Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM nine months 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. 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. Please go ahead, sir.
Good evening, everybody, and thank you for attending the conference on the result of the quarter of Banco BPM. Let me, before leaving the floor to our Chief Executive Officer, Mr. Castagna, remind you that the question and answer section is reserved only for the financial analysts. You can find the presentation on our website in the Investor Relations section. Thank you. I leave the word to Mr. Castagna.
Good evening, everybody, also on my side. Thank you for being with us for the Q3 presentation. I would say, starting from page five, quite a solid performance in all nine months, and especially in this Q3, confirming good achievements in business operation and in the reduction of the risk profile of the bank. Operating profitability is going up 7%, thanks especially to lowering operating costs, and with good performance in revenues driven from commission rather than NII.
Customer volumes are still growing, both in loans and in deposit. We are up 1.7% in deposit in the quarter, 7.3% since the beginning of the year, 1% in the quarter for core performance loans, 4% strong since the beginning of the year. The risk profile is still bettering. Gross NPE and net NPE are going down to 9.4% and 5. 6%. As you know, we are going down organically without doing any massive transaction. The coverage is going basically up, especially in UTP coverage is growing 150 basis points to 37%. Meanwhile, Texas ratio is going down 60% to 58.1%. On page six, again, on the balance sheet side, the loan-to-deposit ratio is bettering. The share of deposit, as I mentioned before, is growing to 82% from 80%. The liquidity position is even better, up to 170% for LCR, higher than 100% for NSFR.
A very good, I would say, an excellent performance on the govies portfolio, which make an evidence. We already talked about that in the second quarter. The third quarter is even better, with a reserve in fair value for more than EUR 250 million, and unrealized gains in amortized cost up to EUR 860 million, which of course, don't go neither into profit and loss nor in the Common Equity Tier 1, but would represent an equivalent of 140 basis points in terms of potential incremental Common Equity Tier 1. The capital position, therefore, is good.
We are growing in terms of Common Equity Tier 1 to 12.1% from 11.9%, and stable at 13.8% in Common Equity Tier 1 phase in. This is notwithstanding marginal conservatism, which I will talk later on when we will comment on Common Equity, which accounts for almost 40 basis points already included into this number.
We would like also to present what normally is already in the balance sheet under IAS scheme, the comprehensive profitability, which shows the creation of value not only in terms of profit and loss, but also including the different issue which are not directly accounted in the profit and loss. Likewise, for instance, the fair value in the govies. If we consider the comprehensive profitability, in nine months, we are up to EUR 790 million of results, of which again, EUR 686 are the profit and loss results, and EUR 271 the difference on other income. All this, again, without considering the unrealized gains on the govies, which I mentioned, is more than EUR 800 million. A quick look to the quarterly performance, both the stated one and adjusted.
Basically, there is no major difference between the two, rather than the extraordinary gain of EUR 336 million in the Q2 related to the Agos transaction, the disposal of the NPL platform. As far the other numbers are concerned, you can see that we went down 2.9% in NII, 2% in commission, a much better net financial results due to the good performance especially from the finance. The total income, which amount exactly the same number, 0.2 more than the Q2. Operating costs went down 3.6% on the stated figure and 1.1% on the adjusted, with profit from operation up 2.4% in the P&L adjusted. LLP provision went up to EUR 208 million, with a pre-tax profit of EUR 168 million, and a net income of EUR 96.2 million, which in the stated version is EUR 93.3 million.
The total profitability for the entire nine months is up to EUR 686 million in the stated account, and EUR 387 million as far as the adjusted P&L is concerned. Let's remember that in Q3, likewise in Q1, we have also the systemic charge with the extraordinary contribution to SSM and the guarantee scheme. The results of this quarter can allow us to confirm the expected adjusted EPS in the region of EUR 0.30 per share. Let's go to the different items. Net interest income, as I was mentioning before, is down 2.8%. As you can see, the difference comes basically all from the Euribor, reduction of the Euribor, which accounts for EUR 50 million negative. Spread effect is EUR 3 million negative. Meanwhile, the calendar, one day more, and the volume effects accounts for EUR 7 million positive.
