Good afternoon. This is the CorSo conference operator. Welcome, and thank you for joining the Banco BPM Full Year 2019 Results Conference Call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions.
At this time, I would like to turn the conference over to Mr. Roberto Peronaglio, IR Manager. Please go ahead, sir.
Thank you very much everybody to be here with the conference. Before leaving the field to our Let me remind that you can find the presentation on the website on the IRF page and that the Q and A section is reserved to financial analysts. Thank you very
much. Good evening, everybody. This is Giuseppe Castagna speaking. Thank you for being with us this evening for the presentation of full year results 2019. As you know, This is a special year for us because it's also the final year of the first business plan we had When we started the merge between the two banks.
So let me allow to introduce this presentation starting from Some successful delivery my team was able to perform during this 3 years plan. Of course, as you know, We will have a much deeper presentation on the business plan of the next 3 years in which we can also Make some further comments on the 1st 3 years of the merger. So let me Start with a very sound capital position. I will give you some number just to recap on what we have Achieved, we started this transaction with a common liability Tier 1 fully loaded over 12.3%. The target was 12.9%, and I would say that we can announce that we basically achieved the target terminating this year with a 13% Fully loaded common equity Tier 1, which after the payment of the proposed dividends will go to 12.8%.
Tax loss ratio starting from 162 percent was due to land to 114%, we are now to 52 Thanks. Derisking gross NPE down for EUR 31,000,000,000 to a target of EUR 23,000,000,000. Now we are at EUR 10,100,000,000 Gross NPE ratio from almost 25% with a target of 17%, We are now at 9.1%. As much as the net NPE ratio, we started at 15.7 With a target of 11.1% and a result of 5.2%. Also, the rationalization of our Cost structure was overcame the business plan.
The branch were down to 1700 from Starting from 2,400, the headcount starting from 25,000 were due to land at 22.560 And we are now below 22,000. The cost efficiency, The total operating cost started at EUR 3,086,000,000. The target for the plan was EUR 2,858,000,000 With a reduction of EUR 228,000,000 and now we achieved a very successful EUR 2.6 €1,000,000,000 with a reduction of €482,000,000 from the starting point. And this was achieved in a very challenging environment In which, of course, we can see how all the macro were basically against the possibilities to reach good results, Starting from the Uribour, which in our plan was due to be 10 basis points positive in 2019, and you know that now we are 38 basis points negative. Also the GDP didn't go as we expected.
We did the business plan With the forecast of growth of 1% year by year and we are now 0.2%. And also The spread BTP wound even though as we recall during the last months for the Majority of the duration of the plan was well above what we forecast, which was 81 basis points. These results allow us to deliver results, which is above the recent guidance that I gave to you In the last quarter, give us the possibility to propose a dividend of $0.08 per share, Which means dividend yield of 4.1 percent and of course pave the way for presenting the new business plan The 3 March next month. Let's go to some figure related to the 2019. We achieved a stated profitability of almost EUR 800,000,000, Adjusted was EUR 649,000,000.
The comprehensive profitability, the creation of capital was really strong, EUR 1,300,000,000 stated EUR 926,000,000 adjusted. And I remember that this is without Considering the strong contribution that we have in the reserve of HTC, which now accounts To around EUR 700,000,000. Also the capital position and the buffer on P2R Are very, very sound. We have reached 14.6 percent on common equity Tier 1 phase in, 12.8%, again fully loaded after the payment of the dividend with an MDA buffer, Which is 440 basis points phase in, 230 basis points fully loaded. If we add on To this figure, the recent contribution of EUR 400,000,000 of 81 issued in January, We end up having a buffer of EMEDA higher than 500 basis point phase in and almost 300 basis points Fully loaded.
The risk profile has bettered a lot even in a year in which There wasn't the massive disposal that we have experienced during the 1st 2 years of the merger. Nevertheless, the gross NPE went down €1,700,000,000 year on year, net NPE down €1,200,000,000 With the ratio, which I already mentioned, 9.1 gross and 5.2 net. The unrealized reserve and unrealized gains, I mentioned the HTC, HTM, which were at the end of the year EUR 520,000,000, now they are back to almost EUR 700,000,000 As well as the reserve on to collect and sale, which were in December EUR 71,000,000 And now again almost EUR 100,000,000 more. This is after, as you know, realizing a sound contribution From disposal of Aglavis for a total consideration of EUR 1,000,000,000 in last quarter 20 Also the commercial activities eventually giving strong results as we frankly speaking, we're expecting Looking at the volumes that we were generating, we have been growing at year on year almost 3% On loans, more than 8% on deposit and 4.5% in asset under management. The liquidity and the funding position is very strong.
