Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM first half 2020 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Roberto Peronaglio, IR Manager of Banco BPM. Please go ahead, sir.
Thanks a lot. Thanks, everybody, to be present with us at the presentation of Banco BPM first half results. As usual, before leaving the floor to Mr. Castagna for the presentation, I would only remind you that you can find the presentation on our website on the Investor Relations page, and that the section Q&A is reserved only to the financial analysts. I leave the floor to Mr. Castagna.
Hello. Good evening, everybody. I know it's 6:30, over 6:00, so I have to be quick. I'll try to do my best. Thank you for being with us. I know it's been a long day also for you. I start on page five. Some news about our reaction to the COVID. What we can say, almost as all the other banks, we are back to normal, of course, with much more digital business grown over these weeks and months. We have reopened all the branches. We will terminate our full reopening by the beginning of September, and now we have more than 90% of our people in the branch, and almost 50% into head office, compared with the 35% in the branch and 20% in head office during the peak of the COVID. I won't spend time about digital. You can see the figure, how they have grown.
They are consistent. Now that we are basically with all the branches open, the digital experience has been appreciated by our clients, and also, I would say, by our colleagues. Back to normal also in terms of business. As you can see, investment product placement and fees and commission, which were the two items hit by the crisis during the two and a half months of the COVID peak, are now in June, almost back to normal. Product placement in June was EUR 1.3 billion, compared to EUR 0.7 in May and EUR 0.3 in April. The fees and commission revenues are up to EUR 151 million in June, compared to EUR 104 in April and EUR 121 in May. The average of the Q1 was EUR 147.
On page six, some comment about the government support measure and how our bank is proactive, trying to have a granular approach at client level in order to exploit all the opportunity given by the state measures, and also the possibility to try to cover at our best the needs of our clients. Basically, we had a three-step approach, analyzing all the corporate and SME clients. The drivers were the pre-COVID rating, the capital solidity, the sector outlook, and the share of wallet. Having done that, we then segmented our clients into different groups, homogeneous groups, in order to assess which kind of impact they would have had by the COVID and which kind of measure they would need on our side in order to be the safest possible.
As you can see, the output was to give target list for each relationship manager, basically indicating the strategy to be adopted at single client level. On page seven, the new lending activity, which grew a lot into Q2. The results of full semester was EUR 12.4 billion of new lending, up 13% vis-à-vis first half 2019. The impact of the guarantee as of June was EUR 2 billion out of the EUR 12 billion. Just to mention the pace of the growing guarantee measures, in July, we are up to EUR 4 billion, so EUR 2 billion only in July.
The amount in the pipeline of the public guarantee amount as of today to EUR 11.5 billion, of which already granted in July, EUR 4 billion, as I mentioned before, and out of the EUR 7.5 billion still to be granted, we have EUR 5 billion which are already authorized by our credit department and waiting for being drawn by our clients. Only EUR 2.6 billion under approval. Going to the moratoria measure on page 8, just a quick number. We had suspended installments for EUR 2.3 billion, out of which EUR 0.4 billion out of ABI moratoria and EUR 1.9 billion for the Cura Italia decree moratoria. The total underlying exposure related to this installment amount to EUR 16 billion, out of which EUR 3 billion ABI moratoria, EUR 12.9 billion Cura Italia decree moratoria. As you know, the ABI moratoria has 12-24 months of extension.
Meanwhile, the decree is supposed to expire by September this year, but is most probably to be renewed with the August decree, as far as we know, at least to January 2021, giving us, of course, time to intervene in order to have the best possible measure for our clients to comply with the installment. Basically, also to this regard, we have a distribution by rating class, mostly in the low, medium risk class, applying for moratoria. Differently from the financing guaranteed by the state, the moratoria was basically applied by everybody, the majority of which are in the low, medium risk, 76%, only 14% in the mid-high risk, and 10% in the high-risk categories. The exposure to selected sectors, which we mentioned also in our Q1 results, which are the most exposed to COVID, is only EUR 500 million for mid-high risk and EUR 300 million for high risk.
Let's have another look on this issue on page 9. As you can see, out of EUR 102 billion of loans portfolio, we have 86% from 87.8% in the low, medium-low, and medium risk categories, and 8% in the medium-high, 5% in the high-risk category. Inside this, we have that the sector most impacted, and are the sector that you can see in the note three, transportation, accommodation, restaurant and travel agency, textile and leather, automotive, and transportation, account for EUR 8 billion out of the EUR 102 billion of our portfolio. Of this EUR 8 billion, almost EUR 5 billion are already covered by either real estate guarantee or state guarantee approved under the liquidity decree. The remaining EUR 3 billion are still under examination in order to find the best solution and try to give also to them the support, as much as possible, of state guarantee.
If we go to the level of high-risk rating and mid-high risk rating, the EUR 8 billion became EUR 400 million for the high risk, EUR 1 billion for the mid-high risk, and only EUR 100 million and EUR 400 million are still to be secured. On page 10, we have the scenario that we applied on the performing loan exposure, in order to consider the ECL impact on H1 result, which, as you know, was EUR 140 million on the performing exposure. This was extrapolated with a more conservative scenario vis-à-vis the Q1. As you know, in the Q1, we had our own scenario, which was more or less 8% of lower GDP. Meanwhile, the new scenario is the one approved by ECB and is a multi-scenario approach, which give us more or less 9.6%, 9.7% of lower GDP.