We have EUR 3 million deconsolidation for the ProFamily captive business, EUR 4.5 million related to the de-risking, and EUR 4 million positive from the financial activities. You can see the spread on the lower part of the slide, which is down, the asset spread from 1.87 to 1.85. The customer spread is down nine basis point, mostly due to the reduction of seven basis point of the Euribor from 0.32 to 0.39.
Of course, the global results, especially if you see the previous year figure, 2018, is very much impacted by the reduction, by the de-risking that we had during last year. Like for like, we have EUR 210 million less of NII contribution from PPA, IFRS 9, and UTP deconsolidation. Let's have a look to the new portfolio, which is, I think, quite encouraging. We were able to maintain the pace of the first two quarter with EUR 5 billion per quarter.
We are up to EUR 15.3 million of new production, 3.1% more than last year. Let me remember that last year we had some giant transaction, likewise Atlantia during the Q3, which didn't happen this year. Let me also stress that this is coming for our bank, both from household growth and corporate, almost 3% each. It's quite interesting to have a look to the right side of the slide, in which we try to give you the sense of the increase of the rates we are having on new production. The production is done normally at 17 basis points higher for large and mid corporates related to last year, and four basis points higher for small corporate.
This is not because small corporates pay less or accept less increase in spread, because we started with a new pricing project, which started before six months ago for mid and large corporates, only two months ago for small business. We are quite confident that we can reach better figure quite soon, both for corporates and small corporate. Let me say that this increase in all-in rates comes also considering, notwithstanding the average reduction of two basis point of Euribor. The volume of the balance sheet up 4% for loans and almost 7% for deposit. You have the different distribution for different mortgages and current accounts and other loans. Everything is growing mostly at the same pace. I have to say that, of course, in terms of total spread, what we are achieving is much better with the corporates rather than households.
As you know, in residential mortgage, the competition is quite tight. Let's go to the funding side of the balance sheet. We have experienced, during these nine months, many issue on the wholesale market of every type of instrument from senior to AT1 to Tier 2, which was the recent transaction we did beginning of October. We did another senior transaction end of October. We have completely replaced the EUR 1.7 billion already matured in 2019 with the global issuing of EUR 2.4 billion during these first 10 months. The average rates and spreads, you can see on the lower right side of the slides, that we are succeeding in having spreads much lower and rates much lower than the one who are maturing. As you can see, the average rates for the EUR 1.7 billion average was 3.8%.
Meanwhile, the new senior issue were an average of 2.1%, and likewise for the spread. The cake of the bond funding composition is quite, I would say, evenly split between covered bonds, senior, with a good tranche also now of subordinated up to 18%. Subordinated are now up to EUR 3.1 billion. EUR 1.5 billion are not included in own fund phase-in, but represent MREL eligible funding, so they are still working in terms of MREL. Of course, these figures still exclude the EUR 350 million issued that we had of T2 in October. Let's go to commission on page 13. Net fees and commission up vis-à-vis the first quarter, down 2% vis-à-vis the second quarter. As you know, there is a seasonality in the third quarter for August.
Notwithstanding that, you can see on the right side of the slide, a new presentation that we have done especially to show that the investment product fees is growing quarter- by- quarter, also in Q3 vis-à-vis Q1 and Q2. +7% versus Q1, +1% versus Q2, we are still growing also during the last quarter. The distribution between running and upfront shows that the margin, which is more increasing, comes from running fees. Another way of shows this increase in investment product is on page 14. You can see that Q3 2019 on Q3 2018, we had EUR 300 million of higher production, which is again the best quarter in the first quarter of 2019, with a solid recovering in upfront fees up to 17% of the total net fees and commission production, with an average profitability of 2.1%.
I have to say that, as we announced also in Q1, after the new approach in 2018 of the change in the advisory by portfolio rather than advisory by product, we finally eventually reach a good pace of performance, which from nowadays, I think, can only show better results from our network. Because the increase in current account and deposit give us an enormous reserve of potential conversion into asset under management from current accounts. You can see on page 15 that up to now, we have grown only EUR two billion from the beginning of the year, I am sure that this can be the real trend that is going up during the next few quarters. Net financial results, again, a very satisfactory result of EUR 41 million during the Q3.
