June 12, 2017, Monday
The Vatican Bank Is Reporting A €20 Million (c. $22 Million) Increase In Profits

How much money does the Vatican bank have?

About 5.7 billion euros. (That is about $6.3 billion.)

But most of it is not the Vatican’s money — it is the money of thousands of depositors, like religious orders, and bishops, and cardinals.

These depositors have a total of 14,960 accounts at the bank — down several thousand in the past two years due to Francis’ reform efforts. (The Vatican has spent almost four years now combing through the thousands of bank accounts, and closing many down. As Christopher Lamb reported today for The Tablet (link), “Over the years the IOR had been mired in scandal with accusations that it was being used for money laundering and failing to abide by international financial standards.”)

The actual amount of the Vatican’s own money at the Vatican bank is a much more modest 636.6 million euro — about $700 million.

And what does the Vatican do with these funds? Does the IOR invest them in Apple stock, or Tesla, or Priceline? Or in commodities like oil or gold? Or in real estate? Bonds? And if in bonds, the bonds of which countries?

If you are looking for answers to such questions, you won’t get them from the Annual Report that the Vatican released today on the 2016 activity of the Vatican bank — officially called the Istituto per le Opere di Religione (Institute for the Works of Religion, commonly referred to as the IOR).

Here is a link to the actual text of the report, which is a 136-page PDF file, so you may open the file and read the entire report in English. (And I would be happy to receive any insight from a reader into the information this report contains, and what it means.)

There is no record anywhere in this report of the Vatican investing in stock like Apple or IBM or Facebook, or in Italian government 10-year treasury notes.

The results do give certain overall numbers.

For example, as stated at the outset, the total amount of money that the bank manages is about 5.7 billion euros (about $6.3 billion).

That may seem like a lot. And some might speculate, for example, that the Vatican might have earned a profit of, say, 5%, on all of those funds and investments, so, perhaps $315 million…

But that would be off target…

The results show that the bank had 36 million euros in profit, or a bit more than 1% of the total under management. And that is an increase of 20 million euros above the 16 million euros in profit the bank earned in 2015.

“These results,” writes Christopher Lamb, “will be seen as a boost for Pope Francis’ Vatican financial reforms, which he has entrusted to Australian Cardinal George Pell. Soon after taking over as Prefect of the Secretariat of the Economy, Cardinal Pell announced a new management of the bank, including appointing billionaire hedge fund guru Michael Hintze to its board.”

Lamb also writes: “In the 1970s and 80s, the bank was embroiled in the collapse of two Italian banks, including ‘Banco Ambrosiano’, whose chairman, Roberto Calvi, was later found hanging from Blackfriars bridge. Crisis then hit in January 2013 when Italy’s central bank blocked all electronic payments through cash machines and credit cards in Vatican City State, caused partly by the IOR failing to keep up to speed with new anti-money laundering rules. These laws were brought in following 9/11 in order to prevent the financing of terrorism. All this meant some cardinals wanted Pope Francis to close down the bank, arguing that St Peter did not have a bank account. This was a view shared by Francis but he later agreed to keep the IOR open provided it was reformed.”

A Step Back

Let’s take a step back. What is the Vatican bank, and how does it earn its money?

The IOR administers about 15,000 accounts worldwide for religious orders, various Church organizations, and individuals.

Through the bank, the Holy See helps its depositors to move funds to support religious initiatives, like missions, convents, schools and clinics, in places from Brazil to South Sudan to India.

“The IOR strives to serve the global mission of the Catholic Church through the administration of the entrusted assets and providing payment services to the Holy See and related entities, religious orders, other Catholic institutions, clergy, employees of the Holy See and the accredited diplomatic bodies,” the report states (p. 13).

The bank invests the funds entrusted to it in very conservative ways, the report says.

“On behalf of its clients,” the report says, “the Institute carries out financial activities… and offers the following services: acceptance of deposits, asset management, certain custodial functions, international payment transfers through correspondent banks, and holding salary and pension accounts of employees of the Holy See and the Vatican City State. The Institute protects its clients’ assets by primarily investing in financial instruments characterized as very low risk (e.g. government bonds, bonds issued by institutions and international organizations, as well as deposits in the interbank market).” (pp. 13-14)

So, can we get a clearer idea of who actually uses the bank?

“Measured by assets entrusted, the most important group of clients, was religious orders,” the report states. “They accounted for more than half of our client base in 2016 (54%), followed by Roman Curia departments, Holy See Offices and nunciatures (11%), entities of Canon Law (9%), cardinals, bishops and clergy (8%), episcopal conferences, dioceses and parishes (8%), with the remainder split between various others, such as Vatican employees and pensioners and Canon Law foundations.” (p. 25)

One question I have is why among the clients there can be a few “dioceses and parishes” (if they have 8% of the total asset under management of $6.3 billion, then they have some $500 million on deposit at the bank) and not an account for every diocese and parish in the world. Why not? I do not know the answer to that question. Of course, having every Catholic diocese and parish in the world open an account at the Vatican bank would arguably make the Vatican bank, for funds deposited, one of the largest, if not the largest, in the world.

The report explains the income figures this way: “In 2016, IOR’s Net profit was EUR 36.0m (2015: EUR 16.1m). The increase from 2015 was mainly due to improved results from Net Income for trading activities, to the remeasurement of a provision for tax remediation to foreign countries recognized in 2015 and to the decrease in Administrative expenses… The most significant source of revenues is the profit derived from Treasury activities on proprietary portfolios. The most important component was derived from bond yield which contributed for EUR 39.6 million (interests EUR 38,0 million plus trading results EUR 1.6 million).” (p. 25)

So, from this passage we learn that the increase in income that the Vatican bank earned in 2016 derived from:

1) trading activities gave improved results

2) recalculating taxes owed to various countries (apparently, recalculating down) allowed higher profits

3) less overhead in the offices themselves enabled greater profits

4) bond yields provided almost all of the profits

The report says “bond yields” provided 38 million euros, and “trading in bonds” 1.6 million euros, for a total of 39.6 million of profit during 2016.