We were able to disaggregate by sector the impact of the relevant GDP reduction for each specific sector. Again, the COVID impact was EUR 140 million on the performing exposure. On page 12, you can find the results of Q2 compared with Q1. As you see, we reported EUR 105 million of net profit, which was EUR 128 adjusted. On the left of the slide, you find the disposition considering the fair value on liabilities under net financial results. In order to give you a more comprehensive and comparable effective result, we have reexposed the fair value on the liabilities under the net income before tax. In order to give you a comparison of the line-by-line result, Q2 on Q1.
As you can see on the right side of slide 12, we were able to have better results, basically in every item, Q2 on Q1, both in terms of NII, in terms of total income, revenues were up 5%. Not in terms of fee and commission, where I told you we have registered the harder effect of the COVID lockdown. We also were able to reduce 3.3% operating cost, and have profit from operation at EUR 387 million, compared to EUR 320 million of Q1 2020. Provision were up almost EUR 50 million, EUR 263 compared to EUR 213, for a pre-tax profit 2.6% higher of Q1, EUR 106 million versus EUR 103 million. After systemic charge, we had the net income before the line that I mentioned before, and the PPA, which was EUR 76 million positive compared to EUR 20 million of Q1 2020.
The final net income, including the fair value on liabilities, is negative EUR 46 million compared to EUR 151 million Q1, which in turn was affected by this item. Let's go to the sum up of the most importan t item. On page 13, we have, frankly speaking, a quite solid H1 performance in this COVID context. Total revenues, again, up 5%, cost down 3.3%, with very good pre-provision income. Also, in terms of reserves and unrealized gains, we got the most, but our Govies portfolio. As you can see, quarter-on-quarter, we had EUR 230 million of reserves on fair value on cost, which of course apply to our Common Equity Tier 1 and impact for 40 basis points. Meanwhile, we also registered a very comfortable EUR 245 million of positive performance in terms of unrealized gains on debt at amortized cost.
As you know, this is not going either in the profit and loss nor in the Common Equity Tier 1. It's still a reserve, which is very comfortable for the months ahead. Also, in terms of volumes, we had a quite comfortable growth, both in terms of loans, which grew 4% year-on-year and 1% quarter-on-quarter. The real growth is still to come, if you consider that only in July, we registered another EUR 1 billion of increase in stock, which is another 1% compared to the second quarter of this year. The same in terms of current account and deposit. The increase was 8.7% year-on-year, 3.2% quarter-on-quarter. In July, we have another EUR 2.1 billion of deposit, growing 2% versus Q2 2020.
Asset quality, we are experiencing a slow decrease of our NPE exposure, going down from 9.1% to 8.7% gross and 5% net NPE ratio, with the Texas ratio down to 49%. Very comfortable also, our liquidity and funding position, of course, couldn't be different because of the possibility and the opportunity that we exploited, drawing EUR 25 billion of TLTRO. We still have EUR 24 billion of unencumbered eligible securities, and we still could draw another EUR 10 billion of TLTRO III. The LCR, of course, was up 193%. Capital ratios, also on the capital side, we had some strengthening. Common equity tier one grew 40 basis points, fully loaded to 13.3%, mainly due to the strengthening of the Govies performance. Meanwhile, phase-in common equity tier one was up 14.7%. Also, in terms of MDA buffer, we were up 335 basis points. As you may remember, our guidance is 250 basis points.
Meanwhile, on common equity tier one ratio versus minimum requirement, we are up 480 basis points. Let's go to some specific figure of the balance of the P&L. Net interest income is up EUR 5 million. On the right, you can see the different contribution to the growth of the net interest income. It's interesting to notice that also in the three months of the quarter, we had a slight increase month by month from EUR 154 million in April to EUR 164 million in June. The commercial spread is up some basis points. We feel that this could experience some decrease in the next months due to both the lowering of the Euribor and also the increasing volumes of state guarantee, which of course, have lower spreads. I already mentioned the volume, both in June and also the increase we registered in July, so I skip page 17.
Going to page 18, where we have some details about our performance in lending. Strong increase, 13% vis-à-vis same period last year, 22% up in terms of corporate, 30% down in terms of household. If you look on the left lower side of the slide, you can see that also the household in the Q2 is growing from 0.6 to 0.8. Likewise, of course, enterprise and corporate. There is another figure, that scheme that you can see the different figure month by month. As you can see, we are increasing quite dramatically the lending, taking advantage from the state guarantee. Let's say that in Q2, the amount of state guarantee represented 29% of the total new lending. Only in July, the amount of state guarantee loans was up to 60%, and this, of course, is going to better our loan portfolio quality.