Again, the EUR 225 million of contribution to the capital position from reserve on govies on fair value, on securities on fair value. Meanwhile, as I mentioned before, is not included nor in P&L, neither in the capital position, the EUR 860 million of equivalent unrealized gains of 140 basis points in CET1. Another slide on page 17 about the composition of our debt securities portfolio is Italian govies are down to EUR 19.3 billion, 56% of the total debt securities, which amount to EUR 34 billion. As you can see on the down left side, fair value is EUR 12.6 billion, 37%. Amortized cost is EUR 18 billion, representing 52% of the securities. Very sound, again, liquidity position, EUR 21 billion of unencumbered eligible assets, 95% of which represented by high quality govies. I would skip page 18.
I can only mention that the duration of govies at fair value is very short, is 2.4 years. Meanwhile, we have a duration of four years as far as the amortized cost govies are concerned. Let's go to the cost side. Total operating costs were down 3% compared to first quarter, 3.6% compared to second quarter, 1.1% excluding one-off, basically in all the three different components of operating costs. Staff cost is going down 2.4% since first quarter, 0.6% since second quarter. Administrative cost down 5% and 2.10% respectively, and depreciation and amortization also down 2% and 19% since the first and second quarter. Let's examine also this reduction in operating cost with a more long view.
If we go back to the first nine months of 2017, which was the first year of the business plan, and the first nine months of 2018, compared to today, we have a reduction of more than EUR 207 million, which annualized means something in the region EUR 270 million. If we compare the annualized results, forecast results of 2019 with the starting point of the business plan, as you can see, the savings amount to EUR 420 million. This comes through, of course, a much bigger evolution of the reduction of the head count, which were down 3,120 person. As you know, only two third of these out of the exit scheme. The retail network evolution also was down 700 branch. Let's pass to asset quality. Here we have the reduction, both gross and net in the NPE stock.
We have also the comparison with the equivalent data of 2018, September 2018. Of course, we had the massive GACS transaction, which, of course, is 43% down. Also, if you consider the reduction from the 1st quarter from December 2018, we have a reduction of 11.4% gross and the same amount net, and 2% gross and 4% net Q3 on Q2. There is a progressive reduction, which would bring us to a safe figure in this ratio without spending more than we are able to recover with our workout activity. NPE ratios were down to 9.4 gross and 5.6 net, down 0.3 from the previous quarter. As you know, the bad loan ratio are still at a very low level, 3% loss, 1.4 net, and all our effort, of course, are much more dedicated to the UTP reduction rather than these remaining bad loans.
This also explain why we increased the coverage of UTP up to 37% for 35.5%. On page 22, another very good news is a consistent good pace in reduction of net flows to NPE in the region nine months of 13%, 5% quarter-on-quarter, but especially, the transition from UTP to bad loans is down both year-on-year and quarter-on-quarter more than 30%. Cost of credit, again, is EUR 208 million, in line with our guidance of 69 basis points during this first nine months, especially due to the increase of the coverage of UTP. Another slide on page 23 on UTP. This is mostly to see the pace that we had since the merger in UTP coverage, even though our effort, as you know, were much more dedicated to bad loans.
We increased 10 full point since the beginning of 2017 in terms of coverage of UTP, which is now up to 37%. The analysis of the UTP portafoglio is EUR 6.9 billion. EUR 2.6 billion are the coverage, net EUR 4.4 billion, of which only EUR 1.3 billion are unsecured. I have to say that the portion unsecured and not under restructuring, so not linked to ongoing position, which are currently on a restructuring plan, normally paying installments and interest, is only EUR 0.4 billion.
The coverage for unsecured, 52%, for secured, 28%. On the upper side of these slides, you can also see how we were able to offset the inflows since the beginning, since 2017, which you see in the red histogram, with the major volume year by year of workout in UTP. In the first year, we had EUR 1.4 billion of inflows and EUR 1.7 billion of workout.
