterprises ("SME") segment, collaboration projects continued in 2005 with guarantee consortia (in 2004 and 2005 the Group signed numerous agreements with guarantee consortia, to make SME financings easier; the guarantee consortia can guarantee the financing) aimed at consolidating existing relations and acquiring new customers with a medium/high credit standing. With regard to medium-term financing for technological innovation in businesses, the initial aggregate ceiling of €250 million allocated at the beginning of July 2004 for applied research loans was increased to €500 million. Moreover, in 2005, there was an increase of the cost limits of the projects to be financed, extending the offer to larger businesses, and a simplification in the procedures for the issuance of loans. Depending on the rating of the borrower, the Group finances up to 100% of the cost of the research project, with a maximum of €4 million (€2 million in 2004) per loan and the disbursement of the loan in 2 tranches of 50% each (3 tranches in 2004); part of the loan can be guaranteed by guarantee consortia. Furthermore, a new product was defined in October 2005 that provides financial support for organic plans for investment in technology for businesses purchasing new technologies on the market. The financing methods are similar to those for applied research loans and outlined above.

        International Activities.    The Group's initiatives in the international area mainly pursued the objective of supporting the development abroad of Italian businesses in direct investment and commercial trade.

        With regard to the Mediterranean basin, a representative office was opened in Casablanca, Morocco to support Italian enterprises there, strengthening the presence of the Group in North Africa, where the commercial agreements entered into in 2004 with Banque Marocaine du Commerce Extérieur ("BMCE") and Banque Internationale Arabe de Tunisie ("BIAT", in which the Group has a shareholding of 5.6% stake) are operational. In Asia, a commercial agreement has been signed in 2005 with ICICI Bank, one of the leading banks in India. The agreement is aimed at facilitating access to services and financings in India's local currency, through ICICI Bank, for Sanpaolo IMI clients operating in India and it makes remittance of funds from Italy easier for Indian households. Moreover, a representative office was opened in Dubai as a reference point for Italian enterprises working in the Persian Gulf and with the further aim of developing relations with banking institutions in the area.

        With regard to Eastern Europe, on December 7, 2005, Sanpaolo IMI entered into an agreement to acquire 80% of Banca Italo Albanese ("BIA") from Gruppo Capitalia and the Albanian Finance Ministry, equal holders of the share capital of BIA. After obtaining the required authorizations of the applicable supervisory entities, the transaction was completed on May 10, 2006 for a purchase price of €42.5 million. Through this transaction, the Group aims to consolidate its presence in Eastern Europe, where it already has investments in Hungary through Inter-Europa Bank (85.9%), Romania through Sanpaolo IMI Bank Romania (98.6%) and Slovenia through Banka Koper (63.9%).

        Finally, Sanpaolo IMI has subscribed to the Global Trade Finance Program of the International Finance Corporation ("IFC") in Washington, D.C., which aims to promote development of trade with

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emerging and developing countries. To achieve this aim, the IFC acts through the subscribing banks, offering guarantees of payment for supplies to countries with a high risk profile. As a member of the program, Sanpaolo IMI has a partial or total coverage of the risks underwritten with banks in emerging markets for the import/export of goods and services and may extend customer risk coverage in new markets, including especially complex transactions.

        Investment Banking.    Banca IMI strengthened its position in the Italian market in 2005, intensifying its corporate finance and structured finance activities and participating in major operations such as the acquisition of a shareholding in Wind (an Italian mobile phone network), by the Weather/Sawiris group and the placement of the shares of Fondo Immobili Pubblici (public real-estate assets), the largest real-estate mutual fund in Italy. In the second half of 2005, Banca IMI, in accordance with the guidelines of the 2006-2008 Plan of the Sanpaolo IMI Group, defined some initiatives to maximize integration and synergies of its activities within the Group. These initiatives provide for Banca IMI to use its specialist activities to support the bodies responsible for the customer segments, not only in the offer of financial services to businesses but also in the creation of financial products for households. Banca IMI plans to selectively develop its activities on financial markets, exploiting the critical mass of customer dealing flows. Banca IMI also plans to take advantage of the opportunities offered by international markets to make the most of its distinctive expertise relating to investment banking in Europe, such as market making, sales and structuring activities.

        Public Authorities and Entities.    In the sector of Public Authorities and Entities, dedicated to the development of relations with public organizations and institutions, commercial presidiums (employees of the Group dedicated to developing business opportunities in their assigned territorial areas) were formed in April 2005 with the goal of improving our competitive position with regard to the reference customers. These presidiums distributed around the Italian territory and entirely dedicated to their assigned customers, are responsible for initiating origination activities and for supporting operating points in their promotional functions. This action implemented the agreement stipulated at the end of 2004 between Banca OPI and the banking networks of the Group aimed at maximizing cross-selling between the various structures in the relative areas of competence (medium-/long-term financing and bridging loans for medium-/long-term transactions for Banca OPI; short-term loans for the Group's banking networks).

    Fiat and Italenergia

        As of December 31, 2005 the Group held a 4,39% stake in the Fiat S.p.A. group ("Fiat"); the increase, in comparison with December 31, 2004 (1,25%), is a consequence of the conversion of the Fiat Convertible Facility, as defined below. As of June 12, 2006 the Group held a 0.84% stake in Fiat. Fiat is also a major client of the Group.

        The Fiat Convertible Facility.    Pursuant to a framework agreement (the "Framework Agreement") among Sanpaolo IMI, Capitalia S.p.A. ("Capitalia"), Banca Intesa S.p.A. ("Intesa") and Unicredito Italiano S.p.A. ("Unicredito") (together the "Participating Banks"), on July 26, 2002 the Participating Banks granted to Fiat a €3 billion loan (the "Fiat Convertible Facility"), consisting mainly of a conversion of Fiat's then current short-term debt owed to the Participating Banks. The Fiat Convertible Facility was a mandatorily convertible facility. The maturity of the Fiat Convertible Facility was September 2005. The Sanpaolo IMI Group's participation in the Fiat Convertible Facility amounted to €400 million.

        The Fiat Convertible Facility was converted on September 20, 2005. The conversion was effected at the share price of 10,28 Euro, calculated pursuant to the terms of the Fiat Convertible Facility, increasing Sanpaolo IMI's overall share in Fiat up to 4,39% of ordinary capital (38.910.496 additional shares, decreased to 38.775.860 after the exercise of the pre-emption right reserved to the actual

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shareholders). On January 20, 2006, the Group sold the entire share capital deriving from the Fiat Convertible Facility at the share price of €7.70.

        The conversion of the Fiat Convertible Facility produced a positive differential of €51 million compared to the negative evaluation of €167 million in the embedded derivative made on the first application of IAS/IFRS on January 1, 2005, (the differential was calculated on the basis of the price of Fiat shares at the conversion date which was €7.29 per Fiat share, an impairment of €116 million) to which €2 million must be added for the re-evaluation of the position listed in the trading portfolio as at December 31, 2005. The sale of Fiat shares, completed in January 2006, gave rise to a further capital gain of €11 million that will be recorded in the 2006 accounts reducing the gross capital loss attributable to the Fiat Convertible Facility to €103 million. Such amount does not take into consideration neither the profits from fees related to the Fiat Convertible Facility nor profits from other operations, such as the Italenergia bis—Edison transaction described below, contemplated by the Framework Agreement. Including such profits the overall economic effect of the Fiat Convertible Facility is, substantially, at break even.

        Italenergia bis—Edison.    Italenergia Bis S.p.A. ("Italenergia Bis") was the holding company of Edison S.p.A. ("Edison"), the holding company of Italy's second largest energy group. Edison produces, imports and sells electric power and hydrocarbons.

        The Italenergia Bis group structure was the result of a process that started in July 2001 with a public tender offer to acquire Montedison S.p.A.—which at that time controlled Edison—through a vehicle called Italenergia S.p.A., owned by Fiat (38.6%), Electricité de France ("EDF" 18%), Carlo Tassara (20%) and by a group of three banks: Capitalia (9.6%), IMI Investimenti of the Sanpaolo IMI Group (7.8%), and Banca Intesa (6%). The three banks are collectively referred to as the "Banking Shareholders".

        In June 2002, the Banking Shareholders, Fiat and EDF entered into an agreement for the reorganization of the Edison group. The plan, completed in December 2002, provided for the creation of Italenergia Bis, the new holding company where all shareholders of Italenergia transferred their interests. Edison was merged into Italenergia and the new entity was called Edison S.p.A. ("New Edison").

        Fiat sold (the "Fiat Sale") to the Banking Shareholders a 14% interest in Italenergia Bis. As part of this transaction, the Sanpaolo IMI Group purchased another 4.66% interest in Italenergia Bis, increasing its total equity interest in Italenergia Bis from 7.82% to 12.48%. In connection with the sale, the Banking Shareholders, Fiat and EDF entered into shareholders' agreements which included put and call options and drag along options.

        At the end of 2004, EDF commenced arbitration proceedings, claiming that Italian legislative and regulatory actions had frustrated the purpose of its put and call options, arbitration proceedings in order to obtain a ruling declaring the termination of the effectiveness of EDF's put and call options or the suspension of their terms. IMI Investimenti together with the other Banking Shareholders, filed its response in the arbitration proceedings. In February 2005, the Banking Shareholders notified EDF of their intention to exercise the put options. In March 2005, the Banking Shareholders notified Fiat of their intention to exercise the drag along option. In September 2005, as a result of specific agreements reached among the Italenergia Bis' shareholders, the arbitration proceeding terminated and IMI Investimenti received €611 million for the sale to EDF of the entire stake held by the Group in Italenergia Bis, including the disposal of Italenergia Bis warrants and Edison shares. The disposal was completed in October 2005. Pursuant to a further agreement with EDF relating to Edison warrants, IMI Invesitmenti received an additional €29 million. The total proceeds of €640 million received pursuant to these disposals gave rise to a capital gain of €136 million.

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    Savings and Assurance Business Sector

        The Savings and Assurance Business Sector operates through the networks of financial planners of the Banca Fideuram group to serve customers with medium/high savings potential, and A.I.P., the company that has been operational since December 1, 2004 and, as a result of the insurance restructuring, comprises all the Group's insurance activities.

        The Savings and Assurance Business Sector was formed to strengthen the rationalization of the Group's insurance activities and further increase their industrial value, economic weight and market relevance. On July 5, 2005 the Board of Directors of Sanpaolo IMI decided to concentrate the insurance activities of Assicurazioni Internazionali di Previdenza (A.I.P.) and the asset gathering activities of Banca Fideuram in the Savings and Assurance Business Sector. On November 10, 2005, the investments previously held by Sanpaolo IMI in A.I.P. and Banca Fideuram were transferred to a newly-founded company reporting directly to the Parent Bank, which is currently named Eurizon Financial Group S.p.A. ("Eurizon").

        Eurizon combines Group's skills in production and distribution of insurance and financial products to meet the needs of customers to protect savings and provide personal assurance. The aims of this organizational and company reconfiguration may be described as:

    strategic positioning;

    focusing on existing structures and activities, with the creation of a large and highly efficient production/ distribution platform; and

    strategic options for growth opportunities.

        The reorganization also provides Eurizon's principal operating companies, A.I.P. and Banca Fideuram, with opportunities for positive strategic and business returns. In particular, both companies hope to:

    confirm their respective current mission (leadership in asset management for Banca Fideuram and excellence in the insurance business for A.I.P.) and business model;

    benefit from synergies for the production and distribution of long-term savings, pension and insurance, expediting the process on behalf of the customer;

    improve their respective position through direct affiliation to a major holding company with an integrated strategy focused on asset management and assurance.

        With reference to Egida, the Group's casualty insurance company which is 50% controlled by A.I.P, on October 25, 2005, the Board of Directors of Sanpaolo IMI authorized A.I.P. to exercise the call option for the remaining 50% of the company capital held by Reale Mutua. The acquisition of total control of Egida occurred on May 3, 2006 for €26 million. The Board of Directors of Sanpaolo IMI on March 23, 2006 authorized the merger by incorporation into Egida of Fideuram Assicurazioni (wholly owned by A.I.P.), the other casualty company of the Group. The merger, expected to be completed by August 2006, is subject to ISVAP authorization.

        The following information, and the information relating to Eurizon contained elsewhere in this annual report, does not constitute an offer of the Securities of Eurizon or any other member of the Group for sale in the United States. The securities described have not, and will not, be registered under the U.S. Securities Act of 1933 or with any securities regulatory authority of any state or other jurisdiction in the United States and may not be offered or sold, directly or indirectly, into the United States unless the securities are so registered or an exemption from the registration requirements is available.

        In an effort to further strengthen the Savings and Assurance Business Sector, on January 24, 2006, the Board of Directors of Sanpaolo IMI decided to transfer Sanpaolo IMI Asset Management, a

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company wholly owned by the Parent Bank, to Eurizon. The Board of Directors of Sanpaolo IMI also authorized Eurizon to prepare for a possible initial public offering in Italy of its shares and the listing on the Milan Stock Exchange of Eurizon. It is expected that, through such offer and listing (which will not include any public offering in the United States) Eurizon will be able to directly access the Italian capital markets, thus enabling Eurizon to further develop its products with high capital absorption. The offer and listing are currently expected to be completed in the second half of 2006 subject to market conditions, though no assurance can be provided that the offering will be completed by such time, or at all.

    Asset Management and International Private Banking Business Sector

        The Asset Management and International Private Banking Business Sector includes Sanpaolo IMI Asset Management and its subsidiaries, dedicated to providing asset management products to the Group networks, as well as institutional investors, Sanpaolo Bank (Luxembourg), which operates in international private banking, and Sanpaolo Fiduciaria.

        This sector consists of the business areas of Asset Management, dedicated to developing wealth management for private and institutional clients, and Investment Management Advisory and International Private Banking, aimed at developing advisory services for high-standing network customers and international private banking, through the companies falling within its perimeter.

