An Islamic rating for Italian companies

Turin, 16 november 2014

Enrico Giustiniani Supervisor of Islamic Finance Working Group

AIAF - Italian Association of Financial Analysts

TURIN ISLAMIC ECONOMIC FORUM

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AIAF - Associazione Italiana degli Analisti Finanziari (Italian Association of Financial Analysts) is a non-profit association. AIAF joined EFFAS (The European Federation of Financial Analysts Societies). AIAF members are now about 1.000. Objectives Support and development of financial analysts' profession in Italy, taking care of its professional qualification. Promotion of the analysis of the financial markets in order to contribute to their development and efficiency, acting as a spokesman of the members’ opinions. Activities Training Course for the Financial Analysts' Education, certified by EFFAS. About 250 meetings, each year, with the listed Italian companies for presentation and discussions on annual and mid-year reports, new listins and extraordinary operations. A quarterly magazine is produced, ("Rivista AIAF“). To all issues are enclosed technical supplements (“Quaderni AIAF”), produced by the single commissions.

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Islamic financial assets

38,97%

15,00% 11,72%

9,83%

9,14%

1,90%

13,45% Equity

Commodities

Fixed income

Real estate

Money market

Balanced

Altri

Investment funds (type of investment) (billion dollar USA) Fonte: United Kingdom Islamic Finance Secretariat

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first target: The research aims to highlight the benefits that Italian companies may take looking at Islamic finance as valid options to conventional financing. second target: Create awareness and visibility, actually insistent, of the Italian production system, that would represent a good opportunity for Islamic investors, also because of the consolidated appeal of Made in Italy in those areas.

Evaluation of the investment in an Italian portfolio based on principles of Sharia for the period 2002-2013, checking annual performances. Qualitative principle: exclusion of companies with business forbidden by Islamic Law (Riba, Maisir, Gharar and Haram) Financial principle: exclusion of companies with unbalanced debt ratios Other conditions: not applied any form of purification to capital gains. The weight of every component is proportional to its free-float, with a cap set at 25% to avoid excessive concentrations. Annual Index update.

Introduction and analysis

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Quality of the sectors

“Main" means that the company is sharia-compliant if the prohibited activity represents only a certain percentage of the profit. "Excluded" means that the company is not sharia-compliant because the prohibited activity is part of the business. The column “ITA-INDEX" has been processed by the AIAF Islamic Group not supervised by a Sharia board. Source: Adopted from Derigs, U., and Marzban, S., (2008), Review and Analysis of Current Shariah-Compliant Equity Screening Practices, International Journal of Islamic and Middle Eastern Finance and Management

Sector Screening Criteria Based on the Major Four Global Islamic Indices Providers

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Islamic Financial Ratios

Source: Adopted from the websites of the companies that provide the market indices. The column “ITA-INDEX" has been prepared by the Group AIAF unsupervised by Sharia board.

Financial Screening Criteria Based on the Major Four Global Islamic Indices Providers

S&P FTSE DJ MSCI FTSE-MIB

Level of DebtTotal Debt/ MarketCap(Aver.36month)

less than 33%

Total Debt/ TotalAssets less than

33%

Total Debt/ Market Cap(Aver.24month)less than 33%

Total Debt/ TotalAssets less than

33.33%

Total Debt/ MarketCap(Aver.24month)

less than 33%

Cash and interest bearing securities

Cash and interestbearing securities/

Market Cap(Aver.36month)less than 33%

Cash and interestbearing securities/

total assetsless than 33%

Cash and interestbearing securities/

Market Cap(Aver.24month)less than 33%

Cash and interestbearing securities/

total assetless than 33.33%

Cash and interestbearing securities/

Market Cap(Aver.24month)less than 33%

Liquidity

Account Receivable/Market Cap

(Aver.36month) lessthan 49%

Account Receivableand cash/ total debt

less than 50%

Account Receivable/Market Cap

(Aver.24month) lessthan 33%

Account Receivablesand cash/ total asset

less than 33.33%

Account Receivable/Market Cap

(Aver.24month) lessthan 33%

Impermissible Income

(other than interestincome) should not

exceed 5%of total revenue

(Total interest andnon compliant

activities income)should not exceed 5%

of total revenue

Should not exceed5% of total revenue

Should not exceed5%

of total revenuenot determined

ISLAMIC INDEX

Used parameters: - Total debt / Market capitalization (12 months) - Account Receivables / Market capitalization (12 months) - Cash and interest bearing securities/ Market capitalization

(12 months) a lower debt allows: A correct financial balance Continuous monitoring of corporate balance Prolonged high levels of debt destroys value These criteria guarantee a good level of quality and stability

for every company Increased stability of the companies "compliant" in times of

crisis 9

Importance of "Sharia compliant“ criterias

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On 09/30/2013 FTSE Shariah All World had a basket of 1,381 shares vs 2,888 of the benchmark FTSE All World (drawn on large and mid cap companies from 48 countries); the selection has determinate a basket of just under 50% of the investable universe of departure. Italian shares included are: Buzzi Unicem, Enel, Enel Green Power, Eni, Exor, Fiat, Luxottica, Parmalat, Pirelli, Prysmian, Saipem e Tenaris e ST Microelectronics.