On page 19, just one minute about the funding. Of course, we are not issuing anything. First of all, we had some very interesting and very good in terms of rate issue in January and February. Nowadays we are waiting for normal time to restore. First of all, we haven't drawn so much in terms of TLTRO. We have almost covered all our needs. I would say that the only thing we will issue by this year is for regulatory requirement if needed, and not for liquidity needs. Talking about liquidity on page 20. Again, 24 billion of unencumbered eligible securities, up to 28 billion in July. I already mentioned that we can draw another 10 million of TLTRO. The total effect of the TLTRO drawing will be in H2 2020 because, of course, as you know, the drawing was done at the end of June.
Let's go on page 21 to net fees and commission. As you can see, we were down 8% year-on-year and 14.6% Q2 on Q1. I can say that we are optimistic. If we see the right side of the slide, you can see both in terms of revenues on the upside of the slide and in terms of monthly product placement trend on the lower part of the slide, the restoring of the normal activity. I would say that after experiencing a very low April with EUR 104 million of revenues coming from commission, we went up to EUR 121 in May and to EUR 150 in June, which is in the average of the best two months beginning of the year.
The same, as you can see on the low side of the slide, we went from EUR 1.2 billion, EUR 1.5 billion of product placement January and February, down to EUR 0.9, EUR 0.3, EUR 0.7. Now we are back to almost the normal activity, of course, coming from the reopening of the network. Again, on the net financial result, as I mentioned before, the result is -EUR 82 million compared with +EUR 206 million. These are mostly due to the fair value of own liabilities on the certificate issuing from our bank. If we exclude these lines, which you know is not going to affect the common equity Tier 1. We registered a comfortable EUR 82 million of NFR compared to zero in the Q1. Most of these revenues came from disposal of GovBs for EUR 34 million, from some revaluation of fair value asset for EUR 29 million, and negotiation activity for EUR 18 million.
I don't comment the reserves on debt securities and unrealized gains, which we already mentioned before, and which are still registering further increase also in July. Debt security, our portfolio has increased in the last two quarters this year. Let's say that the first quarter, we just recovered, as we do every year, some trading activities, which normally end of the year, we try to keep as low as possible. Meanwhile, in the Q2, we had an increase of almost EUR 3 billion of HTC GovBs with a very short maturity, linked to the expiring of TLTRO funding. We have matched the two activities. Still, we have 57% of Italian GovBs mainly concentrated, as you can see down in the slide, in the HTC portfolio.
Page 24, just to mention that the duration is very low, is going down for Italian GovBs AC from 3.9 to 3.3, and for Italian GovBs HTCM from 2.3 to 1.6, and the basis point value is down to EUR 1.5 million. On page 25, some good news from operating cost. We were able to still reduce, as we are doing basically since the beginning of the merger, as you can see on the right side of the slide, basically we are down on the average result of each year, 15% from 2017, and we have reduced another 4.5% comparing H1 '20 to the same period '19. Still, we feel that we can be able to have some further reduction in cost also in the second part of the year, namely in staff cost, but also in other administrative costs. On page 26, we have some figure about asset quality.
As I mentioned before, we are down to 8.75% of total NPE ratio, gross and net, and 3.1 and 1.4 on bad loan ratios. The coverage is still sound, 56% on bad loan, 63% if you include the write-offs, 80 basis point higher. A bit lower, 30 basis point lower in UTP coverage, down to 39.3, mainly due to the different composition of the UTP portfolio, where we increased the guaranteed UTP versus the uncovered. A good increase also in past due coverage and the total coverage of 48.6, including write-offs. Of course, we have also increased, as I mentioned before, the performing exposure to 45 basis point. Flows are going very well. The migration rates are still very comfortable, down 1.1% default rate, down 8.1% deterioration rate. Unfortunately, also down the cure rate to 3.7%.
As you can see, the inflows both to NPEs and to bad loans are very low. Of course, this is also due to the moratoria effect. On page 28, cost of risk. The blue figure is the normal cost of risk, mainly in, of course, coverage on non-performing exposure. Meanwhile, the yellow one is COVID-related top up in generic provision, which amount to EUR 140 million between the two quarter. The cost of risk with this increase is up 28 basis point on the first half and 97 basis point on the Q2. I would like to draw your attention on page 29. This is a graphic that, in our opinion, can explain together with the attention we are having for covering as much as possible our clients with state-owned guarantee. Also, this slide is very important.
It shows you how our geography helps in cost of risk containment. As you can see, we have split Italy in 4 different areas, each one, of course, representing different regions, in which you have the red one, which are the one with the higher NPE ratio. You can see that most of our peers have a good exposure to this region, while we have only 1.5% of exposure of our book to this region. The same, of course, going up, where we have the bigger exposure is in the region where the gross NPE ratio is below 9%. I think this can give you some idea why we could be able to safeguard our asset quality profile. Another very interesting, quite new slide we are going to propose is page 30.
This is to show that it's very difficult to imagine a pick-up of the cost of risk to historic situation. As you can see, we exposed the different contribution to the global cost of risk for 2017, 2018, 2019, and 2020, split into the stock-driven provision, the disposal provision, the flow-driven provision, and only for this year, also the COVID impact. As you can see on the correlation on the right side of the slide, the most important correlation is the stock, the amount of stock that you have. Having reduced quite impressively the stock from EUR 30 billion to below EUR 10 billion, is quite difficult to consider a cost of the stock that can go higher than the level that we have right now. I would say the same almost for the flows.