        With the goal of obtaining higher levels of efficiency in asset management, in the last part of 2005, Sanpaolo IMI Institutional Asset Management, the SGR specialized in management and advisory services for institutional customers, was merged into Sanpaolo IMI Asset Management which already held total control of Sanpaolo IMI Institutional Asset Management. The merger lead to the development of insurance, asset management and asset gathering activities, with improved operational streamlining as well as synergies of purpose and cost obtained by the integration of management, commercial and product development structures.

    Central Functions

        Central Functions includes holding activities, finance, the management of certain shareholding investments (including the Group's shareholdings in Cassa di Risparmio di Firenze, Cassa dei Risparmi di Forlì and Banca delle Marche), the Group's IT operating platform (MOI) and the Group's credit policy. The main task of Central Functions is the governance, support and control of the Group's Business Sectors.

        Central Functions sustains costs using a centralized system on behalf of other Group companies and allocates the costs to the operating units only partially on the basis of standard prices. This method responds to the need to make Central Functions responsible for cost savings.

    Cassa di Risparmio di Firenze

        An agreement entered into in November 1999 by Ente Cassa di Risparmio di Firenze, the major shareholder of Cassa di Risparmio di Firenze, Sanpaolo IMI and BNP Paribas, concerning the latter's equity interest in Cassa di Risparmio di Firenze, expired on May 1, 2005. Pursuant to the agreement, upon its expiration and in the absence of its renewal by Ente Cassa di Risparmio di Firenze, Sanpaolo IMI should have exercised, in the 60 days following the expiration of the agreement, the right to purchase ordinary shares of Cassa di Risparmio di Firenze from Ente Cassa di Risparmio di Firenze corresponding to 10.78% of the share capital of Cassa di Risparmio di Firenze at a price of, under normal circumstances, 1.5 times the average trading price of Cassa di Risparmio di Firenze ordinary shares in the three months preceding the exercise of the Group's right to purchase.

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        Following the expiration of the November 1999 agreement, Sanpaolo IMI confirmed to Ente Cassa di Risparmio di Firenze and the other signatory of the agreement its availability to discuss, without prejudice to the aforementioned purchase right, the terms of a new agreement. Consequently, on June 27, 2005, Sanpaolo IMI and Ente Cassa di Risparmio di Firenze agreed to extend the expiration of Sanpaolo IMI's purchase right through September 30, 2005.

        Nevertheless, on September 28, 2005 Sanpaolo IMI, as a consequence of the failure to renew the November 1999 agreement, decided to exercise the purchase right at a share price of €3 per share, for an expected disbursement of €368 million. Such price implies a premium of approximately €75 million with respect to the average trading price of Cassa di Risparmio di Firenze shares in May 2005.

        The validity of Sanpaolo IMI's right to purchase Cassa di Risparmio di Firenze shares was disputed by the Ente Cassa di Risparmio di Firenze. Because of the dispute, the arbitration proceeding required by the November 1999 agreement was initiated and is still outstanding.

    SI Holdings

        In the second half of 2005, the Sanpaolo IMI Group entered into a shareholders' agreement with five other banks with shareholdings in SI Holding, which totally controls CartaSì, the Italian leader (source: market studies and Bank of Italy researches) in the credit card sector, in order to acquire joint control of SI Holdings. On January 27, 2006, the banks in the agreement subscribed the offer for a total number of shares equal to almost 56% of the share capital of SI Holding. The Group's total stake in SI Holding is 35.2% for an investment of €36 million. Following the completion of the purchase, and pending the necessary regulatory approval, the overall investment of the pool of banks will total 80% of the capital of SI Holding. With this transaction, the participating banks intend to keep CartaSì within the interbank framework and give continuity to the service offered. At the same time, the banks plan to rationalize and improve the efficiency of CartaSì services.

The Distribution Network

        The Group's distribution network is divided into territorial areas and bank networks with central structures, which provide uniform and complete supervision of the respective territory. In order to effectively satisfy the different needs of households and businesses, the distribution model is based on specialization of the branches according to the type of customer served (corporate, private and retail). Internet and phone and mobile banking services also support operations with customers.

        In 2004 and 2005, the Group continued to develop and rationalize its distribution network. In particular:

    The integration of the banking networks (Cassa di Risparmio di Padova e Rovigo, Cassa di Risparmio in Bologna, Cassa di Risparmio di Venezia and Friulcassa, also referred to as the "North-East Networks") operating in the north east of Italy and Banca Popolare dell'Adriatico was completed through the migration of the IT systems to that of the Parent Bank, together with the adoption of the Sanpaolo IMI organization and commercial structure. The distribution model of the Parent Bank network, characterized by branch specialization according to customer type (retail, private and companies) has now been extended to all the Group's networks.

    In 2004, order to rationalize its presence in Italy and strengthen the competitive position of the networks, optimizing the brand names, 113 operating points of the Parent Bank network in the provinces of the Triveneto and Emilia were transferred to the North-East Networks; and 30 operating points of Cassa di Risparmio di Padova e Rovigo and Cassa di Risparmio in Bologna located outside their respective reference territories (namely Rome, Milan and Lodi) were transferred to the Parent Bank network. In 2005, 10 operating points of the Parent Bank network were transferred to Cassa di Risparmio di Venezia and a further 10 to Friulcassa.

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        As of December 31, 2005, the Group had a network of 3,172 banking branches in Italy, distributed as follows: 34.1% in the North West, covered extensively by the Parent Bank's network; 27.2% in the North East, which comprises the branches of four networks (Cassa di Risparmio di Padova e Rovigo, Cassa di Risparmio in Bologna, Cassa di Risparmio di Venezia and Friulcassa); 25.9% in Southern Italy and in the Islands, headed by Sanpaolo Banco di Napoli on the mainland and by the Parent Bank's network on the Islands. The remaining 12.8% of the Group's network is located in Central Italy, with branches of the Parent Bank and Banca Popolare dell'Adriatico.

        In addition, branches of Cassa dei Risparmi di Forlì (in which we hold a 38.25% stake), Cassa di Risparmio di Firenze (in which we hold a 18.7% stake) and Banca delle Marche (in which we hold a 7% stake), with which the Group has distribution agreements, operate in the North East and Central regions.

        With reference to commercial banks, the distribution network, as of the end of December, included 3,050 branches in Italy, 39 more than in 2004.

        The share of total banking branches held by the Group on a national level, as of December 31, 2005, was 10.1% (source: internal data and Bank of Italy). In particular, the Group had an 11.2% share in the North West, 10.2% in the North East, 5.6% in the Centre and 13.4% in the South and in the Islands.

        Regarding multi-channel infrastructures, such as internet and telephone banking, at the end of December 2005, direct banking contracts with retail customers rose to almost one million, an increase of 25% compared to December 31, 2004. Internet banking contracts with companies amounted to 66,600 units, for an increase of over 33% from the beginning of 2005.

        Customer service is also provided through the network of automated teller machines or ATMs (at the end of December 2005, these included 1,944 Parent Bank's ATMs, 849 Sanpaolo Banco di Napoli ATMs and 1,091 ATMs of the four bank networks of the North East and Banca Popolare dell'Adriatico), as well as through POS terminals (38,879 for Parent Bank's network, 15,701 for Sanpaolo Banco di Napoli network and 20,577 for the latter networks).

        The Group's distribution structure also includes 4,151 financial planners of Banca Fideuram and Sanpaolo Invest SIM. The Group operates abroad through a network of 117 branches, 19 representative offices and 2 desks. In 2004, we became one of five members of the Inter-Alpha Group of Banks, which is an association of several major European banks, to be represented by the Inter-Alpha Group representative office in Tehran, Iran. In addition to the international network of the Parent Bank, the external network mainly comprises branches of the subsidiary banks operating in Central Eastern Europe.

        Representative offices are Parent Bank's offices outside of Italy, operated, with the exception of the Tehran office which is operated by Inter-Alpha staff, by Sanpaolo IMI staff. The representative desks are offices operating on foreign markets through commercial relations held with others banks.

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They are also reference points for Italian clients to develop activities in the applicable countries, without carrying out lending and funding activities.

 
  At December 31,
   
Distribution network (Italy and abroad)

  % Change
December 31, 2005
December 31, 2004

  2005
  2004
Banking branches and area offices   3,289   3,239   1.5%
—Italy   3,172   3,126   1.5%
of which: Parent Bank   1,415   1,371   3.2%
  North—East Networks and Banca Popolare dell'Adriatico   948   952   (0.4)%
  Sanpaolo Banco di Napoli   687   688   (0.1)%
—Abroad   117   113   3.5%
Representative offices   19   18   5.6%
Exclusive financial planners   4,151   4,317   (3.8)%
Banca Fideuram   3,112   3,244   (4.1)%
Sanpaolo Invest SIM   1,039   1,069   (2.8)%
 
Domestic distribution network
(at December 31, 2005)

  Parent Bank
  North East
Networks(1)

  Banca Popolare
dell'Adriatico

  Sanpaolo Banco
di Napoli

  Other
networks(2)

  Total
North-West
(Piedmont, Val d'Aosta, Lombardy, Liguria)
  1,039   73.4%   1   0.1%   2   1.4%       41   33.6%   1,083   34.1%
North-East
(Trivento and Emilia Romagna)
  5   0.4%   806   99.9%   17   12.1%       34   27.9%   862   27.2%
Center
(Tuscany, Marche, Umbria, Lazio, Abruzzo, Molise)
  254   18.0%       122   86.5%   4   0.6%   27   22.1%   407   12.8%
South & Islands
(Campania, Puglia, Basilicata, Calabria, Sicily and Sardinia)
  117   8.3%           683   99.4%   20   16.4%   820   25.9%
   
 
 
 
 
 
 
 
 
 
 
 
Banking branches and area offices in Italy   1,415   100.0%   807   100.0%   141   100.0%   687   100%   122   100.0%   3,172   100.0%
   
 
 
 
 
 
 
 
 
 
 
 

(1)
Comprises Cassa di Risparmio di Padova e Rovigo, Cassa di Risparmio in Bologna, Cassa di Risparmio di Venezia and Friulcassa.

(2)
Includes the branches of Banca Fideuram (91), Neos Banca (25), Farbanca (1), Banca Imi (1) and Banca Opi (4).

Assets managed and administered on behalf of customers

        Assets under management represent client financial assets managed by the Group on behalf of its clients. Assets under administration present client financial assets held in custody by the Group on behalf of the clients.

        At December 31, 2005, asset management volumes amounted to €158 billion, an increase of €13.2 billion, or 9.1%, from €144.8 billion at December 31, 2004. The increase was due to the positive performance of the markets (€7.7 billion) and the net inflow of €5.5 billion.

        At December 31, 2005, the Group's mutual funds and fund-based portfolio management totalled €106.2 billion, an increase of €8.3 billion, or 8.5%, from €97.9 billion at December 31, 2004. The increase was primarily due to the positive trend in subscriptions as well as to the positive performance in the securities markets. In 2005, growth in share prices triggered a gradual turn away from the more liquid forms of investment, directing savers toward products with greater added value and maintaining

70



high diversification of the portfolio, aimed at limiting the risk profile adopted. The weight of equity and balanced funds grew; in terms of the various types of low-risk funds, the impact of liquidity funds decreased, while bond funds stabilized, penalized by forecasts of a hike in interest rates.

        As regards the types of funds, at December 31, 2005, the value of bond and equity funds represented, 44.1% and 27.7%, respectively, of the total value of Group funds, compared to 44.0% and 24.8% at December 31, 2004, respectively. At December 31, 2005, the Group was the leader in the domestic market for mutual funds, with a market share of 19.1% (source: Assogestioni, Italian mutual funds association).

        In 2005, the life insurance sector confirmed the growth already shown in 2004. At December 31, 2005, life technical reserves, were €45.9 billion, an increase of €5.1 billion, or 12.3%, from €40.8 billion at December 31, 2004. The increase was primarily due to a net increase in premiums of €3.5 billion. In 2005, there was an increase in customers' interest both in traditional policies such as saving policies, investment policies and pension policies, which represented 44% of the premium inflows in the life insurance segment, and in policies with greater financial content, such as index-linked and unit-linked policies, which represented 56% of the premium inflows. At December 31, 2005, the Group had a share of the domestic life insurance market of 12.2% in terms of technical reserves and 12.4% in new business (premiums on new policies) (source: ANIA, Italian Insurance Companies Association).

        At December 31, 2005, asset administration volumes reached €104.2 billion, an increase of €10.2 billion, or 10.9%, from €94 billion at December 31, 2004.

        The following tables show, at the dates indicated, the amounts of assets managed and administered on behalf of customers:.

 
  At December 31,
 
  2005
  2004
  % 2005/2004
EU GAAP

  (millions of €)

   
  (millions of €)

   
  (%)

  (%)

  (%)

Asset management   157,990   60.2%   144,813   60.6%   9.1%
Asset administration   104,242   39.8%   93,980   39.4%   10.9%
   
     
       
Total assets managed and administered   262,232       238,793        
   
     
       

        The following table shows, at the dates indicated, a breakdown of assets under management.

 
 
  At December 31,
 
  2005
  2004
  % 2005/2004
EU GAAP

  (millions of €)

   
  (millions of €)

   
  (%)

  (%)

  (%)

Mutual funds and fund-based portfolio management   106,219   67.2%   97,920   67.6%     8.5%
Portfolio management   5,879   3.7%   6,044   4.2%   (2.7)%
Life technical reserves and financial liabilities   45,892   29.1%   40,849   28.2%   12.3%
   
     
       
Total assets management   157,990       144,813        
   
     
       

71


        The following tables show, for the periods reported, the breakdown in the change in the amount of assets under management between net inflow or outflow and the performance effect.