We have an LCR of 165 Percent and SFR of more exceeding 100 percent and unencumbered eligible asset for More than EUR 20,000,000,000 nowadays, we are up to EUR 22,000,000,000. Sorry. Let's go to what I mentioned before, the comprehensive profitability, I think, is quite important to So drive you through this number. We start from the P and L stated, which of course include Also series of devaluation from the activity that we had on our real estate Asset, Property and Artworks, these ended up producing a negative impact P and L of EUR 130,000,000, which we already find in the P and L. Meanwhile, the positive effect That you see in the box down in the Slide 8 generate in terms of capital EUR 367,000,000 of pretax EUR 250,000,000 post tax as well as through the disposal that we had and the revaluation That we had in all to collect and sale both in debt and in the equity side, We are having an increase in capital of EUR 267,000,000 pretax and EUR 179,000,000 post tax For the debt side and EUR 151,000,000 pretax and EUR 120,000,000 post tax In terms of equity revaluation, just to mention the two main figure, of course, the debt revaluation comes Almost all from GOVES, the equity revaluation comes from 2 assets, Revaluation, which were Anima, which you know we had a stake of 15% and Sorgenia, Basically, under half and half the contribution that you see on the box.
This brought to increase for more than EUR 500,000,000 the capital generation On top of the profit and loss, which bring us to EUR 1,300,000,000 and this is, of course, without considering the massive Reserves that we still have under held to maturity govies, which I remember as I remember before, Amount to almost EUR 700,000,000 even if we consider net this amount would be in the region of EUR 500,000,000 Bringing the total creation of capital generation, let's say, a sort of NAV In the region EUR 1,800,000,000 this was generated during 2019. Let's have a look even though we'll go through the number to the P and L. I have to mention that we have registered some downside in NII. This was expected due to the sale of GOVIS and the bond, the massive bond issue that we did in the Q4 As well as the effect of the report, then we will go further to these details. I would say almost Completely offset by the increase of fees and commission.
The net financial results, as I mentioned below, was before was Impacted by the massive sales of GOVIS, generating this very sound profitability, Bringing total income in the quarter to more than EUR 1,183,000,000. Operating costs were in line with the previous quarter, amounting to EUR 654,000,000, Generating profit from operation in the quarter for EUR 528,000,000, basically the same number both stated and adjusted As well as also the provision are basically the same in the 2 balance sheet, it's 2 profit and loss. The provision for this year amounted for the last quarter amounted to EUR 220,000,000. After that, you have the more impact in change between the state and adjusted. Basically, we had already mentioned the evaluation of the properties for EUR 130,000,000 and provisioning for risk charge For EUR 62,000,000, the pretax profit of the quarter were EUR 150,000,000 In Q4, stated EUR 300,000,000 adjusted, which after tax and systemic charge Brought the profitability to EUR 95,800,000 and adjusted of course EUR 240 EUR 6,000,000.
Let's go to the different items of the profit and loss. Just to go deeper into what I mentioned before, the different contribution between NII and Commission, you can see that we started very low in commission to EUR 434,000,000. We ended up with EUR 462,000,000, So almost EUR 28,000,000 more as well as we reduced almost EUR 27,000,000 the NII. This brings to the effect that we have almost the same amount of contribution Considering core revenues, both NII and commission, but in a different composition With the commission, which passed from 46% to 49% and NII going down from 54 to 51%. On Page 11, we can go deeper into these numbers, Especially in NII, we have a reduction of almost $20,000,000 This comes from $8,700,000 in the Right side right side of the Slide 11, dollars 8,700,000 comes from Commercial Banking, EUR 5,700,000 is the effect of Euribor, the reduction EUR 3,000,000 is the effect of the growth in deposit.
Meanwhile, we have EUR 3,000,000 of difference negative in the reduction of UTP contribution. And as I mentioned before, almost EUR 30,000,000 down from what we call noncommercial banking, Which basically are Gove's disposal, bond issue and other hedging activity. The good news that we have been for the Q1 resilient to the asset spread, You remember that I mentioned that we are starting different action to stop the reduction of the asset spread. And this is the Q1 in which we can say that the asset spread stayed at 185 basis point. The customer spreads went down 1 basis point, but this was the effect of the reduction of 2 basis points Let's have a look on Page 12 on the volumes of the balance sheet.
As I mentioned before, a growth in net performing customer loan of around 3%, mainly driven by A growth of almost 7% year on year on the medium term loans. Meanwhile, we reduced our share of current accounts due to the negative impact that this source of Asset gives to our NII. In terms of direct funding, we are increasing almost EUR 7,000,000,000 The current account and deposit 8% year on year. In the last quarter, we were successful In limiting the increase in current account and deposit also due to the switch that we have in asset under management. Going to asset under management, you can see that we have experienced the growth year on year 4.7%, Mainly driven by market effect, meanwhile, in the last quarter, there was also a good performance Commercial performance.
Let's have a look to the lending activity. More in Kate, being a bit better than last year, new loans generation, even though as you know, the year was negative For the market, we grew we were able to increase to EUR 21,400,000,000 the new medium term loans production, Increasing 26% on the mortgages and with a slight decrease of 3.2% In big in corporates, where we had last year in 2018, 2 big ticket, which we don't have anymore in 2019. As I mentioned before, on the right side of Page 13, you see the good work we are doing on the repricing. As you remember, we started this policy firstly with the corporate, which went up from 120 To 135 basis points and with the SMEs, we started only in Meet in the Q3 2019, but we are already registering a good increase from 214 to 222 Basis points all in. This is even better if you consider that the yearly average of the Euribor went down 3 basis points.