In the second, EUR 1.4 and EUR 1.6 of workout. This year, in the first nine months, we are having EUR 700 million of inflows, EUR 800 million of workout. The capital position, rightly enough, we reached after 11 quarters since the merger, finally, not anymore a pro forma position, but a stated one. As you know, we were quarter- by- quarter, recurring the transaction that we were closing during the quarter, but which would have had effect on capital in the next quarters. Nowadays, we are on a normal situation, we can see that the final figure are quite satisfying. We have 13.8% of phasing capital ratio and 12.1% fully loaded capital ratios. Let me spend some minutes to explain this 40 basis point of negative impact on the margin of conservatism, which is related to the time series updated. This is something that, frankly speaking, we didn't expect.
Comes after the request that we made to ECB for the update of the model for IRB. We were quite confident that being under review of the model since our application that was done in August, as I mentioned during the Q2 conference call, we would haven't been asked to update the old historical series, having done the work, of course, for the new model. As a matter of fact, ECB asked us to update also the old historical series.
We were not in the position to update the historical series by this quarter as it was asked by ECB, we decide to apply the very conservative margin of conservatism in order to give more room for the exercise that will be completed by this quarter, and of course, will be an impact which will be offset at the end of the validation, most probably by the first half of 2020. It is a real consistent marginal conservatism, which we hope can increase the buffer for further potential headwind. Let me remember that this year, we passed from a stated CET1 at 10% in December 2018 to 12.1% this quarter, notwithstanding 70 basis point of headwind that we had to bear due to the different stress, this margin of conservatism, and IFRS 16.
This is also for showing the ability of the bank to face this potential regulatory request with capital generation and also with organic generation. Let's only mention that this year, stated, we performed up to now in nine months, an organic capital generation of 2.7%, 1.2 out of the capital management action, 1.5% through capital generation, organic capital generation. We are really happy of these results. We feel confident that we can confirm that 12% is now the result that we wanted to reach, and we succeeded basically some months ago, the expected results. Final slide, I would say that with this quarter, we have really reached and confirmed the positive trend in investment product fees. We have cost still under strict control. We are continuing our organic de-risking process. We are quite to a normalized cost of risk.
We have had an excellent performance in reserves and unrealized gains in the debt securities, and we are strengthening. We were able to strengthen even more our capital position, creating some potential buffer also for 2020. Let me confirm, as I already mentioned in Q2, that we confirm our adjusted EPS estimation of EUR 0.30 for full year 2019, and I can also say that we are on track for a possible dividend distribution for 2019.
Excuse me, are you ready for questions?
Yes.
Thank you. We will now begin the question session, which is reserved to analysts only. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Giovanni Razzoli with Equita. Please go ahead.
Good afternoon to everybody. Three, four questions on my side. The first one is a question related to your thoughts about the business plan presentation. In the context of the plan, it would be nice to know what is the timeframe for the plan presentation, if it's year-end or first half, or when you are about to present the plan. In the context of the plan, do you think that is the reduction of the sovereign exposure a priority for the bank, also in the context of the recent statement that we have seen just also today about the banking union, the reduction of the exposure to the BTP. What are your thoughts there? Related to this, you are sitting on about, you disclosed 140 basis points of extra capital related to the gains on the BTP.
I was wondering how can you leverage on this amount, and if you intend to leverage on this amount, to fund an acceleration of the restructuring, for example, in the cost cutting. Again, related to this, I would like you to share with us what are your thoughts about the shareholder remuneration. Do you have a preference to dividend distribution or buyback? I ask you this because in my view, there is a material difference in terms of the method that you give to the market, because buyback gives you flexibility on the capital, but flexibility, in my view, does not give you a straightforward method that you are really confident about your capital position and risk profile. You have a 12.1% Tier 1 ratio. Now you rank number third in terms of asset quality with a 9.4% NPE ratio.