 
  For the year ended
December, 31,

 
EU GAAP
Change in Assets under Management

 
  2005
  2004
 
 
  (millions of €)

 
Net inflow (outflow) for the period   5,476   (3,686 )
—Mutual funds and fund-based portfolio management   2,561   (7,555 )
—Portfolio management   (584 ) (1,647 )
—Life policies   3,499   5,516  
Performance effect   7,701   4,916  
Change in assets under management   13,177   1,230  

        The following tables show, at the dates indicated, a breakdown of Group mutual funds by type of fund.

EU GAAP
Group Mutual Funds by Type

  At December 31, 2005
  At December 31, 2004
 
  (Percentages)

Equity   27.7%   24.8%
Balanced   9.3%   8.0%
Bond   44.1%   44.0%
Liquidity   18.9%   23.2%
   
 
Total Group mutual funds   100.0%   100.0%
   
 

Activities in financial markets

    Treasury and financial management activities

        The control of treasury activities and the management of financial risks of the domestic banking networks are centralized in the Finance Division of the Parent Bank.

        As regards treasury activities, the Parent Bank guarantees direct access to money markets, to spot and forward exchange rate markets and to securities, as well as to payment systems, and controls the liquidity policy of the Group. For access to the medium-/long-term derivatives market, the Treasury division of the Parent Bank uses the subsidiary Banca IMI, which provides these services by taking advantage of the synergies obtained from its own market-making activities.

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        The financial risk management policies related to the banking books of the Group's banking networks (Asset and Liability Management) are discussed in Item 11. Quantitative and Qualitative Disclosures about Market Risk on page 194 below.

 
  At December 31, 2005
  At December 31, 2004
   
 
  Change
 
  (millions of €)

   
  (millions of €)

   
 
  (%)

  (%)

  (%)

Deposits and loans to credit institutions                    
Assets(2)   27,838   100.0%   24,367   100.0%   14.2%
  —Parent Bank   15,829   56.9%   12,625   51.8%   25.4%
  —Banca IMI   6,093   21.9%   6,901   28.3%   (11.7)%
  —Others   5,916   21.3%   4,841   19.9%   22.2%
Liabilities   35,683   100.0%   28,293   100.0%   26.1%
  —Parent Bank   19,786   55.4%   11,293   39.9%   75.2%
  —Banca IMI   7,170   20.1%   8,701   30.8%   (17.6)%
  —Others   8,727   24.5%   8,299   29.3%   5.2%

Securities(1)(2)

 

68,319

 

100.0%

 

65,271

 

100.0%

 

4.7%
  —Parent Bank   8,294   12.1%   7,517   11.5%   10.3%
  —Banca IMI   11,480   16.8%   11,661   17.9%   (1.6)%
  —AIP   39,927   58.4%   38,472   58.9%   3.8%
  —Others   8,618   12.6%   7,621   11.7%   13.1%

Derivatives

 

 

 

 

 

 

 

 

 

 
Hedging derivatives (notional)   57,434   100.0%   75,604   100.0%   (24,0)%
  —Parent Bank   26,712   46.5%   45,937   60.8%   (41.9)%
  —Banca IMI         0.0%  
  —Others   30,722   53.5%   29,667   39.2%   3.6%
Dealing derivatives (notional)   1,219,569   100.0%   742,828   100.0%   (64.2)%
  —Parent Bank   61,899   5.1%   53,361   7.2%   16.0%
  —Banca IMI   1,130,132   92.7%   675,733   91.0%   67.2%
  —Others   27,538   2.3%   13,734   1.8%   100,5%

(1)
The figure does not include securities classified in loans and receivables, reported amount "Securities" (€998 million at December 31, 2005 and €541 million at December 31, 2004).

(2)
The figure includes debt and capital securities (including Collective Savings Investments Organization Funds "OICR" quotas) classified in the various portfolios, except for €3,093 million of Group's shareholdings part of the available for sale portfolio.

        With reference to the centralized management of liquidity, as of 31 December 2005, about 57% of interbank lending and 52% of interbank borrowing by the Parent Bank referred to intragroup financing and deposits. Net of these components, for the entire period under review, the Parent Bank maintained a debt imbalance due to the funding actitivies of the Parent Bank, to which the Treasury division resorted, depending on the short-term net liquidity imbalances, following a strict policy of funding diversification.

        In 2005, with respect to medium- and long-term funding, also centrally managed, the Parent Bank raised a total of €5.8 billion during 2005, comprising:

    €2.7 billion through the placement of senior securities by way of the internal network and the Sanpaolo Banco di Napoli and Banca Fideuram networks;

    €3 billion through the placement of securities on international markets with Italian and foreign institutional investors, of which €1.1 billion subordinated (Lower Tier II for €500 million and Tier III for €550 million);

    €92 million through loans and deposits.

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        In 2005, the Parent Bank transferred €4.2 billion in medium and long-term funding to other Banks and Companies of the Group, of which €3.9 billion senior debt and €265 million subordinated debt.

        Banking networks other than the Parent Bank network, on the other hand, independently collected €480 million on the domestic market, through the placement of senior securities with retail customers.

        As part of its activities, the subsidiary Banca IMI issued structured bonds for €2.6 billion, placed through the Group's networks.

        Regarding deposits from International Organizations, the Parent Bank and other banks of the Group continued to use funds from loans previously issued by the European Investment Bank, especially those destined to finance research and development initiatives in Italy, as well as by Germany's Kreditanstalt für Wiederaufbau ("KfW"). In 2005, Banca OPI independently collected €420 million from the EIB, with maturities of greater than 15 years.

        As of December 31, 2005, the Group's securities portfolio amounted to €68.3 billion, an increase of 4.7% from the end of 2004 (€65.3 billion). This amount is broken down as follows: €38.8 billion in securities held for trading or carried at fair value, €25.7 billion in available for sale investments, €2.5 billion in held-to-maturity investments and €1.3 billion in securities classified under "loans and receivables", of which €312 million issued by corporate issuers.

        As of December 31, 2005, the securities portfolio of the Parent Bank, held for treasury requirements and investment purposes, amounted to €8.3 billion (net of Group securities), an increase of 10.3% compared to €7.5 billion as of December 31, 2004. Excluding the equity component, the break-down is as follows: €4 billion in securities held for trading or at fair value, €2.3 billion in held-to-maturity investments, €0.8 billion in available for sale investments and €1.0 billion in securities reclassified under "loans and receivables".

        The break-down in the securities portfolio of the Parent Bank showed a prevalence of government bonds originating from EU countries, representing 59% of the total at the end of 2005, with a further share of 35% represented by securities issued by banks, financial institutions and international organizations, 4% by corporate bonds and the remaining 2% by OICR Funds. With the objective of maximizing profit opportunities, the portfolio maintained, through the component of securities eligible for refinancing with the European Central Bank, enough collateral to manage liquidity and, at the same time, satisfied network requirements for customer repurchase agreements.

        During 2005, the volume of securities traded by the Parent Bank on its own account was equal to €32 billion, while transactions involving repurchase agreements amounted to €270.5 billion, of which €128.4 billion were carried out on the MTS/PCT platform, the Italian electronic exchange regulated wholesale market for government bonds, other fixed income securities and repurchase agreements.

    The insurance sector portfolio

        As of December 31, 2005, the life and casualty insurance companies under Assicurazioni Internazionali di Previdenza held financial assets of €46.6 billion, an increase of 16% from the beginning of the year (the contribution to the consolidated Financial Statements of Sanpaolo IMI was €40.2 billion, an increase of 16% from the beginning of the year).

        The investments, with respect to traditional policies and free capital (the assets which are not required for coverage of insurance's technical reserves), as well as unit and index-linked policies, were carried out on the basis of strict investments policies defining investment limits by issuer and class of assets, limits for credit and market risk as well as value at risk limits for investments related to free capital.

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        As of December 31, 2005 available for sale investments of our insurance sector comprised 41% of the insurance sector securities portfolio, while securities evaluated at fair value comprised the remaining 59%.

        In particular:

    available for sale securities, mainly for traditional policies and free capital, amounted to €19.2 billion and mainly consisted of bonds and other fixed-income securities, representing 95% of the total. The bond portfolio consisted of bonds issued by the Italian and foreign governments, International Organizations, national credit institutes and, to a lesser degree, corporate bonds distributed across a wide number of issuers, particularly companies of the eurozone. Shares, equal to one billion euro as of December 31, 2005, maintained an average impact of 5% throughout the year, in line with medium- and long-term profit objectives of the insurance sector;

    investments recorded at fair value, equal to €27.4 billion, comprised index-linked policies for 39% and unit-linked policies for 56%. The remaining 5% mainly comprised securities to be liquidated for index-linked products reimbursed to customers and specific asset policies.

    Brokerage activities

        Brokerage activities within the Group are carried out mainly by Banca IMI, the investment bank of the Group and one of the leading Italian financial operators, with a strong presence in stock and bond placements, extraordinary finance transactions (such as initial public offerings and capital increases) and securities trading.

        Banca IMI carries out trading activities on its own account and on behalf of third parties across a wide range of financial products in regulated and over-the-counter markets. Banca IMI also structures and realizes investment products for retail and institutional customers and provides risk management products for businesses and Italian public authorities.

        The securities portfolio of Banca IMI, as of December 31, 2005, amounted to €11.7 billion, in line with the €11.9 billion held at the end of 2004; of the former amount, 73.8% consisted of debt securities, 25.6% of shares in OICR and the remaining 0.6% of equities. At December 31, 2005, short positions in securities amounted to €2.31 billion, a decrease of 5.7% compared to the value as of December 31, 2004 (€2.45 billion).

        At December 31, 2005, trading derivatives amounted to €1,277.46 billion, an increase of 39.9% compared to December 31, 2004 (€912.9 billion) mainly due to volume increases due primarily to mid sized corporate clients.

        Banca IMI's operating results for 2005 show a significant contribution of Risk Management and Distribution activities, along with positive results in the major Equity and Corporate Finance activities, particularly as regards organization and completion of the acquisition of Italian mobile network Wind by the Sawiris group, the largest leveraged buy-out carried out in Europe and the second largest worldwide.

        More specifically, with respect to Banca IMI's trading activities:

    the fixed income and derivatives sector, despite a slight decline in trading on government bonds, confirmed the positive results of market-making activities on interest and exchange rate derivatives and of activities carried out to support product structuring;

    the equity sector showed improved performance over the previous period as regards equity funding, with a substantial increase in volumes and returns, as well as equity trading and market-making: in this context, it is worth mentioning the volumes traded in the exchange traded fund

75


      sector, in which Banca IMI, a leader in Italy (source: Banca IMI's annual report), is one of the leading European players;

    in addition to the stability in flows from retail and institutional customers, the results of the credit trading sector benefited from positive performance in primary activities and the strength of emerging markets; the sector also benefited from sales of long-term securities in asset swaps to international investors;

    global brokerage activities increased considerably, as a result of greater market volumes and thanks to the development of business with new international customers especially in the USA.

        As far as distribution activities are concerned, the fixed income sector benefited from steady demand from institutional investors seeking good returns in primary market transactions, as well as in the investment grade and high yield segments. In terms of asset-backed securities, significant interest was shown by institutional investors for the debt securitization transaction by Fondo Immobili Pubblici (F.I.P.), in which Banca IMI was one of the lead managers.

        The corporate derivatives sector showed a prevalence of interest and exchange rate products to hedge the risks of mid sized corporate customers (companies with revenues between €50 million and €250 million per year). In this customer segment, in 2005, volumes amounted to a total of €2.7 billion in new interest rate derivative hedging transactions. In addition, the last quarter gave way to a recovery of business in the large corporate segment, especially as regards hedging transactions on medium- to long-term funding. In this context, Banca IMI balanced the derivatives brokerage business carried out by the banking network of the Group on behalf of corporate customers, with book values at the end of 2005 equal to €19.3 billion (€15.2 billion at the end of 2004).

    Placement and advisory business

        At the Group level, the placement and advisory business is carried out by Banca IMI; the subsidiary Banca OPI also operates in this business with respect to Public Authorities and Entities.

        During 2005, Banca IMI confirmed its traditional role in the primary debt market, occupying the role of lead manager and bookrunner in 60 bond issues, for a total of about €22.5 billion and with a significant presence in the transactions of foreign issuers.

        With reference to retail investors, Banca IMI established and placed inflation-linked products, as well as products linked to the CMS ("Constant Maturity Swap") parameter and capped FRN ("Floating Rate Note") issues, which satisfied the requirements of prudent investing required by the regulators.

        In the equity sector, the activities of equity capital markets in Italy showed an increasing level of transactions, confirming the trend seen in the last part of 2004. In this context, Banca IMI confirmed its traditional role in the market, in terms of both placements and increases in capital for listed companies, including the IPOs of Safilo and Marr.

        With respect to corporate finance activities, Banca IMI strengthened its role in the market, also thanks to marked recovery worldwide in terms of mergers and acquisitions, which brought Europe increasingly closer to the volumes and values of transactions carried out in the United States.

        Banca OPI provides financing and financial assistance to Public Entities, Local Authorities, Public Utilities and infrastructural projects. In 2005, Banca OPI confirmed its leading position in the Italian Public Sector (source: Sanpaolo IMI's elaboration on the basis of Bank of Italy data), with an overall market share of over 20%, in an increasingly competitive market characterized by an increase in the number of banks present and by very aggressive pricing policies by competitors.

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        Total loans to customers, as of December 31, 2005, amounted to €25.6 billion, including €5.6 billion in the securities portfolio, an increase of about 7.9% compared to December 31, 2004.

        Regarding financing activities, total financial disbursements to customers during 2005 amounted to €6.3 billion, of which €1.5 billion in the form of subscription of securities issued by customers.

        During 2005, Banca OPI emphasized its financial consulting services offered to customers, mainly involving debt restructuring programs and the related promotion of derivative products.

        The year 2005 was also characterized by a significant focus on project finance activities in Italy and abroad. Total financing contracts stipulated by Banca OPI in 2005 exceeded €340 million, an increase of approximately 180% against €120 million 2004.