Let me also underwrite that there is another good piece of news is the second bullet point. We are still experiencing new lending in residential mortgages, Which have a spread, which is lower than the one maturing, but in the corporate business is the opposite. So we are finally having new lending with increasing spread vis a vis the one mature aspiring. On Page 14, you have an overview of our production or issuing of wholesale Bond, this was an area in which we were very active in all the kind on the different Instrument, as you can see, if you consider also the EUR 400,000,000 I mentioned before of EUR 81, basically in 13 months, we had €2,800,000,000 of new issuing split between €1,750,000,000 of senior, €700,000,000 of 81,000,000 €350,000,000 of Tier 2. These allow us to Cope without any problem with the maturities that we have this year.
In 2020, we will have EUR 2,400,000,000 Of maturities as well as we can assume that the reduction in the average rates and average Spread that we experienced in 2019, as you see, we had the maturities at 3.8%, renewed at 2.2%. We now have in 2020 to replace maturities at senior maturities, of course, at an average rate of 2.8 Let's pass to the good results of Net Fee and commission. As you can see, I already mentioned the growth starting from the Q1. Also, the if we have a focus on the investment product Please, on the right side of the slide, you see a 9% increase since the Q1 2019, A very good performance of the upfront fees, testifying the good new level of production And a very comfortable production of running fees. If we compare last quarter 2019 to last quarter 2018, We have EUR 29,000,000 more of revenues coming from the investment product piece.
We didn't include in order now to have a difficult comparison in the Q1. This year, EUR 5,700,000 on performance is due to the very good performance of our asset under management activity In the last quarter, but this amount to EUR 5,700,000. On Page 16, I think it's very interesting to follow. As I always told you In the last quarter that we were experiencing a very good growth and a very good trend in the Investment product, as you can see, starting from EUR 2,900,000,000 in the Q1 of this year, We went up to EUR 3,400,000,000, EUR 3,500,000,000 last quarter. We performed very good results of EUR 3,700,000,000.
If you compare EUR 3,700,000,000 with the last quarter last year EUR 2,500,000,000, we have a growth of 48%. On the right side, there is also the contribution on the total net visa commission, sound contribution stable Of the upfront fees. So also the new model that we have, as you know, after the merger, we started 2018 of the advisory by Portfolio is coming back to generate a good piece Page 17, I think, is doesn't need so many comments. It's really, I would say an extraordinary results coming from the consideration that as you know In the Q3 2019, we communicate to the market the global reserves for more than EUR 1,000,000,000 We consider only prudent to monetize some of them and realize some profit I already mentioned that the results that are under reserve on debt security, which as you know, Are include not included in P and L, but are included in capital position, grew since the end of the year from EUR 71,000,000 To EUR 172,000,000 and unrealized gains on debt security on HTM Grew from EUR 520,000,000 to almost EUR 700,000,000 during the month of January this year. On Page 18, you find that very well Diversified, also this is a part of the de risking, I would say that we performed during the last 3 years.
We went down in Italian office, Representing 84% of the total portfolio to 15 sorry, to 50%, Reducing the gov, Italian gov is from EUR 26,700,000,000 to EUR 15,500,000,000. On the lower part of this slide, you have also the duration of the govies, Total growth is both in held to collect and sale and held to maturity. Let's pass on Page 19 to the very good performance that we had on the cost reduction, Very much ahead of the expectation. As I mentioned before, we reduced EUR 480,000,000 Since the starting point of the business plan, but only in 2019, we performed the reduction Of more than EUR 190,000,000 almost EUR 190,000,000, Almost 7%. This comes from the again, the headcount reduction we had in last year, the retail network, The organization started stable and now, I can say, normal Level of operating cost that you are performing quarter on quarter.
As you can see, there is no such difference between The different quarters this year results. Let's say that in the staff cost, we have Still some conservatism due to the new contract. So we didn't go Directly on profit and loss in terms of Having less provision for the new contract, also because of the good very good reduction in other administrative costs, Which went down 10% since the Q1 and on a different stage, the performance on Depreciation and amortization. Let me give some more ink about the change in Accounting model for property and artworks. Of course, we will have all the different accounting principle In the attached, but let me say, this is something that we decide to do because as you know, after the merger, We find us in a position unbalanced, I would say, in terms of Real estate asset, we had a lot of real estate asset coming from the previous bank, coming from the Nonperforming loans and so on.
So we decide to this is anticipation because of the new business plan. In the new business plan, we will have also a derisking activity, I would say, a massive derisking activity In terms of properties, which will bring to a strong reduction of the balance sheet. In order to do that, we decided to go to change our accounting model to a fair value accounting model, Which basically allow us to reevaluate at fair value all our portfolio, but with different Posting of the results that we have. Just to summarize, you have The P and L, which is affected by a decrease of the asset, we are below Fair value and this is brought directly to profit and loss for EUR 130,000,000 meanwhile you have directly to Capital without passing from the profit and loss, the positive revaluation mainly due to the Instrumental asset. This brings to a positive effect in capital of EUR 350,000,000 and a negative effect in profit and loss EUR 130,000,000.