On 12/31/2013 Dow Jones Islamic Market Index had a basket of 2,510 companies. Italian shares included are: Diasorin, Luxottica, Moncler, Parmalat, Recordati, Salvatore Ferragamo, Tod’s. German companies are 36 and French ones are 23.

On the Italian Stock Exchange from 268 listed companies, 189 are excluded for over-indebtedness (68%). Chronic undercapitalization of Italian companies “Relationship capitalism” and not “market capitalism” In four years (2010-2014) the crisis has accelerated the deterioration of already existing

unbalanced situations A positive evidence has only been found in the luxury and pharmaceutical sector Small and medium caps are more willing to recapitalize

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Islamic Index – Italian outlook

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The Italian Stock Exchange Islamic Index

Da: L’Indice islamico della Borsa Italiana di Daniele Cappellini (Quaderno AIAF «Un rating Islamico per le società italiane»)

2011 2012 2013 NAME SECTOR PESO NAME SECTOR PESO NAME SECTOR PESO LANDI RENZO SPA Automobiles & Parts 1.96% TENARIS SA Basic Resources 15.00% TENARIS SA Basic Resources 15.00% TENARIS SA Basic Resources 15.00% PARMALAT SPA Food & Beverage 15.00% BONIFICA FERRARESI Food & Beverage 1.09% PARMALAT SPA Food & Beverage 15.00% DIASORIN SPA Health Care 7.37% DIASORIN SPA Health Care 12.59% BONIFICA FERRARESI Food & Beverage 0.89% RECORDATI SPA Health Care 6.26% RECORDATI SPA Health Care 10.69% DIASORIN SPA Health Care 8.45% SORIN SPA Health Care 3.70% SORIN SPA Health Care 6.32% RECORDATI SPA Health Care 6.61% SAVE SPA Industrial Goods & Services 1.76% NICE SPA Industrial Goods & Services 2.54% SORIN SPA Health Care 3.73% NICE SPA Industrial Goods & Services 1.49% SAES GETTERS SPA Industrial Goods & Services 1.08% SAVE SPA Industrial Goods & Services 1.99% SABAF SPA Industrial Goods & Services 0.93% LUXOTTICA GROUP SPA Personal & Household Goods 15.00% NICE SPA Industrial Goods & Services 1.77% SAIPEM SPA Oil & Gas 15.00% TOD'S SPA Personal & Household Goods 15.00% SABAF SPA Industrial Goods & Services 1.12% LUXOTTICA GROUP SPA Personal & Household Goods 15.00% DE'LONGHI SPA Personal & Household Goods 8.55% MEDIASET SPA Media 15.00% TOD'S SPA Personal & Household Goods 10.74% GEOX SPA Personal & Household Goods 6.90% BULGARI SPA Personal & Household Goods 10.17% GEOX SPA Personal & Household Goods 4.04% YOOX SPA Retail 4.25% TOD'S SPA Personal & Household Goods 9.59% MARCOLIN SPA Personal & Household Goods 1.22% ACOTEL GROUP SPA Telecommunications 1.00% GEOX SPA Personal & Household Goods 5.80% YOOX SPA Retail 2.49% YOOX SPA Retail 1.76% ACOTEL GROUP SPA Telecommunications 1.16%

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The Italian Stock Exchange Islamic

Index 2002 - 2013

performance Total Return

Portfolio and benchmark trends are very distant During the period under review, the portfolio Sharia Compliant

provided an outperformance of 40% even an accumulated strong underperformance until the end of 2008

Portofolio construction and performance analysis

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• The Italian Stock Exchange Islamic Index is very different from the traditional index (FTSE MIB), dominated by banks, energy and utilities:

– It does not include banks, insurance companies, inside are very few utilities and energy companies,

– It includes Companies with a low debt which are mostly represented by mid and small caps,

– It seems to represent the areas of '‘Italian excellences”: a high percentage of the shares included are companies operating in the fields of fashion and luxury goods, the so-called Made in Italy and pharmaceutical sector (Geox, Tod's, Luxottica, De’ Longhi, Recordati). It include also companies that manage the airports of three major Italian tourist cities: Florence (ADF), Pisa (SAT) and until 2012 Venice (SAVE).

• The fact that the Islamic equity funds invest in companies not in debt, also

makes an interesting selection for those investors who are looking for a long-term equity investment not particularly risky, such as conservative institutional or pension funds, endowments, foundations, etc.

Conclusions

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• Another significant conclusion is that the performance results achieved by the Italian portfolio Shariah-compliant did better than the benchmark: the cumulative return obtained was greater than the portfolio by approximately 40%.

• Another important characteristic is that the religious provisions imply some economically rational guidelines: all the financial ratios are measurements very similar to the ones used by traditional stock pickers.

• Islamic equity funds offer a safer investment opportunity and they are usually more resistant during market shocks.

• Muslims have started to invest capitals in Italy, particularly Arab Emirates investors (Alitalia, Valentino, Eni, Unicredit, …), for Italian companies sharia-compliant could be a good opportunity for growth.

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Conclusions

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target: Is it possible to issue a national (or European) sukuk, through a private or public real estate securitization, considering the current Italian civil and tax legislation?

Next research

Islamic Bonds and Real Estate

Securitization. The Italian outlook

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Thank you for your attention

Q & A