        The expansion of Banca OPI into international markets, with the availability of a dedicated structure from the end of 2004, was intensified during 2005, promoting, in collaboration with local Group offices, relationships and business with the bank's customers (regional entities, public companies and central administrations), particularly in Central-Eastern Europe.

    Significant Subsidiaries

        The following table sets forth the significant subsidiaries (as defined by Rule 1-02 of Regulation S-X) of the Group at December 31, 2005.

Name

  Registered Offices
  Ownership held by
  %
  Voting rights at shareholders' meeting %
Banca IMI   Italy   Sanpaolo IMI   100.00%   100.00%
Banca Opi   Italy   Sanpaolo IMI   100.00%   100.00%
Sanpaolo Banco di Napoli   Italy   Sanpaolo IMI   100.00%   100.00%
Eurizon Financial Group   Italy   Sanpaolo IMI   100.00%   100.00%
Assicurazioni Internazionali di Previdenza   Italy   Eurizon Financial Group   99.96%   99.96%
Banca Fideuram   Italy   Eurizon Financial Group   73.37%   73.43%

        Banca IMI, the Group's investment bank, engages in securities dealing for itself and for customers, underwrites equity and debt capital offerings for companies, and also provides corporate finance advisory services.

        Banca OPI provides financial services to the public sector, with particular emphasis on the financing of infrastructure investments and public works.

        Sanpaolo Banco di Napoli is the Group's bank which covers the regions of mainland southern Italy. Established in 2003, it includes all the Sanpaolo and Banco di Napoli branches operating in Basilicata, Calabria, Campania, and Apulia into a single entity, with a distribution network of 688 branches and 60 other operating points.

        Assicurazioni Internazionali di Previdenza A.I.P. is the Group's insurance company. It is active in: assurance, the casualty sector; life savings and investment products with the aim of identifying a trend in the product range that is coherent with the mission of protecting savings both through enriching the product insurance components and through investment duration profiles that are coherent with the insurance business.

        Banca Fideuram has a network of 4,151 financial planners and operates through its own specialized companies dedicated to asset management services.

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        Eurizon is a holding company that controls Banca Fideuram, A.I.P. and Sanpaolo IMI Asset Management.

Italian Banking Regulation and Corporate Governance Principles

    Italian Banking Regulations—Overview

    Structure of the Italian Banking System

        During the 1990s, the Italian banking system underwent a reorganization and consolidation process as a consequence of changes in banking regulations as well as the competitive stimulus resulting from the liberalization of European financial markets and the introduction of the euro. The main steps in this evolution were the enactment of the Amato Law, the privatization process and the Legislative Decree No. 385 of September 1, 1993 (the "Consolidated Banking Law"), and Legislative Decree No. 58 of February 24, 1998 (the "Consolidated Securities Law").

        The current system allows the banks to decide which banking and related financial activities to engage in and which structures to adopt, subject only to generally applicable rules of prudence and the banks' own Bylaws. The current Italian banking regulations now largely mirror the EU Second Banking Directive (Dir. No. 89/646/CEE, now consolidated in Dir. No. 2000/12/CE). The effect of the regulatory changes and Europe-wide liberalization has been a significant increase in competition and consolidation in the Italian banking industry.

    The Privatization Process

        The Amato Law encouraged consolidation and also encouraged banks controlled by governmental and public law entities to adopt a joint-stock structure and to strengthen their capital bases.

        The process was accelerated by the implementation of the Privatization Law (Law No. 474 of July 30, 1994) and the Decree of the Minister of Economy and Finance (the "Dini Directive"), enacted, respectively, in July and November 1994. These statutes permitted and promoted the sale of majority holdings of banks owned by the Ministry of Economy and Finance and by Italian banking foundations (considered public law entities) to the private sector. Certain fiscal incentives were provided for Italian banking foundations to reduce their stakes in banks that converted into joint-stock companies under the Amato Law to below 50%. Furthermore, to encourage the reform, new incentives were introduced pursuant to the Ciampi Law, which reorganized the regulatory framework of the Italian banking foundations. Those incentives were reviewed and permitted by the European Commission, which decided on August 22, 2002, that fiscal measures introduced in 1998 and 1999 in favor of banking foundations were not subject to the European Union's state aid rules). Pursuant to the Ciampi Law (Legislative Decree No. 153 of May 17, 1999), the banking foundations that modify their Bylaws and progressively divest their stakes in banks and only maintain controlling interests in entities dealing with social purposes, are considered as private not for profit organizations with social purposes. The Ministry of Economy and Finance is in charge of authorizing the sales of holdings in banks owned by foundations in compliance with criteria of transparency and non-discrimination.

        In accordance with Article 25 of the Ciampi Law, as amended by Law No. 212 of 2003, the deadline for the banking foundations to dispose of their control of banking institutions was extended to December 2005 (the Ciampi Law initially set the deadline for the disposals at June 2003). Moreover, the longer term of December 2008 was allowed for those banking foundations entrusting their stakes in banking institutions to asset management companies ("società di gestione del risparmio") charged with managing them independently. Moreover, banking foundations with net equity not in excess of €200 million or operations in Italian autonomous regions ("regioni a statuto speciale") are exempted from the requirement to dispose of their controlling stakes in banking institutions.

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        Article 25 of the Ciampi Law has been recently amended further by Law 262/2005. Pursuant to the amendment, as of January 2006 instead of requiring a mandatory transfer of controlling shareholdings authorized by the applicable authority, Article 25 of the Ciampi Law prevents the banking foundation from exercising their voting rights for those shares exceeding 30% of the share capital with voting rights of a bank. The shares exceeding such threshold can be converted in shares without voting rights, by means of an extraordinary shareholders' meeting resolution.

    Implementation of the EU Second Banking Directive

        Effective January 1, 1993, the old distinction between "ordinary credit institutions" and "special credit institutions" was formally eliminated and every kind of banking activity can now be performed by any bank, which can collect and solicit savings deposits from the public, issue bonds and grant medium- and long-term credit subject to regulations issued by the Bank of Italy.

        Italian banks, whether incorporated as joint-stock companies (Società per Azioni), co-operative banks (banche popolari and banche di credito cooperativo), or as residual public law entities (governed by special regulations) subject to their Bylaws and to financial services regulation, may also engage in all the business activities that are subject to mutual recognition under the EU Second Banking Directive, and in certain other financial activities not listed therein.

        Credit institutions incorporated in a European Union country other than Italy may conduct banking business in Italy as well as those business activities that are subject to mutual recognition and are authorized to be carried out in their home country, provided that the Bank of Italy is informed by the entity supervising the relevant EU credit institution. Such supervising entity retains control over the relevant EU credit institution (so-called "home-country control" rule).

    Consolidated Banking Law

        Effective January 1, 1994, the Consolidated Banking Law, which repealed and replaced previous regulations, has defined the role and the powers of the supervisory authorities and has regulated the definition of banking and related activities. Moreover, the Consolidated Banking Law contains provisions regarding: the authorization of banking activities, the acquisition of equity participation in banks, specific discipline of co-operative banks, banking supervision (on an unconsolidated and consolidated basis), special bankruptcy procedures for banks, and the supervision of financial companies, the transparency of contractual terms and conditions related to banking and financial services, applicable fines and sanctions. The resulting regulatory framework of Italian banking system is described below.

    Supervisory Authorities

        Under the Consolidated Banking Law, the supervision and regulation of Italian banks are exercised by: three different Authorities, with the aim of granting the sound and prudent management of the supervised entities, the overall stability, efficiency and competitiveness of the financial system as well as the compliance with provisions concerning credit. The supervisory authorities are the following:

    the Interministerial Committee for Credit and Savings (the Comitato Interministeriale per il Credito e per il Risparmio or "CICR"). The CICR includes the Minister of Economy and Finance and other economic ministers, acts upon proposals of the Bank of Italy, and has wide-ranging policy-making and guidance powers.

    the Minister of Economy and Finance. The Minister of Economy and Finance has broad powers in relation to banking and other financial activities, which include: setting definite eligibility standards for holders of equity interests of a bank; and the level of professional experience required from directors and executives of banks and other financial intermediaries. The Minister

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      of Economy and Finance may also place banks in mandatory liquidation (liquidazione coatta amministrativa) or under extraordinary management (amministrazione straordinaria).

    the Bank of Italy, which is in charge of implementing the policies set forth by CICR by adopting regulations and instructions concerning the following four main areas: (i) capital requirements; (ii) risk exposure; (iii) acquisition of equity participations; and (iv) administrative and accounting organization and internal audit.

        The main set of rules implemented by the Bank of Italy with respect to banks is collected in the Istruzioni di Vigilanza per le Banche (Supervisory Directives for Banks), which is updated from time to time.

        The Bank of Italy supervises the banking institutions through its own auditing body, granting authorizations and examining the reports that banks are required to file on a regular basis. The main supervisory powers include: the review of financial statements and statistical data; the preliminary review of amendments to Bylaws; inspections; and verification of capital ratios, reserve requirements exposure limits. The Bank of Italy may also fine banks and their managers with administrative sanctions. Each year the Bank of Italy publishes a report on its supervisory activity.

        In addition, the Bank of Italy oversees compliance with rules of conduct and disclosure requirements provided for banking and financial transactions and services, with particular reference to: (i) public notices of interest rates, prices, charges for customer notifications and every other economic condition concerning the transactions and services offered; (ii) prescribed contractual forms; (iii) consumer protection in cases of unfavorable modification of interest or any other price or condition or unilateral alteration of contract, and (iv) periodic notifications to customers. The Bank of Italy also cooperates with governmental entities in preventing and repressing usury. To this end the Bank of Italy and the Ufficio Italiano Cambi ("UIC") conduct a periodic survey to measure the "average overall effective rate" charged by banks and financial intermediaries for different types of transactions. The data collected is published in a decree of the Minister of Economy and Finance and is used to calculate the threshold beyond which rates are considered usurious.

        The Bank of Italy conducts inspections of all credit institutions through its supervisory staff of auditors. Matters covered by an examination include the accuracy of reported data, compliance with banking regulations, and Bylaws. Specific areas of audit include compliance with exposure and other prudential limits.

        The Bank of Italy requires all banks to report interim balance sheets on a monthly basis.

        As a consequence of the Cirio and Parmalat defaults (see: Item 8. "Financial Information— B. Legal Proceedings" on page 174 below), there has been an intense debate on the regulatory framework applicable to banks.

        In this context, the Italian Parliament has recently enacted an important new law (Law n. 262 of December 28, 2005) which among many others, moves the antitrust powers related to the banking sector from the Bank of Italy to the Antitrust Authority, makes amendments to the powers of internal bodies of the Bank of Italy, fixes to a six year term, the duration of the appointment of the Bank of Italy's Governor.

        In this regard, it should be noted that the above mentioned law deals with many other different items, such as the corporate governance of listed joint stock companies, auditing and auditor's liability, transparency of foreign companies participated by or participating in Italian companies, banking foundations, conflicts of interest, investors protection, regulated markets and the introduction and reinforcement of penalties and administrative sanctions.

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    Banking and Related activities

        Pursuant to Section 10 of the Consolidated Banking Law, banking is broadly defined as fund raising and granting credit.

        Under the Consolidated Banking Law, banks are also allowed to carry out other activities, including: financial leasing and payment services; issuance of credit cards and traveler's checks; trading in money market instruments, foreign exchange, futures, options and securities; participation in issuances of securities and related services; advisory services related to capital structure, industrial strategy and business combinations; money brokerage; portfolio management and portfolio advisory services; safekeeping and administration of securities.

        In addition to banking and related activities, banks are permitted to provide investment services and to hold control shareholdings in banking, financial and insurance companies. Italian banking groups are therefore entitled to provide services that are subject to different supervisory authorities. In particular, the Bank of Italy supervises the banking and related activities and exercises prudential supervision on intermediaries providing investment services, Commissione Nazionale per le Società e la Borsa ("CONSOB", the Italian securities regulator) is responsible for disclosure and fair dealing in providing investment services, while the Istituto per la Vigilanza sulle Assicurazioni Private e di Interesse Collettivo ("ISVAP") is the supervisory authority responsible for insurance services.

        It should be also noted that, under the Consolidated Banking Law, banking groups comprise either: (i) an Italian parent bank and the banking, financial and instrumental companies it controls or (ii) a parent financial company and the banking, financial and instrumental companies it controls, provided that banking activity is significant within the group, as determined by the Bank of Italy in compliance with CICR directives. All the companies belonging to a banking group are subject to the supervision on a consolidated basis of the Bank of Italy.

        In compliance with EU Directive 2002/87 and the Legislative Decree 142/2005 on financial conglomerates (and Basle 2, as defined in Item 11 of this annual report), insurance companies as of 2006 are to be included in the prudential supervisory area and are subject to additional capital adequacy requirements as it will be determined by the supervisory authority (see also "Financial Conglomerates" below).

        The adoption of IAS/IFRS entails that insurance companies are included in the scope of consolidation of Italian banking groups, while Italian GAAP only made reference to banking activities.

    Participation in the Share Capital of a Bank

        Pursuant to Section 19 of the Consolidated Banking Law, and in compliance with EU Directive 2000/12, the Bank of Italy's prior authorization is required in the event that acquisition of shares (together with the shares already held) reaches or exceeds 5% of the voting rights or leads to control over an Italian bank. Prior authorization by the Bank of Italy is also required when the 10%, 15%, 20%, 33% or 50% threshold of voting rights is triggered. The Bank of Italy may grant its authorization subject to conditions that are likely to ensure the sound and prudent management of the bank. In addition to the Bank of Italy's authorization, under the recently enacted Law n. 262/2005, in the above mentioned cases the Antitrust Authority's authorization is also required in relation to antitrust issues regarding the market.