So all in all, we have EUR 223,000,000 of capital impact, Of which EUR 108,000,000 properties EUR 40,000,000 in hard works. Let's pass on Page 22 to the strong improvement that we are still experiencing In the asset quality, we have reduced from EUR 11,800,000,000 beginning of the year to EUR 10,000,000,000 December 19, of which EUR 6,400,000,000 OTP and EUR 3,600,000,000 By the loans, the NPE stock net went down from EUR 6,700,000,000 to EUR 5,500,000,000 So a reduction in line of the gross book value, almost 15% for the gross and 17% Year on year for the net. This brought the ratio I already mentioned before to 9.1% Of NPE 5.2 net and 3.2% of bad loan ratio, 1.5% net By the loan ratio, we took advantage to this very good balance sheet Also to strengthen our OTP coverage, we went up from 37.1% To 39.1 percent, 200 basis points of increase. We also increased, of Of course, for a much limited amount, the PC coverage from the past due coverage from 18% to 26%. Let me only remember also coming back to the business plan that the starting point for the business plan was 27%, so increased 12 full point in terms of increasing coverage of OTP And also the target, strangely enough, was 27.5%.
Meanwhile, we now reached 39%. On Page 23, you find one of the main for which we were successfully Delivering these results, we have registered a very good decrease in net flows of NPEs Year on year, 15% reduction, very good and very sound 4th quarter. Even better, The net the flows from OTP to better loans down 32%. I already mentioned the EUR 220,000,000 of provision, Which brought the cost of risk to 73 basis points. Let me say that we didn't consider the Sorghania transaction, Which impacted for more than EUR 110,000,000 under this account.
So if we perform also Celgene as a recovery of a provision, we would have ended up to 62 basis points. The global NPE workout activity on Page 24 is basically due To the LA transaction beginning of the year, which was the only disposal that we performed this year. Meanwhile, the rest was the main part of the reduction was brought by the cancellation rate of recovery and cure rate, Which amounted for something like EUR 2,300,000,000 visavisnetinfluence from EUR 1,200,000,000. On Page 25, we wanted for 25, excuse me, sorry. We wanted to give up a recap Because we always speak about the very good performance in reducing bad loans, let me say that we did An extraordinary performance also in the reduction of UTP if you consider that this is basically all due to workout.
As you can see in the different 3 years of the plan, we had a decrease of EUR 1,800,000,000, EUR 1,700,000,000 EUR 1,200,000,000, basically driven by the green block, which is Squared under the right circle, which is the workout. Meanwhile, the inflow basically were Compensated by the outflows to bad loans. So if you don't consider these two effects, the real reduction comes from a very effective An industrialized machine that we build up during these 3 years, which is delivering year by year And in terms of percentage, even better, the 3rd year visavis the 1st year. As I mentioned before, this allowed us to Increased also the coverage in 1 year, 400 basis points, 4 10 basis points in the last quarter, 200 basis points of OTP coverage. Let's comment the significant increase in the capital ratios.
Let me remember that last year, we had stated the common equity Tier 1 of 10%, which Pro form a was 11.5%. Last quarter was 12.1%. And due to the different step That you can see on Page 26, we reached this very ambitious 13% of capital, coveneg with Tier 1, For which we were enabled to propose a dividend distribution of $0.08 which amounts to 20 basis points Of the common equity Tier 1. As I mentioned before, the 12.8% match with the 14.6% Of Common Equity Tier 1, which is some 500 basis points better than the P2R. We also calculated the MDM buffers, as I mentioned before, in order to give you some hint about The ability of the bank to deliver profitability and possibly maintaining dividends distribution in the future, Even though we still have, of course, to offset some headwind, some regulatory headwind.
All in all, let me say that thanks to the profitability to the good profitability, Which we reached through a positive trend and increase in investment product fees, a very strict control of cost, A sound and constant reduction in cost of risk and a resilient growth in business volumes, We were also able to build up a capital position strongest ever In our bank and also considering the previous banks, allowing us again to withstand potential future regulated headwinds As much as distribution of dividends, very good also again the reduction Continuous reduction in the level of NPL in all the metrics work out lower inflows and higher coverage. Finally, let me mention again the strong funding and liquidity position of the bank and all in all, this allowed us to Finally arriving 3 years to the dividend distribution. On Page 28, and I will terminate with this slide, Leaving you the floor for some questions. This is sort of outlook for 2020, let me say that, of course, most of the things that we have to say about The future will be included in the presentation of our strategic plan in March 3 in less than 1 month's time.
But all in all, I would say that the core revenues will be driven by the growth in net fees and commission Able to offset the potential pressure on net interest income, which in our case not only comes from what I already mentioned. You're right. Borgo, this OTP funding for the new bond, but also for a reduction of ETA year on year. We will continue strict cost control also during 2020, but we will start also To invest and to increase the cost for our IT system in order to Allow a growth in the business activity, we will always control and reduce The cost of risk and the NPL ratio, and we are sure that with this track record of internal capital generation That we performed in a very difficult environment of these 3 years, we can support sustainable shareholders' remuneration, Managing also every potential future regulatory headwind. Thank you very much.