Of course, there is a lower elasticity in the flows, but also this is important to show that if you see the different figure of the flows, this can show you that basically our bank was already with a good cleanup when we start the merger. Unfortunately, we had a lot of stock, but the quality of the performing portfolio is performing almost the same since the merger. Finally, strong capital ratios and buffer. We have anticipated the figure of 13.3 on common equity Tier 1, 14.7 phase in. Let me say some details. The increase was driven by the HTCS reserves on GOVs, and from the SME supporting factor. Meanwhile, we already embedded in our capital the effect of the RWA deterioration following the GDP scenario we have applied to our numbers, and the shift of the PD from the best categories toward the lower one.
This should bring some lower effect in terms of reduction of common equity Tier 1 in the second part of the year. We are really comfortable with the MDA buffer we are registering. The only effect that we are forecasting for reducing common equity Tier 1 is related to the combined effect of regulatory headwind and tailwinds, which are going to be applied by the year-end and amount to some 35 basis points. Just some final remarks. We find the performance quite solid, a good net income. Moreover, a comfortable pre-provision profit up to EUR 390 million in Q2 versus EUR 320 million in Q1, and fostered by a very good cost containment, which we feel will characterize also the second part of the year. Also, the provision policy is prudent. Our scenario does not forecast other potential impact on performing loans.
We are deciding, and we will make some further reason during the second part of the year, in order to still reduce the NPL ratio. Of course, the workout for the first part of the year was very difficult because of all the constraint of the COVID. We are having some sort of understanding and some reverse offer on the market in order to see if it's possible to have, toward the last part of the year, some disposal of NPL. The capital position, again, very robust, as much as the liquidity and the MDA buffers. Some figure about the outlook. I already mentioned a positive outlook for the second part of the year. Basically, all the more significant items are going to better, so both NII fees, cost control, as much as the cost of risk, we should remain at the level we have envisaged.
We imagine a potential outlook between 90 and 100 basis points. I would terminate with this, and I leave the floor to you for your question.
The first question is from Christian Carrese with Intermonte. Please go ahead.
Yes. Good afternoon. Thank you for taking my question. I would say a positive set of results, in particular on core revenues. My first question is on net interest income. If you can share with us the moving parts expected in second half 2020, in particular, in terms of customer spread evolution, I would suppose a further reduction of that spread due to new loans guaranteed. TLTRO, the current additional contribution expected in the second half, and the possibility you to increase for additional EUR 10 billion the TLTRO take up. The government exposure increased in the quarter. Do you expect to further increase the debt exposure? Is there any room to optimize liquidity, taking into account that today you have a liquidity coverage ratio of 193%? The second question is on fees. We saw a quite important increase in deposits year to date, I think EUR 5 billion.
We saw a positive trend in June. Do you expect this year, the third quarter, to be different from the other years in terms of seasonality? Do you expect some commercial action to try to regain what was lost in the first and second quarter? Third question on cost base. You said costs should go down further in the second half, so if you can update on redundancy plan, let's say, and the reduction of branches that you announced after the COVID outbreak. Finally, a question on M&A and dividends. We saw ECB asking banks not to pay dividends to keep some capital for COVID-19, and at the same time, issued a consultation paper in which clarified rules for M&A, for bad recognition, and so on. I was wondering if you can share with us your thoughts on M&A. We saw the successful bid by Intesa for UBI.
Do you see further consolidation, need for consolidation in the current environment? It could be helpful to hear from you your thoughts. Thank you.
Thank you, Mr. Carrese. Very comprehensive set of questions. I would say, of course, I cannot give you the right number, we expect a quite consistent increase of NII in Q2. This is both for TLTRO, but also for the increase of volumes of our lending activity, even though will be tempered by the slight reduction in spread because of the bettering of the quality of the asset, of the loans we are going to grant. We don't think, as I mentioned before, to exploit very much the TLTRO other than for repositioning the maturity during the lifetime. It's possible that you are going to add some drawing in order to have different maturity, and not only one maturity, but the average will be more or less the one that we have right now.
Cost, as I mentioned, unfortunately, we think that we are quite good at cost reduction. We have done a massive cost reduction the first three years of the plan. We try to have an unfortunate industrial plan in which we were not cutting costs so much because we thought it was the time to invest more, to invest for more revenues. Of course, as we mentioned, that time, as the case may be, and unfortunately, the COVID was the case, we were able to still reduce our cost base. We feel that this year can be quite consistent, the reduction that you are going to have, consistent with the reduction we had in last year by year.
The majority will come not from redundancy and branch closure, because as you know, we still have to present the renewal of the industrial plan, until then, it's very difficult to have some action to be taken. Also, on ordinary basis, and thanks to some measure COVID-related, we will be able to consistently reduce cost base for personnel and also for other general costs. Commission, as I mentioned before, we are quite comfortable because of the June performance. The July was in line with June. This is for investment products. The normal activity is recovering. The amount of loans we are doing, of course, bring with them also a lot of commercial activity, and so we can have some sort of optimistic approach in terms of also banking commission, as we registered already in June. Dividend. Capital, as you see, is very strong.