        Pursuant to Bank of Italy regulations, the authorization from the Bank of Italy must also be obtained before any irrevocable commitment to buy a significant stake in a bank. In the case of purchases (or sales) which could lead to controlling interest in a bank, the request for authorization to the Bank of Italy must also be preceded (by not more than 30 days) by a preliminary notification to the Bank of Italy concerning the main elements of the transaction (timetable, methods and sources of finance).

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        Persons who, directly or indirectly engage in significant business activity in economic sectors other than banking and finance may not be authorized to acquire shares of a bank which, when added to those already held, would represent more than 15% of the voting rights or control of the bank.

        The Bank of Italy as well as, when the bank is a listed company, CONSOB (the Italian securities and stock exchange regulator), must be notified of any agreement, however concluded, which involves an Italian bank or could lead to a joint exercise of voting rights in a bank or in the parent company of such bank.

    Deposit Insurance

        The Interbank Deposit Guarantee Fund (Fondo Interbancario di Tutela dei Depositi, (the "Guarantee Fund"), established in 1987 by the principal Italian banks, protects depositors against the risk of insolvency of a bank and the loss of their deposited funds. Sanpaolo has been a member of the Guarantee Fund since 1987.

        As a result of certain amendments to the Consolidated Banking Law, in 1996 (pursuant to EU Directive No. 94/19), a bank's membership in the Guarantee Fund became compulsory and must have a minimum coverage of Lit. 200 million (€103,291) per depositor.

        Deposits covered by the Guarantee Fund are mainly those of ordinary customers, namely repayable funds in the form of deposits, bank drafts and other similar instruments; bearer deposits, bonds and deposits placed by other credit institutions for their own account have been excluded. Furthermore, the guarantee scheme does not cover, among others, deposits of government and local authorities, financial and insurance companies, and mutual funds.

    Capital Adequacy Requirements

    Solvency Ratios

        The implementation of the Basle Committee's risk-based capital guidelines, which occurred in 1988, is based on the EU's "Own Funds Directive" and the "Solvency Ratio Directive" consolidated in the EU Directive 2000/12. Under these risk-based capital guidelines, implemented since 1992 by the Bank of Italy, a bank's capital adequacy assessment is based on the ratio of its total capital to the risk-adjusted value of its assets and off-balance sheet exposures. A bank's capital is composed of primary capital and supplementary capital. The consolidated total of primary and supplementary capital of a bank may not be less than 8% (or 7% on an unconsolidated basis) of the bank's risk-weighted assets.

        Primary capital (Tier I) consists of: paid-in equity capital, retained earnings, funds for general banking risks, and innovative capital instruments such as preferred shares, minus: treasury stock, intangible assets and losses for the preceding and current fiscal years. Innovative capital instruments can be included in Tier I capital only up to 15% of the capital including such instruments. Any amount in excess of that level can be included in supplementary capital as hybrid capital instruments.

        Supplementary capital (Tier II) capital consists of: asset revaluation reserves, general loan loss reserves, hybrid capital instruments and subordinated loans, minus: net unrealized losses from investments in securities. Starting in March 1998, supplemental assets may include 35% of the net unrealized gains on interests in non-banking and non-financial companies listed on a regulated market. Fifty percent of any net losses must be deducted from supplemental assets, as already provided for net losses on securities. Tier II capital cannot exceed Tier I capital. There are also limitations on the maximum amount of certain items of Tier II capital, such as subordinated debt, which may not exceed 50% of Tier I capital.

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        The capital adequacy ratios are applied to the sum of primary and supplementary capital, less equity investments and certain quasi-equity capital instruments in, and subordinated loans to, affiliated credit and financial institutions.

        In November 2005, the Bank of Italy, in compliance with the Directive 2002/87 ECC and the Legislative Decree 142/2005, published some guidelines, requiring banks to deduct from primary and supplementary capital also shareholdings in insurance and reinsurance companies (including insurance holding companies) at least equal to 20% of the share capital with voting rights as well as those shareholdings in such companies intended to develop the shareholder's activity.

        To assess the capital adequacy of banks under the risk-based capital guidelines, a bank's capital is related to the total of the risk-adjusted values of its assets and off-balance-sheet exposures. The various categories of assets are assigned one of five risk weightings: 0%, 20%, 50%, 100% and 200%.

        In January 2001, the Basle Committee published proposals for an overhaul of the existing international capital adequacy standards. The two principal goals of the proposals are:

    to align capital requirements more closely with the underlying risks (introducing, among other things, the possibility to use internal rating systems for credit risk) and

    to introduce a capital charge for operational risk.

        On October 11, 2005 the proposal for a new directive (the "Capital Adequacy Directive") in order to implement the Basle 2 regulatory framework was definitively approved, even though it has not been published yet on the European Union Official Gazette. Each EU country is required to implement such directive by the end of 2006. During 2003, Sanpaolo IMI launched the Basle 2 Project, with the objective of preparing the Group for adoption of the Advanced Approaches from the date the new capital accord comes into effect. (See: Item 11. "Quantitative and Qualitative Disclosures about Market Risk—The Basle 2 Project" on page 195 below).

        Finally, it should also be noted that, under the above mentioned Bank of Italy's guidelines published in November 2005, the Bank of Italy has provided banks with instructions in order to mitigate the impact on regulatory capital of banks arising from the application of IAS/IFRS as of December 2005.

    Market Risk Capital Requirements

        In March 1997, on the basis of EU directive 93/6 and in response to the increased activity of Italian banks in securities intermediation, the Bank of Italy requested specific consolidated capital requirements, in order to carry out securities intermediation activities. The requirements concern the various classes of risk involved and apply to all securities not held to maturity (i.e., trading account securities and available-for-sale investment securities).

        The risks covered by the capital requirements are:

    position risk: the risk deriving from fluctuations in the price of the securities due to market trends and status of the issuer;

    settlement risk: the risk that arises in securities settlement transactions when, after the contract has matured, the counterparty has not fulfilled its obligation to deliver the securities or amounts due;

    counterparty risk: the risk that the counterparty will not perform its contractual obligations upon maturity;

    concentration risk: refers to exceeding, as the result of risk positions in the portfolio of marketable securities, the individual credit limit established with regard to the concentration of risks;

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    commodities positions: refers to the risk of potential losses in commodities positions;

    foreign exchange risk: the risk of incurring losses due to adverse changes in foreign exchange rates.

        In February 2000, the Bank of Italy introduced the possibility (subject to prior authorization) for banks to use their own internal models to calculate capital requirements to cover market risks. The models may use commodity position risk and total portfolio exchange rate risk. In 2000, certain other modifications to the regulatory framework on market risk concerning the calculation of commodity position risk and new methods of valuing options became effective. See: Part E, page F-119 to the Consolidated Financial Statements.

    Lending Limits

        The Bank of Italy issued certain instructions in respect of the EU Large Exposure Directive in October 1993. From November 1993 until the end of 1998, all loans made by a bank to a single borrower or group of affiliated borrowers (together with all other exposures as defined by the EU Large Exposure Directive) could not exceed 40% of the bank's own funds (as defined pursuant to the EU Own Funds Directive). These regulations were consolidated in EU Directive 2000/12. Since January 2002, the above-mentioned ceiling has been lowered to 25% of the bank's own funds.

        A specific limit applies to loans to companies which are affiliated with banks (i.e., companies in which a bank holds a stake of 20% or more) and to loans to shareholders holding a stake of 15% or more in a bank: these exposures cannot exceed 20% of the bank's own funds as specified by the Bank of Italy regulations. In this regard, it is worth noting that stricter limitations have been recently provided by Law 262/2005 and the CICR in relation to broader categories of entities. The CICR guidelines are still to be implemented by the Bank of Italy.

        In addition, the amount of a bank's large exposures—defined as exposures individually exceeding 10% of the bank's own funds—may not, in the aggregate, exceed eight times the bank's own funds. Under the Bank of Italy's instructions, loans and other exposures are assigned one of four risk weightings (0%, 20%, 50% or 100%), largely depending on the identity of the debtor or guarantor.

        These concentration limits apply to banking groups on a consolidated basis, although the activities related to the trading portfolio of banks and of securities dealing firms (società di intermediazione mobiliare, "SIMs") belonging to a banking group are not taken into account in assessing the group's exposures. Such activities are specifically regulated by regulations implementing EU Directive 93/6. In addition, banks belonging to a banking group are individually subject to a 40% limit on weighted exposures to a single borrower or group of affiliated borrowers.

        For a discussion of the Group's large exposures as of December 31, 2005 see: Item 3. "Key Information—B. Selected Statistical Information—Loan Portfolio—Loans by Category of Borrower" on page 20 above and Part E, Section B of Consolidated Financial Statements on page F-131.

    Medium- and Long-Term Credit and Funding Activity

        In consideration of the ability of the banking system to manage, the risks related to the imbalance of maturities and yields, on February 22, 2006, CICR decided to partially repeal the applicable regulations provided by the Ministry of Economy and Finance Decree N. 242632 of June 22, 1993.

        The new regulation does not exempt banks from the responsibility to adopt the appropriate measures in order to control and manage the above mentioned risks, included the risks related to liquidity and changes in maturities.

        In connection with funding activity, the regulations provide the opportunity for all banks to collect funds from the public in any form permitted by law. Banks are also permitted to use various financial

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instruments including bonds and certificates of deposit. The financial instruments may also be issued in the form of subordinated or perpetual debt for funding activities.

    Equity Investments by Banks

        Banks are permitted to make equity investments in all types of companies, subject to rules enacted by the Bank of Italy. Generally, equity participations by a bank in all types of companies may not in the aggregate exceed, together with real estate investments, the bank's consolidated capital. These rules require prior authorization for equity investments exceeding 10% of the consolidated capital of the acquiring bank or 10% or 20% of the capital stock (or otherwise entailing the taking of control) of the bank, financial or insurance company being acquired and for taking control of ancillary banking service companies. Investments in insurance companies exceeding in the aggregate 40% of the bank's consolidated capital (and 60% of its unconsolidated capital) are not authorized.

        Moreover, equity participations in companies other than banks or financial or insurance companies may not exceed (i) 15% of the bank's consolidated capital (or 7.5% for investments in unlisted companies), (ii) 3% of the bank's consolidated capital for investments in a single company or group of companies, or (iii) 15% of the capital stock of the company whose shares are being acquired by the bank. The limit described in (iii) does not apply if the value of the equity investment and the sum of all the other investments exceeding the 15% owned by the bank, do not exceed 1% of its consolidated capital.

        Higher limits are applied by the Bank of Italy upon request by banche abilitate (authorized banks), which are banks with at least €1 billion in capital and which meet the solvency ratios, and by the so-called banche specializzate (specialized banks), which are banks that collect mainly medium- and long-term funds, take no demand deposits, have capital in excess of €1 billion and meet the solvency ratios. The Bank of Italy has recognized Sanpaolo IMI as a banca abilitata. Therefore, Sanpaolo IMI is empowered to purchase over 15% of the capital of a non-financial company, as long as both the value of the equity investment and the sum of all other investments exceeding the 15% limit do not exceed 2% of its consolidated capital. The aggregate of equity investments in non-financial companies cannot, in any event, exceed 50% of Sanpaolo IMI's consolidated capital (or 25% of its consolidated capital for investments in unlisted companies); investments in a single non-financial company or group of companies may not exceed 6% of the bank's consolidated capital.

    Administrative and Accounting Organization and Internal Audit

        The Bank of Italy's regulatory supervision has, in recent years, focused on verifying the existence of conditions of efficiency and self-regulation of banking groups. The focus of the Bank of Italy led Italian banking groups to review their internal controls. The terminology used by the Bank of Italy, "Internal Control System", introduces a strong concept of innovation in the Italian regulatory system: no longer formal controls, but an integration of sub-systems of control which, operating in an integrated manner at all levels throughout the organization, can manage all kinds of risks. In this context, the internal audit department is required to focus on the organization structure. The structure must be designed to evaluate the capacity of the company to reach its given objectives with effectiveness and efficiency. Within Sanpaolo IMI, these responsibilities are assigned to the Internal Audit Department, which is independent from the operating structures and has free access—within its mandate—to data, archives and company assets. (See: Item 6. "Directors, Senior Management and Employees—C. Board Practices—Committee for Internal Control and Internal Audit Department" on page 158 below).

    Mandatory Reserves

        The ECB and the Bank of Italy require that banks based in Italy must maintain mandatory cash reserves, directly or indirectly through an intermediary bank, with the Bank of Italy.

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        The amount of the reserve is calculated on a monthly basis at a 2% rate on the total of the following items subject to the reserve requirements: deposits and outstanding debt securities, excluding liabilities due to other banks, to the ECB and to other national central banks. There is no reserve requirement for deposits and debt securities issued with a maturity of more than two years or repayable with a notice of more than two years and for repurchase agreements.

        The reserve can be amended by banks for the whole amount during a particular month as long as the average amount of the daily balances is not less than the required reserve. The Bank of Italy pays interest on the reserve at the average refinancing rates set by the ECB for that month. Sums in excess of the reserve required do not receive interest. In the event of a violation of the requirements of the mandatory reserve, the ECB may impose proportional fines on the bank (or intermediary bank).

    Financial Intermediaries

        The Consolidated Banking Law also governs certain financial activities performed by non-banking entities, which, in order to be allowed to deal with the public, must be enrolled in a general register kept by the UIC. Such regulated financial activities are as follows: acquiring equity investments, granting loans in any form (including leasing activities) and performing payment or brokerage services in foreign currency. Pursuant to Law 130 of April 30, 1999, relating to securitizations, the transferring of assets to special purpose vehicles and the collection of credits and cashier services are to be considered among such regulated financial activities.

        Financial intermediaries that deal with the public may engage in the activities listed above and, subject to specific authorization, derivatives trading activities for their own accounts and placement of financial instruments, are required to observe the rules for clarity of contractual conditions set forth in the Consolidated Banking Law. Further provisions set forth requirements for the probity of the participants and for the probity and professional competence of their business representatives.