I am free for your question.
Session, which is reserved to analysts only. The first question is from Giovanni Razzoli of Equita. Please go ahead.
Good afternoon to everybody. Two Questions. I've seen that you have reduced quite significantly your stock of domestic OIBIS. If I'm not mistaken, you mentioned something like €4,000,000,000 on a quarter on quarter basis. I've noticed in the annexes that Part of it relates to the fair value through the P and L category Securities, which in the past also in the Q3 have shown a significant Volatility, so this may inflate your actual stock of govies, so increasing the risk perception of your group Without actual, you contributed significantly to the revenues.
Can we assume that in the future, this reduction in the Bonds held in the fair value to the P and L is reduced so that the actual holding is more limited than in the past so that the peaks that We have seen, for example, in the Q3 2019 in the Q1 in September 'nineteen and also last year, He's reduced. So this is my first question. And whether the reduction in the domestic office is something that is will be part And the second question is more confrontational, if I may. The beat in terms of CET1 is impressive. You have 12.8%.
You also have made a much better Job in terms of derisking visavisbusinessplan. What is missing here in my view is the payout ratio of the business Plan was 40%. Here, you are in the region of 15% to 20%, depending on what you look at in terms of adjusted EPS. So I was wondering whether shall we take this prudence in terms of dividend payout in a context where banks we have seen, for example, Unicredit today Raising the payout from 40% to 50%, in Tesis, 70%. I was wondering whether we should take this kind of prudence as something Of the regulatory wins in the context of the plan will be significant, so we have to keep a Large buffer compared with, for example, with your NDA?
Or how shall we read this relatively low Payout ratio and whether the 40%, 50% is an ambition in terms of payout that you may reach in a couple of years' time? Thank you.
Okay. Thank you, Mr. Razzoli. Good evening. I would say that finally, a reduction in Trading activities is quite normal for our bank.
Normally, we have EUR 1,500,000,000 to EUR 2,000,000,000 less in the end of the year. So this, if you consider also the previous year, is something that you will see year on year. So I wouldn't consider this as a stable situation Because of course, we have also had a very good activity in trading, bringing profitability. And so We will, of course, cautiously and try not to make absorb so much capital. But of course, this is something that we will exploit over the year.
I wouldn't say that this will bring volatility in this respect because, of course, it's much more volatile L2O Excellence sales, as you know, we have reduced the stake in this asset class and we have mostly Under the L2 maturity. Thank you for the second question. Finally, I can be considered A bank like the others, so we are talking about having the same payout of the very good bank. It was not easy to convince everybody that we could became a normal bank during these 3 years. But nevertheless, don't forget that this is the 1st year after many years that we go back to dividends.
I think nobody was expecting this kind of results. We have to be still to be prudent. Remember that what everybody Undermine, which is the fact that we are the only one went under a merger into the ECB era It's something that has forced that to assume a lot of prudent approach to the capital. So let's say that even in this very happy situation and good situation, we are assuming Some prudence and approach in order, again, to be able to offset anything which should come from the regulatory. And you know that, Of course, something will come, but we are still confident that we can be easily above the target of Common equity that I mentioned always is my target, which is to be above well above 12%.
Can I make a follow-up on capital, if I may? Hello?
I didn't get the question.
Sorry. Follow-up on capital. In the Q3 or Q2 conference call, you had Included a margin of conservatism in your CET1 that you were expecting to revert at year end. Is this taking place in this quarter?
It's still there. So no reverse. We are still under the, I would say, The RB revaluation model by ECB, I think this will terminate during this year. As you know, I cannot talk on behalf of ECB. So this is something that will terminate when we will have the final answer relating to the famous LGD aspect
The
The next question is from Christian Carreze of Intermonte. Please go ahead.
Hi, good afternoon. The first question is on, let's say, top line. You Said that the net interest income should be under pressure. I mean, still a little bit weaker than in the past due also to The fact that you realized some capital gain on government bonds and also the evolution of LIBOR and so on. So I was wondering, Should we look at revenues in a different way going forward in
the sense that we have
to look at net Interest income combined with trading income because if I look at the Slide 17, you still have some €870,000,000 unrealized capital gain on your financial portfolio. So should you expect some higher trading income compared to the past recurring trading income and maybe A little bit lower net interest income. And on net interest income, do you see the tiering effect already In the Q4 and still on it, interesting, there is any possibility to optimize Liquidity and maybe your liquidity coverage ratio seems to be quite high compared to the past. So I don't know if you want to share with us Some room to optimize debt liquidity. The second question is on capital.
Very good indeed. I think that there is room to further improve the common equity Tier 1 Due to the buffer of conservatives, but also some other maybe stakes that you can Reduce as you did in this quarter like Kariasti, I was wondering what is your thought on How to use that capital? It's better to increase payout or maybe still to reduce the gross NPE ratio that is Very good compared to the starting point, but still at 9%. Thank you.