And the total profit for the year was only 36 million euros. So there had to be some losses somewhere else.

And there were. In trading activities.

The report says, “Net Income for trading activities recognized a net loss of EUR 9.0m compared to a net loss of EUR 15.4m in 2015.”

So, both in 2105 and 2016, the IOR traders lost millions of euros.

“The result,” the report says, “was mainly affected by the decrease in UCI unit investment compared to 2015, amounting to EUR -12.8 million. The improvement in the results was mainly due to the positive performance of the bonds held in the proprietary portfolio in 2016, compared to 2015, to market trends during the year.”

So, in short, there was a 12.8 million euro loss due to a decline in the “UCI unit investment” (not sure what that was, and I do not see it defined anywhere in the report).

So, from this report, we are told that the main culprit for the loss was a single “bad trade.”

We are also told that the Vatican bank traders made a profit of… 94,000 euros (just a bit more than $100,000) in trading stocks(!).

“Equity securities,” the report says, “recorded a profit of EUR 94,000 in 2016, versus a loss of EUR 307,000 in 2015, while FX activity contributed for EUR 2.0 million versus EUR 1.9 million in 2015.” (FX activity refers to trading in currencies.)

Still, there is no list of stocks bought or sold. Again, we have no idea if the Vatican bank bought gold mining shares or technology stocks or bank stocks or consumer goods stocks — such details are not part of this report.

We do glimpse a bank that is shedding employees, slowly.

Administrative Expenses were EUR 19.1m in 2016 (2015: EUR 23.4m),” the report says. So there were 4.3 million euros less spent on administering the bank.

The report continues: “This includes Staff Expenses of EUR 10.2m in 2016, in reduction with the prior year amount (2015: EUR 11.3m, or – 9.1%). As of December 31, 2016, the IOR had a total of 102 personnel (2015: 109). During the year, six employees retired and one resigned.”

So, the banks spent 1.1 million euros less on salaries in 2016 than in 2015, and dropped from 109 to 102 staff people. (If those 7 people together were earning the 1.1 million euros saved, they were earning an average of 157,200 euros each, or close to $175,000 each.

And: “Administrative expenses also include expenses for professional services, which decreased from EUR 7.6m in 2015 to EUR 4.0m in 2016. This was due to lower extraordinary costs incurred during the year from the completion of certain projects.”

So the bank spent 3.6 million euros less on “professional services” — that is close to a $4 million saving.

We come to the “bottom line” results on page 129 of the report, where these figures are given (I give the text of the statement in italics):

The Financial Statements may be summarized as follows:

EUR000 [Note: meaning figures require adding 3 zeros]
Total assets 3,268,890
Total liabilities 2,596,290
Net assets 672,600


Net result from financial activities 42,762
Net operating profit 36,001
Profit available for distribution 36,001

The IOR Press Release explaining the 2016 statement is as follows:

Vatican City, 12 June 2017 – For the fifth year, the Istituto per le Opere di Religione (IOR) has published its financial statements.

The financial statements have been audited by the independent audit firm Deloitte & Touche S.p.A.

The Board of Superintendence of the Istituto per le Opere di Religione unanimously approved the 2016 financial statements on April 26 and proposed to the Cardinals Commission the distribution of the entire amount of profits to the Holy See.

In 2016 IOR has continued to serve with prudence and provide specialized financial services to the Catholic Church worldwide and the Vatican City state. The highlights are as follows.

  • In 2016 the IOR served nearly 15,000 clients worldwide who entrusted to the IOR assets worth Euro 5.7 billion at the end of the year (Euro 5.8 billion in 2015), of which Euro 3.7 billion related to assets under management and under custody. Many initiatives were taken throughout the year to increase customer focus in accordance with IOR’s mission.
  • The Institute continued to reduce its operational expenses, which decreased to Euro 19.1 million from Euro 23.4 million in 2015 notably due to rationalisation of contracts with service providers.
    The 2016 operating income was Euro 44.1 million (Euro 45.4 million in 2015). The major contribution (Euro 46 million) came from the management of IOR’s balance sheet (proprietary portfolio). The net result was Euro 36 million (Euro 16.1 million in 2015).
  • This result has been achieved thanks to a prudent approach in managing IOR’s investments in a year characterised by high volatility, global political uncertainty due to unexpected outcomes of major electoral events and low interest rates.
  • As of 31 December 2016, the Institute’s equity — net of distributed profits — amounted to Euro 636.6 million, corresponding to a 64.5% CET1 ratio, highlighting high solvency and low risk profile.

Other achievements
In addition to achieving those economic and financial results, the Institute has also met the organizational objectives envisaged by the 2016 business plan, among which the most important were:

– IOR’s governance, risks control and compliance in general
The IOR has consolidated and strengthened its internal governance and internal control system. The Institute has notably defined and implemented a Risk Appetite Framework, and has continued to adapt to the new AIF regulatory framework whilst seeking consistency with international best practices.

– Disclosure and tax matters with the Republic of Italy
The Agreement between the Republic of Italy and the Holy See on tax matters entered into force on the 15th of October 2016. It opened the way to the inclusion of the Holy See in the tax “white list” of the Republic of Italy on the 23rd of March 2017.

Visit www.ior.va website for further information.

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