        The financial intermediaries have also to be enrolled in a special register (provided for in Section 107 of Decree N. 385 of 1993, the "Special Register") maintained by the Bank of Italy, if they meet certain objective criteria, defined by the Ministry of Economy and Finance, and corresponding to the activities they perform, their size, their debt to equity ratio and their internal control system and organization. These intermediaries are subject to the oversight of the Bank of Italy, which, in August 1996, issued regulations concerning various aspects of capital requirements and risk management. Financial intermediaries must also comply with the rules governing the regular and consolidated annual financial statements of banks.

    Securities Market Control and Legislation

        The Italian implementing provisions (Law No. 415 of 1996, "Eurosim Law") of the European Directives on investment services (No. 93/22/EEC of May 10, 1993) and market risk capital requirements (No. 93/6/EEC of March 15, 1993), allowed banks to operate directly in regulated securities markets. Restrictions on access by foreign banks and investment firms to the Italian investment services sector have also been removed.

        In 1998, the regulations introduced by the Eurosim Law were reorganized within the framework of the Consolidated Securities Law. The Consolidated Securities Law that was recently revised as a result of important amendments to Italian corporate law and following new Law 262/2005 contains rules concerning the prudential supervision applicable to intermediaries that provide investment services (including the requirement to use guarantee systems as protection against crises) and to intermediaries that offer collective investment management services (mutual funds and open-end investments companies). In particular, the Bank of Italy is responsible for issues related to limitation of risk and financial stability while CONSOB is responsible for issues related to disclosure and proper business conduct. Other sections of the Consolidated Securities Law concern standards for organization and

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management of financial markets, centralized management of financial instruments, methods for soliciting investments and corporate governance of companies that have listed securities.

    Regulated Markets

        The organization and management of Italy's regulated markets is reserved to joint stock corporations: Borsa Italiana S.p.A. runs the Milan stock exchange (which includes the electronic equity market "MTA" or "telematico", (which is subdivided among the Blue Chip, Star and Ordinary segments), Nuovo Mercato and Mercato Expandi, the Securities Derivatives Market (SeDeX), the Italian Derivatives Market (IDEM), the After Hours Market, the MTF (which is a segment of the MTA dedicated to funds) and the Fixed Income Market (MOT and EuroMOT). In compliance with law 262/2005, CONSOB is entitled to prevent, within five days, the execution of Borsa Italiana decisions regarding the exclusion, admittance or suspension of financial instruments and market participants. All the Italian regulated markets are entered onto a list kept by CONSOB. CONSOB continues to exercise supervisory control over listed companies, intermediaries and the markets, as well as the correctness and intelligibility of information required of companies issuing listed securities and other forms of solicitation relating to securities. CONSOB is also empowered to verify compliance with the legislation regarding insider trading and to report infringements to the public prosecutors. In this regard, the Italian Parliament issued a law (Law n. 62 of April 18, 2005) on price-sensitive information and market abuse, amending the Consolidated Securities Law, in order to implement EU Directive 6 of January 28, 2003. The new law sets forth precautionary measures aiming at strengthening the level of protection and the proper use and disclosure of price-sensitive information.

    Intermediaries

        Securities market participants in Italy include (subject to partially different conditions) investment firms such as SIMs, financial intermediaries the persons entered in the Special Register and banks. Banks, the investment firms and authorized financial intermediaries are allowed to provide investment services, including: professional brokerage and dealing in securities, underwriting and placement, asset management, retail distribution of securities and advisory services regarding investments in securities. As mentioned before, these intermediaries are regulated by CONSOB and the Bank of Italy, and have to observe prudential regulations and rules on transparent and fair business dealing (such as disclosure duties and rules on conflict of interest).

        Because of the reform of Italian corporate law, an important provision had an impact on the liability regime related to dealing and brokerage of corporate bonds applicable to intermediaries. Under the new rules, with reference to private placements of corporate bonds, the intermediary that sells such corporate bonds to "retail" investors, carrying out dealing and brokerage services, is liable, where the amount of bonds issued exceeds a certain level, to such investors for the insolvency of the issuer. Under the new law 262/2005, a similar rule applies in relation to private placements related to financial products apart from the amount of the issuance. In such case the intermediary that sells financial products to "retail" investors is liable to the investors for the insolvency of the issuer for one year from the issuance unless the intermediary provides the investor with a document containing certain information set out by CONSOB. Such information is still to be determined by CONSOB.

        As for the legal framework regarding investment services, a European directive was enacted in 2004 (Directive 39 of April 21, 2004, the so-called MIFID Directive), repealing and replacing EU directive 93/22. The EU member states, Italy included, are required to implement the new regulations by January 31, 2007 and the provisions implemented by member states will be applicable as of November 1, 2007.

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    Mutual Funds

        The marketing, promotion, organization and ownership of mutual funds and the management of SICAVs (even if established by third parties) are reserved for a specific category of authorized intermediaries, SGR (società di gestione del risparmio) and SICAV (società di investimento a capitale variabile). The rules concerning the investment limits of mutual funds, with respect to single sectors or companies and overall minimum portfolio diversification, are set by the Ministry of Economy and Finance. The reform introduced by the Consolidated Securities Law allows SGRs, supervised by the Bank of Italy for those aspects concerning financial stability and risk management policies, to operate in the sector of asset management. Regulations on mutual funds were recently revised by the Bank of Italy. A new regulation was issued on April 14, 2005. The regulation is aimed at ensuring, among other things, full compliance with EU provisions.

    Insurance activity

        As previously mentioned, banks are permitted to hold control shareholdings in insurance companies. Moreover, the adoption of IAS/IFRS entails that, unlike what was required by Italian GAAP, insurance companies are included in the scope of consolidation, from an accounting point of view, of Italian banking groups.

        The insurance activity is reserved to insurance businesses enrolled in a special register and is mainly regulated by the Legislative Decree No. 209/05, which has enacted the "Private Insurance Code".

        The Private Insurance Code, that repealed and replaced previous regulations, defines the role and the powers of the supervisory authorities and provides for the definition of insurance activity. Moreover, it contains provisions regarding, among others: the authorization of insurance activities, the acquisition of equity participation in insurance companies, insurance supervision (on an unconsolidated and consolidated basis), insurance brokerage, special bankruptcy procedures for insurance companies, transparency of contractual terms and applicable fines and sanctions.

        According to the Private Insurance Code, insurance activity is defined as taking and managing risks by an insurance undertaking.

        The insurance activity is divided into (i) non-life insurance activities (including, among others, accident insurance, health insurance and fire insurance) and (ii) life insurance activities (including insurance activities related to the human life span, to the marriage rate and birthrate, whose value can also be connected with the value of funds or other indexes). As a general rule, it is not allowed to carry on—both—life and non-life insurance activities, except for specific circumstances provided by the Private Insurance Code, and subject to the Isvap's (Istituto per la Vigilanza sulle Assicurazioni Private) prior authorization.

        The insurance activity is subject to the supervision of the Italian Ministry of Productive Activities and the Isvap (in compliance with the applicable EU directives), with the aim of granting the sound and prudent management of insurance and reinsurance undertakings, fair behavior of supervised entities, the overall stability and efficiency of the insurance system and protection of clients. Isvap's supervision is carried out on (i) insurance and reinsurance undertakings which carry out their activity in Italy, and (ii) insurance groups and financial conglomerates including insurance and reinsurance undertakings.

        With regard to supervision functions, Isvap has the general power to authorize insurance activity (subject to the existence of some specific requirements provided by the Private Insurance Code), to adopt general regulations, to make inspections and inflict sanctions.

        Isvap supervision is focused on, among others, insurance companies financial statements, review of amendments to bylaws, solvency ratios and reserves requirements and insurance companies internal control system.

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        With regard to the participation in the share capital of the insurance undertakings, Isvap's prior authorization is required in the event that acquisition of shares (together with the shares already held) reaches or exceeds 5% of the voting rights or leads to control over an insurance company.

    Financial Conglomerates

        The Legislative Decree No. 142/05 implementing the Directive 2002/87/EEC regulates additional supervision (the "supplementary supervision") of banks, insurance undertakings and investment firms being part of a financial conglomerate.

        A "financial conglomerate" is a group which meets the following requirements:

    (a)
    a regulated entity (a bank, an insurance company, an investment firm) is at the head of the group or at least one of the subsidiaries in the group is a regulated entity;

    (b)
    where there is a regulated entity at the head of the group, it is either a parent company of an entity in the financial sector or an entity which holds a significant participation (20%) in an entity in the financial sector;

    (c)
    where there is no regulated entity at the head of the group, the group's activities mainly occur in the financial sector;

    (d)
    at least one of the entities in the group is within the insurance sector and at least one is within the banking or investment services sector;

    (e)
    the consolidated and/or aggregated activities of the entities in the group within the insurance sector and the consolidated and/or aggregated activities of the entities within the banking and investment services sector are both significant.

        The supplementary supervision on the regulated entities which are included in a financial conglomerate is aimed at safeguarding the stability of the whole conglomerate as well as the stability of the single entities being part of the financial conglomerate, whether or not they are regulated. It is also aimed at preventing the destabilizing effects upon the financial system arising from the difficulties affecting some of the companies of the financial conglomerate.

        Every financial conglomerate which is a subgroup of another financial conglomerate is subject to the supplementary supervision within that financial conglomerate.

        Based on the Legislative Decree No. 142/05, the Bank of Italy and Isvap, on November 16, 2005 entered into an agreement regulating the identification and the capital adequacy of financial conglomerates. This agreement, subsequently endorsed by CONSOB, points out seven different financial conglomerates in Italy and the authorities charged with the task of coordinator and with the supplementary supervision. According to such agreement, Sanpaolo IMI has been recognized as a financial conglomerate and the Bank of Italy as the Authority responsible for the activities of coordination and supplementary supervision on the regulated entities of the Sanpaolo IMI financial conglomerate.

        The supplementary supervision will be mainly focused on: (i) capital adequacy requirements, (ii) risk concentration, (iii) intra-group transaction and (iv) internal control systems.

        The main supervisory powers of the Authority that is responsible for carrying out supplementary supervision (the "Coordinator") include the following:

    (a)
    coordination of the gathering and dissemination of relevant or essential information in going concern and emergency situations among competent authorities;

    (b)
    supervisory overview and assessment of the financial situation of a financial conglomerate;

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    (c)
    assessment of compliance with the rules on capital adequacy, risk concentration and intra-group transactions;

    (d)
    assessment of the financial conglomerate's structure, organization and internal control system;

    (e)
    planning and coordination of supervisory activities in going concern as well as in emergency situations, in cooperation with the relevant competent authorities involved.

    Corporate Governance

        The following is a discussion of Italian corporate governance regulatory framework. For a discussion of the comparative analysis between NYSE corporate governance standards and Sanpaolo IMI corporate governance practice see: Item 6. "Directors, Senior Management and Employees—C. Board Practices—Comparative Analysis between NYSE Corporate Governance Standards and Sanpaolo IMI Corporate Governance Practice" on page 160 below.

    Italian regulatory framework

        A specific section of the Consolidated Securities Law, recently revised by Law 262/2005, is devoted to the corporate governance of listed companies. This section contains, among others, provisions concerning both voluntary and mandatory tender offers; the disclosure of interests held by the shareholders, of interlocking interests and of shareholder agreements. The board of statutory auditors was given broader powers to examine the management of the company, and further measures to protect minority shareholders were added. In this regard, it is worth noting that Law 262/2005, amending the Consolidated Securities Law, requires one member of the board of directors be appointed by a minority list of shareholders and one member be independent (if the directors are more than seven) according to some specific requirements. The Consolidated Securities Law introduced a special system for the voting of proxies at the shareholders' meetings of listed companies and for the solicitation and collection of such proxies; CONSOB regulations specify the methods and procedures.

        In 1999, a committee, coordinated by the Chairman of Borsa Italiana (the "Committee") and composed of representatives of Italian banks, industries, insurance companies and associations of issuers and investors, prepared a Code of Self-Regulation for listed companies (the "Code"), a model of corporate governance that emphasizes the role and the responsibilities of the board of directors and ensures a balanced division of power among the executive and non-executive members of the board of directors, the auditing department and the relation with all the shareholders. The Code recommends the constitution within the board of directors of certain technical committees. According to the Code, the board of directors is required to appoint, within the board of directors itself, a committee for internal control (Comitato per il controllo interno). The purpose of such committee is to advise and make proposals. The committee for internal control is composed of non executive directors, the majority of which is independent. The chairman of the board of auditors or another auditor appointed by the chairman of the board of auditors participates in the committee's meetings. As for the composition, tasks and powers of the committee for internal control in Sanpaolo IMI; see: Item 6. "Directors, Senior Management and Employees—C. Board Practices—Committee for Internal Control and Internal Audit Department" at page 158 below.

        The importance of the Code, whose application is voluntary, was immediately acquired by the market. The Board of Directors of Sanpaolo IMI adhered to the Code in 2000. Borsa Italiana currently requires all companies applying for listing on MTA to submit a statement comparing their corporate governance model to the model of the Code. In 2002, the Committee revised the Code to reinforce the independence of the non-executive members of the Board of Directors, the correct handling of confidential information, the responsibility of the board of Directors for the internal control system and the compliance with criteria of substantial and procedural fairness with reference to the transactions

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with related parties. In March 2006, the Code was significantly revised and issuers are expected to be compliant with new provisions of the Code by the end of 2006.

        Moreover, in January 2003, the Italian Government approved a reform of corporate law (the "Reform"), governing limited liability and joint-stock companies and co-operatives. The Reform, whose provisions became part of the Italian Civil Code, introduced more flexible corporate models as well as rules concerning, among others, simplification of the incorporation procedures and the issuance of new financial instruments by limited liability and joint-stock companies. The Reform became effective on January 1, 2004. Provisional regulations were enacted to allow companies to gradually conform to the Reform. Full compliance with the Reform was required by September 30, 2004.