Thank you, Mr. Carrezza. Very articulated. I will try to do my best to give the best answer to your question. We wanted to show, of course, NFR has something to do with the reduction of NII.
We can consider when you have such a reserve, you can opportunistically decide what to do. But having said that, we're happy to have the reserve, but we fight to sustain the NII as much as we can. Of course, in the strategy of managing the balance sheet, there are opportunities. When you have such reserves, The opportunities come easier. As you mentioned, this can be used to if we need to further reduce NPE To whatever we decide into the strategic plan to foster some costs.
So we are we don't think that we We'll perform every year a sort of capitalization of the reserves. We did the EUR 1,000,000,000 sales last quarter also because there was a sort of The investment of the trend in the Gulf is you can remember that after the reduction of the spread in the Q3, then The sort of fear on the regional election was bringing up again The interest rate. So we decided to take advantage from a very huge amount of reserves.
I
would just say that we say that more than with NFR, We will try to compensate any reduction of NII with an intensive activity in commission. Also for this, I hope that now we can have some credibility as much as I was Telling all of you that I was not worried over the results in the last part of last year and beginning of this year, Driven by problems that we are having through the reorganization and for many other problem, Now we are increasing. I have to say that January was even better than the average of the quarter. Last quarter, February is still very, very good. So I would say that in terms of commission and asset under management, Bank Assurance, we still have to start.
We are now finally in a good situation with the new joint venture. We are finally with the network very well focused on that. And all the bank, as I mentioned also last quarter, will be very much focused on that. Capital, happy that you consider is very good. I do the same.
But nevertheless, I had the problem in the last year to be every quarter in the need to produce capital in order to offset headwinds or problems. During the business plan, I will give you the figure of capital that we have produced during these 3 years in order to offset The problem that we had and is a figure which almost double the Current Common Equity Tier 1. So we have no worry about possibility and The capability of capital production, but having said that, we consider SAFE being still under, I would say, The final part of our merger to conserve a buffer below sorry, above The target, which is again 12%.
Sorry, just on NPE. So you are Planning some tactical disposal or just mainly internal workout to reduce the stock of NPE?
But I think I showed on the slide where we were showing the Constant reduction, I think, was Page 25 of the workout is EUR 1,300,000,000 also this year with a very Lower amount of volumes. So we think we can reduce year by year at least EUR 1,000,000 And so to basically touch the end of next plan with the famous 5%. But of course, as I was mentioning before, If we see opportunity, if we decide in UTP, it's a bit more different from Straight disposal, you have to find the right combination. For some of these combination, there is also some Change in ECB view, for instance, in the contribution of UTP portfolio into new Asset under management company. So we will decide if there are opportunity.
We are studying everything, But we don't want and I repeat, we don't want anymore to pay the price we paid in the 1st 2 years in order to reduce The stock, we paid more than EUR 5,000,000,000 in order to reduce the bad loan. So now we want transaction which are basically With no capital impact or very minimal capital impact, if we found this, we will go ahead. Otherwise, we go with our plan Slowly, but effectively towards 5%.
Very clear. Thank you.
The next question is from Domenico Santoro of HSBC. Please go ahead.
Hi, good evening. Can you Please give us a bit of sense quantitative, of course, of all the regulatory headwinds that you expect From now on, just to understand a little bit the evolution of the capital from here, please.
Okay. Good evening, Mr. Santoro. I think we will have more detail on that in the Strategic plan, I think I gave you already some hint if I say that I want to be safely Above 12% is my target, but still apart from what every bank is expecting, We still have to conclude this LGD application of the model. And so let's wait some months in order to have the result of this.
As you know, we have already applied a lot of Conservatories, but still we are not in our end, but in ECB end. And so I want to be comfortably In this situation, on top of that, the usual things that you already know, I think there is something in the market risk, Something in Liana, I would say for a total consideration of 30, 40 basis points on top again the credit.
All right. Sorry. Can I just ask a follow-up question? Because the capital is, of course, is important. I know that you don't want to tell Anything now and of course, we will know more in the March presentation.
But just to understand a little bit more, I mean, as the colleague was mentioning before, there's a big chunk of equity, which are At the moment, deducted from capital, there is, of course, other probable levers. So Apart from all the points that you mentioned before about the plan, is there any Actions specifically here that we should expect in order to change or improve even more The quality of the balance sheet. My understanding is that you don't want to change the size of the Sovereign portfolio, which is, of course, something that is under observation from the market because it's NII productive. Also in the NPE area, you want to be cautious because OTP is different from nonperforming. But I mean, Qualitatively, what are the action that we should expect in order to improve even more the quality of the balance sheet at this point?
Again, I'm sure that I will give much more detail On the business plan, we are now commenting only the Q4 results. But basically, I don't know how much more I can say We expect I already said, so we will we have a plan, which is in terms of NPE is a workout plan. Again, there has been also recently interesting transaction in the field of UTP, which is under our scrutiny. We are considering everything as we did during the 1st 3 years. We won't lose any opportunity to have some more reduction, But I don't think that this has something to do with the capital buffer because basically I don't want to spend capital buffer for debt.