Of course, we are still showing an optimistic approach. We want to see if the situation is really the one we see right now. We will take advantage from the ECB rules to wait until the end of the year. I hope we will have a clear view of the situation to understand what is better to do. The most important thing is that we have enough capital. The MDA buffer is well comfortable. The production also of profit that we mentioned for the first half, we feel is possible to have also good production in the second half. M&A. Congratulations to Intesa for the deal. Of course, this is a new situation. We couldn't do anything. We had to wait, foresee what was going to happen. For sure, this is a catalyst for new aggregation.
Our job is to be ready to take any potential opportunity at our best. In order to do that, we will try to work as much as possible to have a sound balance sheet, sound revenues, and be ready for whatever opportunity is going to come.
Just to follow up, would you take in consideration also a buyback, have in mind the current low valuation?
Everything is possible. Every year we do this conversation, which depends from the amount of revenues and profit we are going to generate. I would really take the opportunity to wait up to the end of the year. Again, I think you can be comfortable from the size of capital we have reached.
Thank you.
The next question is from Giovanni Razzoli with Equita. Please go ahead.
Good afternoon. Some clarifications on my side. The first one is on your cost guidance. If I'm not mistaken, in the business plan, you were assuming staff reduction, voluntary exits with a cost in the region of EUR 200 million-EUR 220 million, if I'm not mistaken. Shall we assume that you will enter into negotiation with the trade unions for this plan, or shall we wait for the new business plan? If so, can you give us an indication of what's your thoughts about the timing of this business plan? The second question relates to the situation of Agos, which has been very good performance in this second quarter.
Please correct me if I'm wrong, but if I remember correctly, you have a put option with Crédit Agricole on 10% stake for evaluation of EUR 450 million, which expires in June 2021, whilst you retain the option of listing the company, if I'm not mistaken, by November this year. I was wondering, as the timing is running late, what are your thoughts on this stake and what could be the impacts on your capital if the put option were to expire or if you were not succeeding to listing the company? Thank you.
Thank you, Giovanni. You're right. We mentioned, of course, in the business plan, some early retirement scheme. Nowadays, everything is frozen because we have to wait for the update of the plan in order to start a negotiation with the union, which are a prerequisite in order to make some provision on the exit. What I was mentioning before in terms of cost reduction was not taking into account the potential add-on need for redundancy. If this would be the case, we will have enough room also for that. I was talking like for like. Agos, also because of the COVID, we decided together with Crédit Agricole to give some time for deciding what to do, and we are basically under negotiation to postpone the maturity of the put option.
I cannot give you any other detail because it's not yet closed. The intention of both parts is to postpone to better times, I would say, the possibility to list the company.
Okay, thank you.
The next question is from Fabrizio Bernardi with Fidentiis. Please go ahead.
Hi, everybody. I have another question on M&A, the usual one on Anima. If you can give us an update about the possibility the other asset management company may join Anima sooner or later. Maybe there is an evolution of the situation considering the UBI is gone, and BPER may be looking for a partner. Second, if you think that there will be an extension of the moratoria, as some of the CEOs that had the conference call in the last few days have told us. Third, if you can give us an idea of the capital gains on Gov, let's say, or to collect or the amortized cost that you may realize quarterly, just to have an idea of the magnitude of the trading line that we can assume. Thank you.
Thank you, Mr. Bernardi. Anima, as I mentioned many times, Anima is a strategic partnership for us. Of course, we took the opportunity to increase our stake, both for showing that it's not a stake we want to dispose. Secondly, because it was a very low price when we increased our stake. We feel that whatever transaction with product factory is very convenient for the bank. We are very interested to try to understand what are the opportunities on the market. We don't forecast right now to increase our stake in Anima. Again, all the product factory for us is a core business, and we want to try to be stronger in each of these product factory. The extension of moratoria, of course, I don't know nothing for sure.
As far as we know, we have been told that there should be some postponement in the new decree from the government, the one which will be issued in August. If this is the case, it's very good for the banking system because as much as we have arranged the good transaction for many of the clients who needed the moratoria and the liquidity to comply with the installment, we will have another three, four months of time. As I mentioned before, we have worked for the vast majority of clients, but still we have some thousands of clients which we have to deal with. Some postponement would be very beneficial. Again, for the reserves and realized gains, basically, we are not going to be opportunistic on that. We have had a very good second half in terms of NFR.
We have almost reached 70% of the budget for the year, so we are not going to have a speculative approach in order to capitalize these revenues. Of course, we follow the market, so if there are opportunities, we can decide to take some advantage. Normally, all this is done to support NII, especially with the TLTRO convenient funding.
Sorry, if I can follow up on M&A. When I look at your stock, it's trading at 0.2x tangible, so it's a very low valuation. You usually tell me that this multiple is not good for M&A, especially if you go on with a paper deal. This multiple is more a risk or a concern or a positive factor from the M&A standpoint? Because at the end, UBI was taken over at 0.5x, if I'm right, the tangible equity, so more than twice your multiple. Which is your consideration about the current valuation of the stock?