        The main innovations introduced by the Reform with regard to companies relate to their corporate governance. Together with the "ordinary" system, which is the traditional organizational structure which entails three different corporate bodies with different tasks and powers, the shareholders' meeting, management and supervisory bodies (the board of directors or sole director and the board of statutory auditors), the new rules provide for two other models: the "single" system and the "dual" system. Each company is able to elect which corporate governance system, among those listed below, it wants to implement.

        The Italian Legislative Decree No. 37/04, approved on February 6, 2004, modified the Consolidated Banking Law and the Consolidated Securities Law to coordinate their provisions on banks and listed companies with the provisions of the Reform. The amendments to the Consolidated Banking Law and the Consolidated Securities Law include, among others, amendments relating to the duties and responsibilities of the administrative and supervisory bodies of the companies provided by the new models of governance. Moreover, on December 28, 2004, the Italian Government issued Legislative Decree No. 310/2004, which further modified the Consolidated Banking Law and the Consolidated Securities Law in order to complete the reform process and remove all the inconsistencies noticed during the first year of effectiveness of the Reform.

        The following are the three models of governance which companies are able to adopt pursuant to the Reform:

    The "ordinary system" is based on the shareholders' meeting, which appoints the administrative body (the board of directors or the sole director) and the supervisory body (the board of statutory auditors).

    The "dual system" involves a management board which manages the company, plus a supervisory board, appointed at the shareholders' meeting. The supervisory board must have at least three members, one of whom must be listed on the Italian auditors' register. The supervisory board is responsible for appointing and removing the members of the management board, approving the accounts and bringing any claims against the members of the management board. The supervisory board is, substantially, assigned the tasks and powers which are reserved to the shareholders' meeting in the "ordinary" system;

    The "single system" involves a board of directors with administrative tasks, appointed at the shareholders' meeting, plus a 'supervisory management board' within the board of directors itself. The supervisory management board is appointed by the board of directors unless otherwise provided by the Bylaws.

        Italian banks are not allowed to adopt the new corporate models provided by the Reform until new regulations on corporate governance and organization implementing the Reform are enacted by the Bank of Italy.

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        In this regard, while CICR adopted (see CICR decision of August 5, 2004) a set of guidelines for the implementation of the Reform with respect to banks, the Bank of Italy has not yet enacted the related supervisory instructions.

        Sanpaolo IMI—whose corporate governance framework reflects the mandatory provisions of Italian corporate law and securities laws—is maintaining the "ordinary" system. The organizational structure of the Parent Bank is based on:

    The shareholders' meeting;

    The Board of Directors, which is responsible for the strategic direction of the Group and its ordinary and extraordinary administration (except for those powers expressly attributed to the exclusive responsibility of the shareholders' meeting) and which consists of executive and non-executive Directors;

    The Technical Committees (among which are the Remuneration and Personnel Policies Technical Committee and the Committee for Internal Control, see: Item 6. "Directors, Senior Management and Employees—C. Board Practices" on page 157 below), consisting of Directors, as well as consultative and management functions designed to support the Board of Directors; and

    The Board of Statutory Auditors (Collegio Sindacale) (see: Item 6. "Directors, Senior Management and Employees—A. Directors and Senior Management" on page 144 below).

D.    Organizational Structure

        See: Item 4. "C. Business Overview" on page 59 above.

E.    Property, Plants and Equipment

        Sanpaolo IMI owns the headquarters buildings of the Sanpaolo IMI Group, located in Turin, and secondary offices located in Rome and in Bologna. In addition, Sanpaolo IMI owns or leases other properties in Italy and abroad which are used for Group operations or leased to third parties.

        Sanpaolo IMI has conducted an audit of any environmental issues that may affect the use of its assets. Full details of this analysis are published in its "Social Report" (Bilancio Sociale) which is available in English on Sanpaolo IMI's website: www.grupposanpaoloimi.com, under "corporate social responsibility". The Social Report considers direct environmental impact (energy consumption, recyclable publication expenses, waste disposal, atmospheric emissions and water consumption) and indirect impact (financings of environmentally sensitive projects and ethical investment funds).

        Management believes that Sanpaolo IMI is compliant with all relevant environmental standards in Italy and abroad and pursues a policy of adherence to best international practices.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

        The following discussion should be read in conjunction with the Consolidated Financial Statements included in this report, which have been prepared in accordance with EU GAAP and which differ in certain aspects from U.S. GAAP. For a summary of the significant differences between EU GAAP and U.S. GAAP, see: Part M, Section 1 and Section 2 of the Consolidated Financial Statements on pages F-214 and F-215, respectively. EU GAAP also differs in certain aspects from IFRS as published by IASB. For a reconciliation between our results of operations for the years ended December 31, 2004 and 2005 under EU GAAP and under IFRS as published by IASB, see Part M, Section 3 of the Consolidated Financial Statements on page F-223 below.

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        As explained above under "Presentation of Financial Information", we first adopted EU GAAP on January 1, 2005. In connection with presenting our results of operations for the year ended December 31, 2004 for purposes of comparison with our results of operations for the year ended December 31, 2005, we elected the option available to us under IFRS 1 "First-time Adoption of International Financial Reporting Standards" to defer the first-time application of IAS 32, IAS 39 (financial instruments) and IFRS 4 (insurance contracts) to January 1, 2005 without restating our financial statements at and for the year ended December 31, 2004 to give effect to the three foregoing accounting standards. Consequently, comparable information at and for the year ended December 31, 2004 relating to financial instruments and insurance contracts covered by IAS 39 and IFRS 4 was prepared in accordance with Italian GAAP. In the tables presented in this section of this annual report, the line items for the year ended December 31, 2004 that were prepared in accordance with Italian GAAP are identified with the reference numbers from our Italian GAAP financial statements for the year ended December 31, 2004 and the abbreviation "It." The results of operations for the year ended December 31, 2004 relating to our insurance activities, which under Italian GAAP were consolidated at equity, are presented in this annual report using the same line items applicable to such activities in our financial statements for the year ended December 31, 2005.

        The Consolidated Financial Statements have not been reclassified in order to comply with the format required for the consolidated income statements and consolidated balance sheets of bank holding companies pursuant to Regulation S-X under the U.S. securities laws but have been presented in the same format as that used in the consolidated financial statements included in our annual report to shareholders prepared pursuant to Italian law (which we refer to as our Italian annual report).

Presentation of Results

        Except as discussed herein, in the following discussion, the comparison between our consolidated results of operations for the years ended December 31, 2004 and those for the year ended December 31, 2005 is based on our audited consolidated income statement. For what concerns the discussion of our consolidated results of operating, solely for purposes of discussing our net interest income, average interest spread and net interest margin, we also compare the results for the year ended December 31, 2005 with those for the year ended December 31, 2004 based on our reclassified consolidated income statement. The reclassified income statement presented as part of our net interest income discussion is derived from and reconciled to the audited income statement, and is prepared consistently with and as authorized by Italian law and regulations. The reclassified income statement also forms the basis of management's discussion and analysis of operating results in our Italian annual report. For what concerns the discussion of our results of operations by Business Sector, we compare the results for the year ended December 31, 2005 with those for the year ended December 31, 2004 based on our reclassified income statement. The reclassified income statement presented as part of our Business Segments discussion is derived from and reconciled to the audited income statement, and is prepared consistently with and as authorized by Italian law and regulations. For the year ended December 31, 2004, the reclassified income statement by Business Sector is EU GAAP compliant, reconstructed in conformity with IFRS 1 without application of IAS 32 and 39 (financial instruments) or IFRS 4 (insurance contracts) whose application date was determined to be January 1, 2005. The reclassified income statement is the only basis upon which management prepares operating results and projections by Business Sector. For purposes of strategic and operational planning, management prepares reclassified income statements broken down by Business Sector which provide more detailed information than that contained in the Consolidated Financial Statements. These Business Sector statements reflect the organizational structure of the Group and are based on the reclassified income statements that form the basis of management's discussion and analysis of the operating results in our consolidated Italian annual report. Since we believe the additional level of detail contained in our reclassified income statement by Business Sector is more informative to our shareholders, the discussion of our operating results by Business Sector in this report is based on the reclassified income

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statements. For the purposes of the discussion of the results of operations by Business Sector, the data for the year ended December 31, 2004 are on a proforma basis, assuming that the changes to the organizational structure affective as of July 18, 2005, had occurred as of January 1, 2004. See: Item 4. "Information on Sanpaolo IMI" on page 56. For a reconciliation between our audited income statement and our reclassified income statement see Item 5. "Operating and Financial Review and Prospects" on page 93 below.

General Factors Affecting Sanpaolo IMI's Business

    The International Economy

        In 2005, the global economy, though slowing in comparison with 2004, grew at a significant pace (4.8%), driven by the performance of the United States and many Asian countries, including China and India. After a temporary deceleration in the first months of 2005, world trade volumes picked up again towards the end of the year. At the same time, signs of strengthening in the Euro Zone (by which we mean the EU member states that have adopted the euro as their currency) and Japan's economic cycle and of softening in U.S. economic growth became more evident.

        Despite tensions in the crude oil market, which drove up consumer prices in many countries, on a global level, core inflation (excluding energy and food prices) remained well-contained. The high price of energy products did not translate into wage rises and expectations for medium-term inflation remained under control.

        The United States reported a solid economic performance in 2005. Gross Domestic Product grew at an annual rate of 3.5%, despite the sharp braking in production in the fourth quarter, the Federal Reserve's restrictive monetary policy and climactic troubles. The increase in households' disposable income—which also benefited from the increase in net worth due to the appreciation of real estate values—contributed to maintaining high levels of consumption, while strong earnings and cash flow supported corporate investments. However, the United States' public sector and foreign trade deficits were not corrected. In 2005, the public sector deficit represented 4.1% of GDP and the foreign trade deficit represented 6.4% of GDP.

        Price indices were affected by increased energy prices, and the average consumer price index increased by 3.5% in 2005. Tensions were more marked in the second half of the year, partially driven by production prices. As a result, the restrictive stance of the Federal Reserve was continued for longer than markets initially expected. As of December 2005, the policy rate had been gradually raised to 4.25%. All the same, long-term interest rates followed a different trend, which former chairman of the Federal Reserve Board, Alan Greenspan, described as a "conundrum". Despite an increase in short-term interest rates, in the first half of 2005, the 10-year benchmark rate fell from 4.5% to 4%, with a visible shrinking in term premiums, only to rise again to 4.5% in the second half of the year.

        Solid growth in the United States and progressive increases in interest rates by the Federal Reserve were the main drivers behind the U.S. dollar's strengthening against the yen and the euro during 2005. At the beginning of 2005, the euro-dollar exchange rate was €1=$1.30, whereas, at the end of December 2005 the exchange rate was €1=$1.19. However, the increasing public and current account deficits continued to be major factors pointing to a depreciation of the U.S. dollar in the medium term.

    The Euro Zone and the Italian Economy

        In 2005, the Euro Zone grew at a slower than expected rate of 1.3% despite a recovery in the second half of the year, when the depreciation of the euro and historically favorable financing conditions led to a positive trend in exports and a gradual upturn in investments. Overall, internal demand remained subdued as consumption was still very modest.

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        Among Euro Zone members, Germany and Italy had the lowest growth rates, 0.9% and 0.1%, respectively, in 2005. The economic performance of the two countries was largely affected by the weakness of domestic demand. France and Spain showed livelier trends with growth rates of 1.4% and 2.7%, respectively, due to the positive dynamics of household consumption, which was sustained by a large increase in real estate prices.

        Public sector deficits throughout the Euro Zone were stable at approximately 3% of GDP with an overall trend towards matching the Maastricht parameters. Among Euro Zone countries, public sector net debt reached 67.5% of GDP in Germany and 67.3% of GDP in France.

        Inflation in 2005 was 2.2%, only slightly lower than in 2004, sustained by the extensive rise in oil prices. The European Central Bank ("ECB") raised the policy rate to 2.25% in December 2005, the first such increase in 30 months.

        The stagnation of the Italian economy in 2005 was largely due to a negative contribution from foreign demand, a decrease in gross fixed investments and a flat trend in household consumption. A change in inventories, increased residential investments and an increase in public spending made positive contributions. In terms of value added, the services and construction sectors contributed positively, balancing the negative contribution of the manufacturing sector. Although the annual growth rate for industrial production was negative (a decrease of 0.8%), overall it showed a recovering trend from the lows seen at the beginning of 2005. The competitive difficulties experienced by some "Made in Italy" sectors were reflected in the poor performance of exports in real terms (an increase of 0.3%), despite the expansion of international trade volume.

        From the information available so far, the financial deficit of the Italian public administration is estimated to have deteriorated from 3.4% in 2004 to 4.1% in 2005, due especially to a slower growth in revenues caused by the weakness of the economic cycle. At the same time, Italy's public debt, as a percentage of GDP, is estimated to be 106.3%, 2.4 percentage points higher than in 2004.

        The rate of inflation in Italy was 1.9% in 2005. The inflationary trend in energy prices was partially mitigated by moderate price increases in non-energy goods.

    The Italian Banking Sector

        In 2005, the weakness of the economy was not a constraint on Italian banking loan dynamics, which increased at a rate higher than nominal GDP.

        Loans increased by 7.7% in 2005 compared with 5.5% in 2004. The overall trend was sustained by a significant increase in household loans (an increase of 11.7%). Mortgages, still in considerable expansion (an increase of 17.4%), were encouraged, on the one hand, by the substantial increases in prices in the real estate market and, on the other hand, by particularly favorable financing conditions. Consumer credit, while continuing to account for a small part of total household debt (below the average of the principal European economies), increased at a sustained pace (an increase of 16.3%).