For me, this is a very important year. Maybe it's still a bit different a bit difference between our bank and others. But again, I want to solve all the pending situation, which in my opinion are very sound, I'm very comfortable, but I didn't see, frankly speaking, the need to increase dividend this year When I know that I have to perform sound profitability also in the next year of the plan. So with the plan, we will understand, I think, better what will be our path in capital generation, revenue generation and so on. And of course, we won't lose the opportunity to use at best our capital either in Reducing and bettering our balance sheet or in giving back money to our shareholders.
Can I ask also about the increase in the gross Not performing in the quarter, please? The reason behind that.
Sorry, you mean by the loans? Yes, correct. Okay. Sorry, because I was a bit shocked because we were reducing Also, when we talk about increasing, I'm worried. No, it's of course the switch.
As you can see Also on Page 25, there is a natural switch from OTP to bad loans, which It's 35% 32% lower than last year, but nevertheless, some of the TP come to bad loans Naturally. So this is the normal outflows from UTP to bad loans.
All right. Thank you very much for your answer.
Thank you.
The next question is from Fabrizio Bernardi of Fidentiis. Please go ahead.
Hi, everybody. I was wondering what's inside the €63,000,000 of provision for risk and charges of the 4th quarter. I think I read that it's something one off related to customers relationship. Is it related anyhow with the Diamond issue, please?
Yes. Mostly, I would say, is also related to the diamond. It's not that we have a Problem in dealing with the provision we already have done last year that you remember were 320,000,000 Now because also of the possibility that we have the balance sheet and the situation that we are still A bit far from concluding the transaction with the clients, we have overcome 55% of transaction, But we still have 45% of transaction to deliver. So having a so good situation into the balance sheet, We consider a prudent approach to foster the provision. Again, I don't think that this can be Utilize that, but it was, in my opinion, a good move in order to offset potential risk and overall accelerate The final definition of all these problems.
Sorry, one more thing if I can. Have you changed your overall idea The role that the regulator may play during an M and A deal. I remember you had very tough words about The SSM or the EBA about what they did during the Popemilano Banco Popular merger deal?
No, I don't know,
not tough. I think I am the only one, I would say, entitled to talk about this Because everybody speaks, but we are the only one to do it. So it's not tough, it's concrete, it's real. It's been an enormous amount of work To perform a merger so big and I would say in such a also macro Economical environment and on top of that, we had also to face a lot of Request from ECB that is only normal. We expect this to come also for whatever happens in the market.
Of course, we are very attentively considering all the opportunities, but Having done a very strong experience on this field.
The next question is from Andrea Vercellone of Exane. Please go ahead.
Good evening. Two questions Finsa, on costs. The first one is on personnel costs. You mentioned that some of the jump Quarter on quarter in personnel cost was linked to upfronting certain elements of the banking contract. Can you please quantify the amount given that €21,000,000 up quarter on quarter, It's pretty big.
So just to have a better idea of what the run rate without this would have been, we all know what the banking contract us next year, and we don't want to risk double counting the salary increase. 2nd point is on the depreciation. You have changed the Accounting treatment, it's more a curiosity. I see that you have restated the previous quarters. The line depreciation is Lower by €5,000,000 every quarter, but you also have volatility every quarter through fair value.
Do you expect this volatility to continue or for the next few years, you've done the exercise now And there shouldn't really be any movement up and down? Thanks.
Okay. Thank you, Mr. Bertolone. Let's start from depreciation. We don't expect volatility just because we now have The fair value situation in which we can deliver any kind of disposal without looking at Potential volatility on the transaction, the depreciation was one off because, of course, we had to cut off All the depreciation we had already performed in the 1st 3 quarters when we didn't know yet that we would even go to this accounting model, That is for sure, right, normalized and is continuing in this way also for 2020.
Sorry, I meant on the new line that you have added, which is minus 7, minus 19, Basically nothing minus 131. So every quarter there is something?
No, no. Thank you For clarifying, no, no, I understood that you were mentioning the amortization, the depreciation, but even more On the profit and loss devaluation is completely one off. So the accounting rules are that you have to immediately post on P and L any depreciation To the fair value, meanwhile, you have to post a capital, any revaluation of the fair value. So this is one off now is that everything at fair value, whatever we will do will be, of course, directly impacting Our profit and loss, but not because of exceptional items, but because of potential disposal or potential new Depreciation or revaluation of asset.
Okay.
Is that clear?
Yes.
Okay. Cost personnel, now maybe that I was not Completely clear, we had some provision for 2019. We left this provision even though the contract It's on 4 years, of course. So 2019 is already a part of the contract, but we have some room also to accommodate the potential increase in 20 So it's a one off vis a vis the increase is 1 off vis a vis the potential cost in next year.
But we know the potential costs. The contract has been signed. So can you tell me what you mean? I mean, you have up fronted a cost that has not come because the salaries go up on 1st January 2020, Not 2019.
Yes. As I mentioned, we have already Provisioned what we have to pay starting from January 2020.