Of course, I am very disappointed about the current valuation. We would like to be, of course, in a different position, but we have to have respect for this valuation. Of course, in the last months, I think there is some realignment vis-a-vis also other banks, which are reducing the market cap. We will try to fill the gap in order to be ready again, if the case may be, either to have a potential aggregation or to valorize at the maximum possible level our stock, in case somebody would like to look at our bank.
Thank you.
The next question is from Tiberio Guidolin with JP Morgan. Please go ahead.
Good afternoon. Thank you for taking my questions. I just have two quick ones. The first one is on capital and what impact on RWAs are you expecting from rate migration in the second half of the year and in 2021? Then secondly, if you could just please give us a better understanding on what drove the increase in associate income over the quarter. Thank you.
Thank you for your question. It's not that easy to consider the capital impact. We feel that we have already done what was needed in terms of outlook and forecast in order to adjust the deteriorating of our performing portfolio, with the scenario that we mentioned before. On top of that, we feel that even though there should be some further deterioration, for sure, we still don't have factorized at the right level the positive effect of the guarantee. We are right now experiencing, as of June, we had only EUR 2 billion out of EUR 11 billion of potential pipeline of guaranteed loan already in our book. In July, there were other EUR 2 billion, and we are growing up possibly to fill all these pipeline by the year-end.
If this is the case, of course, the positive impact of the guarantee will go on to completely offset in our forecast, the potential further deterioration, if any, of the RWA. In terms of the stakeholdings in our participation, I would say normally, especially in the last year, the best contributor was Agos, and this is also the reason why this year we are having a lower contribution. Of course, the second is Anima.
Very clear. Thank you.
The next question is from Jean-François Neuez with Goldman Sachs. Please go ahead.
Hi there. Thanks for the call. I just wanted to ask on your comment about filling the guaranteed loan bucket. The question that I have is, how do you expect this to play out, the filling up of the guaranteed bucket? Do you expect this to be loans to new clients, or do you expect that even though it's not the aim that essentially over time, this guaranteed bucket will, in one way or another, refinance or serve to amortize progressively existing loans of existing clients? Obviously, this has an impact on the cost of risk, I guess, whether that's just additional loans or whether they serve to remix, if you want, the existing loan book. Also on the cost of risk, I just noticed that there wasn't much increase.
There was a slight decrease in total NPE this quarter, but the provisions which did not relate to COVID, the one that you call physiological cost of risk, they still rose almost 20 basis points on the quarter without necessarily having seen many new NPL. I just wanted to understand whether you'd stick to the cost of risk guidance that you gave earlier in the year, and whether you think that this year is the peak, or whether you think that the lag effect is going to hit 2021 as well, as per the slide where you show that the stock is much more powerful in terms of provisions than the typical flow. My second question is on costs. I just wanted to ask, the cost reduction, 5% year-over-year, that's a really big reduction, and that's great to see.
I just wanted to understand whether in there were any costs that you've postponed or any operations that you would normally do, any investments or any items which is essentially going to have to be expensed at some point down the line, and where this is a temporary decrease, which will have to be refilled either in Q4 or later in 2021. Trying to find what's the right base, essentially. Thank you.
Thank you. I try to give some order to your question. The guarantee, if I understood well. You want to know how much is a replacement of loans, how much is new loans? Of course, especially for small, medium enterprise, the vast majority is replacement. I would say 60% is going to replace loans which are expiring as normally do during the year. Also normally we do EUR 20 billion of new loans each year. Of course, it's not that this is all add-on to the stock. The add-on is only EUR 2 billion-EUR 3 billion per year. Normally there is a maturity and a replacement, which is more or less EUR 20 billion. This year, we feel could be much higher. We feel could be in the region of EUR 26 billion-EUR 27 billion.
The vast majority, of course, is replacement. There is also 30%-40%, which is going to be new loans, not compulsory to new client, but the new loans to existing client or to new client. If I understood the question about the cost of risk, excluding the performing side, the increase of EUR 40 million, if you see also in Q1 and Q2 2019, there is the same increase in Q2. Is quite physiological because Q1 normally comes after the end of the year, and you have done a lot of provision already for year-end. I don't think it's something which is worrying us. Again, we showed the correlation between the increase of stock, increase of flows to the cost of risk, and for the time being, we are not experiencing neither increase of stock of NPL or increase of flows.
We feel that this could be the normal situation up to the end of the year. The only new things could come from further eventual performing provision. There are provision on performing. Lastly, cost. No, we have not done any postponement. Of course, we were very attentive to invest. First of all, we had all the investment that we forecasted in the plan for IT. We are increasing our investment in IT. The other cost or expenses were related to revenue-driven project, which of course, for the current situation, have been postponed, but are not costs that will come without revenues.
Okay, that's great. Thanks a lot. This was very clear to me.
Thank you.
The next question is from Noemi Peruch with Mediobanca. Please go ahead.
Good evening. Thank you for taking my question. I have two. The first one is on capital. You mentioned 35 basis point headwinds in 2020. Can you please update us on the distribution over time of the capital headwinds that you mentioned in your business plan? Can you update us on the disposal and strategic securitization envisaged in the plan? Did you make some of the securitization in 2020 already? The second one is on fees. If I'm not mistaken, you are planning to reprice current account fees in H2 worth EUR 20 to 25 million. Do you confirm this is still happening? Thank you very much.