        Loans to non-financial companies showed, on the whole, a smoother trend (an increase of 5.1%), paying heavily for the stagnation of manufacturing activity and large corporate sector cash flow. Among the various business sectors, loans to services, including real estate services, and to public works showed the most significant growth. During the year the financing of merger and acquisition transactions, especially in the telecommunications sector, showed an increase. In 2005, the composition of loans by duration again showed a clear difference between the medium/long term (an increase of 10.8%) and the short term (an increase of 0.5%). This can be explained by the increase in household residential mortgages, the high volume of liquidity and the ongoing process of restructuring the maturity profile of corporate debt. In 2005, non-performing loans decreased by 32.8%. The main risk ratios (including the net non-performing loans/net loans ratio) reflected the improvement in credit quality.

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        The evolution of asset management enjoyed the positive effects of a broad revaluation of share prices in 2005. The climate of uncertainty that characterized 2005 was reflected in a significant increase in liquidity and prudent financial investments by households. In this context, bank funding increased by 7.9% due to the contribution of total deposits (an increase of 7.3%) and bonds, which continued to grow considerably (an increase of 8.8%).

        With money market reference rates remaining substantially stable, the average cost on banks' interest-bearing liabilities in 2005 remained at the levels of year-end 2004. On the other hand, the average yield on banks' interest-earning assets continued to decrease, especially for the household sector. At the end of 2005, the short-term interest spread on household and non-financial company loan rates was 18 basis points lower than at year-end 2004.

    The International and Italian Equity Markets

        The main international share indices reflected an alternating trend in the first nine months of 2005 before ending the year with a net gain compared to 2004. The S&P 500 gained 3%, the Nikkei 40.2%, the DJ Euro Stoxx 23% and the Mibtel 13.8%. Globally, equity markets benefited largely from two factors: a positive trend in corporate earnings, generated not only by cost reductions but also—especially in the United States—by increases in operating revenues and the particularly low level of nominal and real interest rates.

        Owing to the recovery of prices, the stock market capitalization of Italian companies listed on domestic exchanges rose to €677 billion in 2005, a strong increase also as a percentage of GDP (49% at year-end 2005 compared with 43.1% at year-end 2004). There were 15 new listings in Italy in 2005 compared to eight in 2004. Capital raised through public offerings in 2005 amounted to €6.8 billion compared to €12 billion in 2004, on the basis of 18 transactions, the same as the previous year. The total funds raised by listed companies through capital increases, on the other hand, rose to €12 billion in 2005 compared with €3.3 billion in 2004, on the basis of 23 transactions compared to 28 in 2004. The average daily value of shares traded was €3.73 billion in 2005 compared with €2.9 billion in 2004.

    The Italian Asset Management Sector

        Despite a scenario characterized by uncertain economic conditions, a considerable increase in real estate prices and a prudent attitude by Italian households in favor of lower-risk financial investments, the asset management sector grew at a higher rate in 2005 than in 2004. At December 31, 2005, the value of investment funds managed by Italian intermediaries was €585 billion, an increase of 8.8% compared with year-end 2004. The increase was due to a positive revaluation of share and bond prices and to investment inflows. As of December 31, 2005, there was a net inflow of funds totalling €8.4 billion. The year-end data showed a particularly large outflow for equity and liquidity funds (a decrease of €14 billion).

A.    Results of Operations for the Two Years Ended December 31, 2005

1.     Changes in the Scope of Consolidation

        All the Italian and foreign entities in which Sanpaolo IMI holds, directly or indirectly, more than 50% of the voting rights or is exposed to the majority of the risks and obtains the majority of benefits, with the exception of certain minor subsidiaries which are not material, are fully consolidated. The scope of full consolidation specifically includes entities engaged in banking, financial and related activities that are part of the Sanpaolo IMI banking group as recorded in the Bank of Italy register in compliance with Article 64 of Legislative Decree No. 385 of September 1, 1993; subsidiaries engaged in activities other than banking, financial or related activities; and entities which expose the Group to the majority of risks and rewards.

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        All Italian and foreign entities which are jointly controlled with other shareholders and entities over which Sanpaolo IMI exercises significant influence by holding, directly or indirectly, between 20% and 50% of the voting rights, are consolidated under the equity method. Under this method, our proportional share of the net profits or losses of these entities is included in the Consolidated Financial Statements. An entity is considered subject to joint control where agreements exist to the effect that all material administrative, financial and management decisions require the consent of all the parties sharing control over the entity.

        The individual entities' financial statements used for consolidation purposes are those prepared at December 31, 2005 and approved by the individual entities' Board of Directors, subject to consolidation adjustments where necessary. The valuation of investments using the equity method was made on the basis of the latest reports or financial statements available. For a more detailed explanation of the basis on which we consolidate subsidiaries and other entities, see Part A.1, Section 3 of the Consolidated Financial Statements on page F-16 below.

        There were no material changes in the Group's scope of full consolidation in the year ended December 31, 2005 compared with 2004. For details of the Group's scope of full end equity consolidation, see Part B, Section 10 of the Consolidated Financial Statements on page F-48 below.

2.     Year Ended December 31, 2005 Compared with Year Ended December 31, 2004

    Overview

        For the year ended December 31, 2005, our principal income margins (being the difference between income and expenses of the main income components) increased compared with 2004. Our net result of financial and insurance activities increased by €2,420 million, or 45.8%, to €7,706 million in 2005 compared to €5,286 million in 2004. However, to make the comparison more meaningful, other net income from insurance activities in the amount of €1,831 million should be added to the net result of financial and insurance activities for 2004, for a total of €7,117 million. On this basis, the increase in 2005 amounted to €589 million, or 8.3%, compared to 2004, primarily due to a 21.5% increase in net interest income, a 6.0% increase in net commissions and a 12.1% decrease in impairment losses on loans and financial assets.

        Our operating profit before tax from continuing operations increased by €878 million, or 40.9%, to €3,023 million in 2005 compared to €2,145 million in 2004. This increase reflected our successful containment of operating expenses, which remained substantially stable, as well as a decrease in net provisions for risks and charges.

        The net profit attributable to equity holders of the Parent Bank was €1,983 million in 2005, an increase of €536 million, or 37.0% compared to €1,447 million in 2004. This increase was reflected in an improvement in our return on equity, or RoE, calculated as the ratio of net profit for the year to net shareholders' equity (excluding profit for the year) at the end of the year, which increased to 17.2% in 2005 from 13.3% in 2004.

    Net Interest Income

        The following table sets forth the components of the Group's net interest income for the years ended December 31, 2005 and December 31, 2004, based on the Audited Consolidated Income Statement.

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Audited Consolidated Income Statement

 
   
  Year ended December 31,
 
 
   
  2005
  2004(1)
 
 
   
  (millions of €)

 
10.   Interest income and similar revenues   8,235      
10 It.   Interest income and similar revenues(2)       7,196  
20.   Interest expense and similar charges   (3,786 )    
20 It.   Interest expenses and similar charges(2).       (3,534 )
       
 
 
    Net interest income   4,449   3,662  
       
 
 

(1)
EU GAAP in conformity with IFRS 1 without the application of IAS 32, IAS 39 and IFRS 4, whose transition date is deemed to be January 1, 2005.

(2)
Item presented in accordance with Italian GAAP format.

        In 2005, net interest income increased by €787 million, or 21.5%, to €4,449 million compared with €3,662 million in 2004. This increase was primarily due to the reclassification of the results of our insurance activities, which produced net interest income of €702 million in 2005. In 2004, the net interest income attributable to our insurance activities, was included in other net income from insurance activities.

        The positive impact of the reclassification of our insurance activities on net interest income in 2005 was partially offset by the results of Banca IMI, whose net interest income decreased by €47 million, or 39.8%, to €71 million in 2005 compared to €118 million in 2004. This decrease was due to an increase in Banca IMI's financing needs for non-interest-bearing securities, attributable to an increase in its equity arbitrage activities as a result of changed market conditions. Banca IMI's net interest income is related to securities dealing activities rather than banking activities. Management believes that excluding the impact of Banca IMI's net interest income is relevant for a better understanding of the components and the reasons for the year-on-year changes in net interest income from the Group's banking activities. Excluding the net interest income of Banca IMI and our insurance activities, and taking into consideration certain other related adjustments, as shown in our reclassified income statement and average balance sheet discussed below, the Group's net interest income related to banking activities increased by €119 million or 3.3%, to €3,724 million in 2005 compared to €3,605 million in 2004.

        Both components of net interest income, interest income and interest expense, increased in 2005 compared with 2004. Interest income increased by €404 million, or 6.0%, to €7,096 million in 2005 from €6,692 million in 2004, due to an increase in the average balance of interest-earning assets, partly offset by a decrease in the average yield on interest-earning assets from 4.24% in 2004 to 4.14% in 2005. Interest expense increased by €285 million, or 9.2%, to €3,372 million in 2005 from €3,087 million in 2004. This was primarily due to an increase in the average balance of interest-bearing liabilities and, to a lesser extent, an increase in the average cost of interest-bearing liabilities from 2.03% in 2004 to 2.05% in 2005.

    Average Balances and Interest Rates

        The following tables show, on the basis of Sanpaolo IMI's reclassified financial statements, the average balances and interest rates by category and by currency of the Group's interest-earning and non-interest-earning assets and its interest-bearing and non-interest-bearing liabilities in each case related to our banking activities, for the years ended December 31, 2005 and 2004. Loans and other interest-earning assets are presented net of any write-offs and any allowance for probable loan losses. For purposes of these tables: (i) average balances have been determined based on daily figures for

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interest-earning assets and interest-bearing liabilities of Sanpaolo IMI, Sanpaolo Banco di Napoli, Banca OPI, Banca Popolare dell'Adriatico, Cassa di Risparmio di Padova e Rovigo, Cassa di Risparmio di Venezia, Cassa di Risparmio in Bologna, and Friulcassa, and on monthly figures for all the other assets and liabilities of the Group (management believes that the average figures below present substantially the same trend as would be presented by daily averages); (ii) interest income and expense in the following tables vary from the amounts presented in the Consolidated Financial Statements (see footnotes to tables below for further details); and (iii) tax-exempt income has not been calculated on a tax-equivalent basis because the effect of such calculations would not be significant.

 
  Year ended December 31,
 
  2005
  2004(1)
 
  Average balance
  Interest(2)
  Average yield(3)
  Average balance
  Interest(2)
  Average yield(3)
 
  (millions of €, except percentages)

Assets:                        
Interest-earning assets                        
Interest-earning deposits and loans to credit institutions   20,055   541   2.70%   14,812   292   1.97%
  —Euro   9,863   238   2.41%   10,355   200   1.93%
  —Non Euro   10,192   303   2.97%   4,457   92   2.06%
Reverse repurchase agreements   6,475   145   2.24%   7,721   155   2.01%
  —Euro   5,574   116   2.08%   6,976   143   2.05%
  —Non Euro   901   29   3.22%   745   12   1.61%
Trading account securities and investments   17,533   513   2.93%   16,512   508   3.08%
  —Euro   15,597   436   2.80%   14,344   445   3.10%
  —Non Euro   1,936   77   3.97%   2,168   63   2.91%
Loans and leases to non-credit institutions   126,429   5,869   4.64%   117,962   5,703   4.83%
  —Euro   120,905   5,640   4.66%   112,130   5,485   4.89%
  —Non Euro   5,524   229   4.15%   5,832   218   3.74%
Other interest-earning assets from Banco di Napoli(4)   722   28   3.88%   938   34   3.62%
Total banking interest-earning assets   171,214   7,096   4.14%   157,945   6,692   4.24%
  —Euro   152,661   6,458   4.23%   144,743   6,307   4.35%
  —Non Euro   18,553   638   3.44%   13,202   385   2.92%
Investment banking assets   31,759           24,555        
Insurance business assets   45,028           37,728        
Total non-banking interest-earning assets   76,787           62,283        
Non-interest-earning assets   19,550           25,735        
   
         
       
Total assets   267,551           245,963        
   
         
       

(1)
EU GAAP in conformity with IFRS 1 without the application of IAS 32, IAS 39 and IFRS 4, whose transition date is deemed to be January 1, 2005.

(2)
Total interest income varies by €1,139 million and €504 million from total interest income as shown in the Consolidated Financial Statements for the years ended December 31, 2005 and 2004, respectively, due to the following differences:

the reclassification of interest income of A.I.P. that relates to insurance activities of €815 million in 2005;

the reclassification of interest income of Banca IMI that relates to securities dealing activities of €770 million and €552 million in 2005 and 2004, respectively;

the reclassification of interest income on derivative contracts hedging interest rate risk, which in the Consolidated Financial Statements are netted together, but which in the above table are

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      netted against interest income of the respective assets or liabilities hedged by the derivatives and the effect of the intra-Group eliminations between our insurance business, Banca IMI and other Group companies. These reclassifications decreased interest income by €398 million in 2005 and by €8 million in 2004; and

    the reclassification of interest written off in previous years and recovered during the year of €48 million and €40 million in 2005 and 2004, respectively, which in the Consolidated Financial Statements are included in "Impairment losses/write-backs to loans".

(3)
Represents interest income as a percentage of average interest-earning assets.

(4)
This line item comprises the credits from SGA. SGA is the company established to recover non-performing loans of Banco di Napoli. See Part B, Section 7 of the Consolidated Financial Statements on page F-44.

 
  Year ended December 31,
 
  2005
  2004(1)
 
  Average balance
  Interest(2)
  Average rate(3)
  Average balance
  Interest(2)
  Average rate(3)
 
  (millions of €, except percentages)

Liabilities and Shareholders' Equity:                        
Interest-bearing liabilities                        
Deposits, short-term borrowings and medium and long-term debt from credit institutions   29,357   795   2.71%   21,680   499   2.30%
  —Euro   19,808   479   2.42%   15,442   373   2.42%
  —Non Euro   9,549   316   3.31%   6,238   126   2.02%
Short-term borrowings and medium- and long-term debt from non-credit institutions   76,899   849   1.10%   70,580   712   1.01%
  —Euro   68,254   592   0.87%   65,943   608   0.92%
  —Non Euro