I'll follow-up with Investor Relations. I just don't want to multiply something that
I shouldn't be multiplying. I should be trying to add The contract also to 2020, of course, or at least most of them, then better if you talk with the IR for the details.
Thank you.
The next question from Noemi Peruca of Mediobanca. Please go ahead.
Good evening and thank you for taking my questions. I have a couple. So can you please disclose the yield attached to the real estate assets subject to the reclassification in Q4? And have you repriced fees on current accounts for 2020? And if so, what impact do you expect from it in next year.
Have you already discussed with the supervisor The potential application of calendar provisioning on D and P stock for 2020. And just a Minor clarification on capital. With market risk, AMA risk and credit risk, Are you referring to Basel IV or something else? Thank you very much.
I start from what I got more precisely. I think one question was on calendar provisioning. There is we do not consider impact in 2020. We I think we will in our business plan, we will be again more Clear, but we will start from 2021 to have some effect. Of course, in a static situation, but we are moving in order to avoid static situation.
There is no other credit The problem that we foresee, so if this was the question. For the yield on real estate, frankly speaking, I will revert to some of my colleagues Because I have many calculation, quite difficult depending on the different town and the different situation, instrumental, non instrumental asset, Lended rented assets are not asset utilized by ourselves. So I don't have a precise Number to give you, but of course, we have all the job done by our evaluator and by The external auditor that I think can clarify better your question the answers to your question. Maybe I lost a bit of your many questions. Can you repeat some of them if I didn't answer?
Sure. Have you repriced fees on current accounts for 2020? And if so, what do you expect risk, credit risk and operational. Is it Basel IV or something else?
Okay. We have just approved a reprice maneuver For negative interest rate, I think that in 2020, we'll affect Only for 2 quarter, because as you know, we have to wait the calendar day bylaws. So would be in the region, I think, of €20,000,000 €25,000,000 for half year, then the double, of course. Maybe the last question was related to the headwind. I mentioned that there is one question related to the definition Of the IP model, which is still to be approved, and I don't have practically any Potential hint that I can give you, meanwhile, for the other potential impact that we expect, Which are market risk, specific risk, operational risk and I don't know the
update
of time series. Of course, this will be The impact which I was mentioning in around 40 basis points.
Thank you.
The next question is from Hugo Cruz of KBW. Please go ahead.
Hi, thanks. I just wanted to ask and sorry if you was asked before about the tiering benefit. What will be the incremental benefit in 2020 Compared to the level of Q4 2019. Thank you.
As you know, we have an opportunity to utilize EUR 6,000,000,000 a bit more than EUR 6,000,000,000 So it would be something like in the region $20,000,000 to $25,000,000
But is that incremental to The move is already booked in Q4. So is there incremental to the level Q4?
In Q4, I don't know if utilized for all the Q4, The EUR 6,000,000,000 I think is 2 months or no, almost, okay. So starting from the beginning of October. So the Q4 already included The piece of increasing that I was mentioning before.
Okay. Thank you.
The next question is from Alberto Cordara of Bank of America. Please go ahead.
Hi, good afternoon. My first question is on the NPE inflows, I'm looking at Slide number 23. There was a big drop this quarter from An average of over €200,000,000 in the previous quarter to €88,000,000 If you can give us some comments on why there has Such an improvement maybe by splitting these numbers between gross flows and exit. And then my other question is similarly related. If you feel Hille, you can give us an idea of what could be the impact of the extension or the definition of default in terms of growth in Of additional one off non performing exposures.
We saw some banks that have already adopted this new definition. And finally, my third question is, you had a very fat, very big trading line in Q4. What we should expect is a normal inverted common trading line For future years, because in Q4, obviously, you have Sardinia, but you also have a very big capital gain from The place in Oslo are involved. Thank you.
Okay. The first Question is on NPE inflows. Basically, I would say, even though we consider a very good year in terms of Normal inflows, considering normal not big tickets, we were very affected by big ticket during the year. Luckily enough in the Q1 there were no big tickets. So let's hope that this could be at least More range rather than the previous quarter.
But of course, as you know, we have so dedicated activity on that and we Immediately switch monitoring any situation as soon as we understand that it's not anymore performing. So let's say that was a good quarter, not affected by big ticket. Impact of DoD, I am not That's sure that this will come for us this year because as you know, we have applied for the 1 step transition. But nevertheless, I think it's a minimal impact on our Let's say that the cost could be in terms of provision around €30,000,000 More provision with 3, 4 basis point increase since when we will be applying The new definition of default. Dan, sorry, you were talking about NFR.
Of course, I think you follow us for many years. We have already had something in line with EUR 100,000,000 EUR 120,000,000 Of course, my Head of Finance is staring at me because he always says that it's almost difficult to reach these results Every year that is very good and as you see we have good reserves in our book. So let's say that the normal impact In the region of what I mentioned to you, but we are almost every year over performing the normal impact.
Okay. Thank you very much. Thank you.
Mr. Castagna, there are no more questions registered at this time.
So let me thank you all the participants. And of We will be a bit around at mainly in Milan and we are willing to have everybody on board for the 3 March. Thank you. Bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.