Yes. I start from this. We are confirmed that we are postponed due to the COVID, whatever increase in cost of current account. This will start from January 2021. We are, of course, postponing this fee-driven increase that will come from next year. In terms of capital, if I understood well your question, the 35 basis point comes from headwinds and tailwinds. I think that most of them will come in the last quarter, I cannot really be so precise with you. Basically, they come from negative AIRB market, the operational risk going to standard, and the update of the historical series. Meanwhile, the positive one comes from the software deduction and infrastructure supportive factor. Most of them, I think, will come in the last part of the year.
I was referring to the distribution over time between 2020, 2022. From your business plan, I see 100 basis points of headwinds between 2020, 2021. Is it reasonable to think that in 2021 we will see 65 basis points of headwinds?
Yes, of course. We mentioned that we are going to have some shift towards 2021. Basically, everything is postponing by one year. We will have a less impact on 2020, a bit higher impact in 2021, again, a lower impact in 2022 and 2023. The global, of course, is going to be 200 basis points, as we mentioned in the presentation of the business plan.
Okay. Can you update us on the disposal and strategic securitization as well? Thank you.
Yes, of course. The forecast was done taking into account a lower amount of provision that we had in forecast for the business plan. Of course, doing more provision, the shortfall is going to be reduced, so possibly we will have lower impact also for that. You ask about disposal. Basically, we are still working for some securitization, possibly by the year-end. I already mentioned some sounding about NPE disposal, but still nothing sure to tell you for this quarter.
Thank you. The next question is from Antonio Reale with Morgan Stanley. Please go ahead.
Hi. Good evening. Thank you for taking my questions. Two from me, please. The first one is on your cost of risk guidance. I'm looking at your slide 10, which shows your assumptions so far, from the model, which I think imply EUR 140 million of loan losses from IFRS 9, and that's exactly what you've booked in Q1 and Q2. My question is, how much of your full year guidance of 90-100 basis points is purely model-driven, i.e., from macro, and how much is underlying, and if anything else, how much is sector-specific or any other? That's the first one. Also, it's a follow-up from your previous question, but I think with IFRS 9 models, there's a significant discretionary element as you decide how much to book in 2020 versus 2021. I wonder if you can share the logic there and what your numbers imply for next year.
That's the first one. The second one on your latest comments regarding the disposal of NPLs, and you've been one of the most active sellers of NPLs in Italy in the last few years. You've been negotiating NPL sale pre-COVID, and you seem to suggest also post-COVID. I would like to hear from you anecdotally what you're seeing in terms of NPL bids compared to before COVID. If you can share just a bit on spread widening, if any, of your experience so far. Thanks.
Okay. Thank you, Mr. Reale. I'm sure I got the first one. I have some problem with the second one, but I'll try to go for the first. Cost of risk, basically, as I mentioned before, we should be done with the provision we have done on the performing loans this year. Of course, if our forecasts are correct. Basically, whatever will come, will come in order either to increase the NPE coverage or because of some higher flows should come to non-performing loans. I think we shouldn't be so different from the figure we mentioned in terms of performing loans. As far as I understood that you make some positive comment on our disposal, so thank you very much. What do we feel? Nowadays, we don't know. That's why we are trying to have some understanding of the current market situation.
That's why we are trying to have some hint about the possible price. Please remember that all the disposal we have done were bad loans. This time could be also UTP, in which we have no direct experience. This is why we are trying to have some understanding, taking also in consideration that for disposal concluded by 2020, there is also some benefit coming from the government measures in terms of fiscal advantage. We will try to understand what is possible to do. We think that we have a very comprehensive portfolio in terms of secured, unsecured, more secured, more provisioned, and so on, in order to find the best possible solution.
Quite clear. Thank you.
The next question is from Alberto Cordara with Bank of America Merrill Lynch. Please go ahead.
Good afternoon. I just wanted to connect to a question that you were asked before by a colleague of mine. Looking at the regulatory headwinds, you mentioned that there is a net impact of 35 bps in the second part of the year. My question is, can you give us an idea what is the gross positive tailwind from software intangible and infrastructure supporting factor? Another question related to this, of the 200 bps that you mentioned of regulatory headwinds, how much will be taken this year in the second half, and how much is left for the next few years, and in particular for 2021? The other question is, I think before you mentioned that this state-backed guarantee loans comes obviously at a lower spread, and the IRR is taken on a negative path.
Can you give us a bit more of an idea on what we should expect in terms of NII evolution over the next few quarters? Thank you.
For the first question, I think you make reference to the 35 basis points I mentioned before. Again, the different items, I didn't mention the right numbers, but the different items are the market, the update of the historical series, and the going standard for operational risk. This amount to some, let's say, almost 50 basis points. On the other side, we have a positive impact between software intangible deduction and infrastructure supporting factor of more or less 15 basis points. All in all, it could be 35 basis points. With this, we are done with the forecast we gave you with the presentation of the business plan. The RWA on credit, you know that we have a long-standing request application for the disposal we have done. We are still waiting for that, and most probably this will come in 2021. The second was NII.
Again, also for that, there is increase of volumes, possibly quite consistent. Decrease on spread because of the quality of these volumes coming from state guarantee loans or very low risk borrower, which of course are taking some liquidity, and the contribution of 1% for the TLTRO drawn this year. Is a consistent increase in NII.
Okay. What should we expect in the next quarter? Is it still an increase in NII or some pressure?
It's almost even in Q3 and Q4 because, of course, there is this big impact also from the full deployment of TLTRO, and also a consistent increasing month by month of the new loans. As I mentioned before, in July, we had EUR 2 billion of new loan, all with the state guarantee.
Okay. Thank you.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Good evening. I've got two. One is a clarification on the moratoria or on the extension of the moratoria, and the second one is a follow-up on a previous question on cost of risk. On the moratoria, you mentioned before, and we also read it in the newspaper, that maybe it's postponed to the end of January, and you said that would be very important, because that gives you more time to wrap guarantees on client positionings. I don't understand why that is the case, since you are free to move anything, at least that's my understanding, from the expiring moratoria, the state-sponsored one, to the other one, which is not lapsing yet. If that is not correct, I'd like to know why and what are the differences. To me, it's more or less a carbon copy, one of the other. The second one is on cost of risk.
If I'm not mistaken, you said before, that the provisions you will book in H2, whatever they will be, they will only be related to Stage 3 loans, so existing NPLs or new NPL formation. Other banks are also doing some Stage 2 overlay, i.e., moving some positions to Stage 2 and posting some provisions. I call them a bit inventive provisions. Is this something that you're planning to do as well, or you'll just take it as it goes, and then if you have NPL formations next year, you will provide them? Thank you.
Thank you, Mr. Vercellone. First, of course, I can switch, but we lose the 33% of the guarantee from the state, which of course apply only to the moratoria decree and not to the ABI moratoria. Of course, it's very good for us also, for our portfolio to still keep this guarantee, even though it's not a full guarantee. Of course, if this is not coming, we can also work with the ABI moratoria. Secondly, I want to be clear about that. We of course have forecasts which are quite consistent in terms of provisioning. Also in H2, we expect that this will come from potential. Even though I mentioned, as of today, we don't have either increase of flows to the deterioration, neither from UTP to bad loans. It's very difficult to make forecasts.
With the scenario we have, there is a potential deterioration of the default rate, of the danger rate, and so on. If we follow these numbers, we have some consistent provision to do, which will apply mostly to NPL, and not to other performing. If this is not the case, and we will be consistent with the default rate and danger rate, which we are experiencing right now, which are basically the same as usual, I think it would be possible to make some more provision also on stage 2, because there is not a deterioration from stage 2 to stage 3.
Your 90-100 basis point guidance assumes this top-up, or it's all underlying? My understanding is that it's all underlying, plus what you have already made in H1. Correct me if I'm wrong.
Say that it's very difficult that could happen both. For me, it's very difficult that can happen both as a shift between stage 2 and 3, and at the same time, a further increase of stage 2. We think we are safe enough with our forecasts, which are again, the famous, let's say 100 basis point. We still don't know if it will be because of the increase of stage 2 or because there will be a shift from stage 2 to stage 3. As of today, it's more because of the increasing of stage 2, but could be different in the next months.
Okay. Thank you.
The next question is from Domenico Santoro with HSBC. Please go ahead.
Hi. Good evening. Thanks for the presentation. Very two quick questions from my side. First of all, on the DTAs, as other European banks have done in the Euro, you're going to potentially temper your targets, the profit targets, of course, when you present the new business plan. I'm just wondering whether at a point there will be a profitability test on DTA, whether we should expect any write-down of non-guarantee DTA that at the end that might be also beneficial, of course, for your Core Tier 1, given the way Basel III and the deduction they work. Secondly, on the NII, I'm sorry to ask the same question. Can you give us a bit of visibility on the incremental contribution from TLTRO in the third quarter, given that some of the banks are also giving back to the ECB part of the liquidity? Thank you very much.
Okay. Thank you for your question, Mr. Santoro. We have a very clear the effect of DTA. We know that from one side, they can be very useful if the profitability is going to increase. On the other side, of course, they are a burden to the profitability on equity. In any case, we will have to do the right choice. Up to now, we thought, we still think, with the last business plans we presented, that was not the case to write down. Let's take advantage of these months. As of today, we don't think this is the situation we are going to face. Of course, we are under a very extraordinary period. Just for example, if the situation should be worse than we imagine because of a second lockdown or whatever, of course, we will be reconsidering also the possibility to write down something.
As of today, we are not taking this move. NII, I can give the gross profitability of TLTRO because it's very easy. It's 1% split basically even into the two quarter. Of course, this is the gross because you have also to utilize and make the best possible use of this funding. Sometime if you are not able to use everything, you have to make some transaction which give you some negative basis point, negative yield. It's almost EUR 60 million per quarter if you could be able not to have negative yield on utilizing this liquidity.
All right. Thank you very much.
Gentlemen, there are no more questions registered at this time.
Anita?
Gentlemen, would you like to add any final comments to conclude the conference?
Okay. Thank you very much to everybody. Plenty of questions. I'm very happy considering the timing. Have a nice holiday, and see you on September. Thank you.