I was wondering what are your preference between dividend and buyback, and why you are still relatively shy in terms of saying possible dividend distribution, while most of your peers are already committing to a much larger payout ratio. Finally, sorry for the long questions. You mentioned you have added a marginal conservativism to your CET1, and you say that the regulatory headwind amount to 70 basis points, including the IFRS 16 and this margin of conservativism. I have reconciled the different moving parts, and to my understanding, this margin of conservativism amounts to 40 basis points of CET1. I was wondering whether my calculation is correct. Thank you, and sorry for the long list of questions.
Okay. Thank you. I would say more question for the business plan rather than for Q3, but I will try to do my best to give some answer. Business plan presentation, as I mentioned also in Q2, we were working on it. We are still working on it. Frankly speaking, the scenario changed a lot during the last months, both in terms of liquidity, in terms of political and economic situation, in terms of interest rates. We are still trying to do our best to present something that is reasonable and is feasible with the current situation. This would bring, in my opinion, to deliver the business plan during Q1 next year. Second question, the govies. Of course, this is very much linked to the business plan strategy.
Whatever will be done in terms of potential major reduction of cost or further reduction, accelerated reduction of NPE, rather than other measures that we have to adopt, have a good reserve fostered by this quite solid govies position. We know that we have ammunition in order to prepare a very good and satisfactory, I hope, business plan. We don't have to forget that the liquidity position, the NII situation is under threat. We have negative interest rates, which up to now are giving some thought for the near future to the banking system. Of course, whatever the share of NII we would envisage will be done both by interest from customer and also from investment in securities.
The trade-off is not that evident, that in doing one thing, you are doing to adjust forever the contribution for the bank and the potentiality to have a sustainable profitability for next years. Let us finish our homework, and we will try to be the clearest possible when we will present the business plan. Dividend distribution, I thought that I had a soft approach to this issue. During the Q2, I only mentioned the possibility of a dividend distribution. This time, we wanted to write down the possibility of a dividend distribution. I mean, the consequence of this would be that we want to pay a dividend this year. Of course, we are the only bank which comes from a merger.
We wanted before announcing officially something that has to be, of course, decided also by the board and by the EGS, of course, we wanted to have all the possible situation which does not endanger our bank. Nowadays, we are confident that we have reached the right capital structure. We are also reinforcing our structure, as you know, with the emission of AT1. I think that is quite evident, the willingness of the bank in terms of dividend. Last one, the MOC. Yes, you were right. If you want, I can give you the difference. The split of the 70 basis point was 12 basis points IFRS 16, 20 basis point add-on, on TRIM, and 40 basis point on this MOC.
Thank you.
The next question is from Azzurra Guelfi with Citi. Please go ahead.
Hi, good evening. A couple of questions. One on the coverage of UTP. This has been continuing to increase over the last quarter. It has results also probably in better workout for the banks, but I just wanted to know if there has been any changing in the way of managing the UTP from your side. The other one is on the NII, the effect of the disposal should have been now crystallized on the NII. What would be your expectation? Is this the bottom of the NII going forward, assuming the rate doesn't move forward? If possible, can you give us the average yield on your government portfolio? Thank you.
I'm not sure I understood the coverage on UTP question. Is increasing 150 basis point. This comes before, as you know, we have already done basically all the homework. We are still, of course, opportunistic also on bad loans, which basically is almost all composed by leasing activities, which we will be trying, in any case, to dispose. On UTP, we are very much concentrated on increase this level because also with workout, we have to try to reach some potential opportunity for reducing at the same pace we are doing right now. I remember in less than three years, we have reduced more than EUR 4.4 billion, basically without losing money. This is our goal, to still increase the coverage in order to reach potential opportunity when they happen on the market. On NII, this comes together with the question of Mr. Razzoli.
Of course, if we think about the same govies portfolio, would be very much the same apart from the reduction of the Euribor. You consider that the average Euribor for the Q3 was 34 basis point. Nowadays, we are already at 39, if I am not wrong. There is, anyway, an effect still on the portfolio. Of course, the vast majority for a forecast on next year will be depending on the portion of govies that we'll decide to keep or sell on the market.
Can you give us the average yield of the government portfolio?
No, I am not in the position right now to give the number, but we can elaborate.
The next question is from Christian Carrese with Intermonte. Please go ahead.
Hi, good afternoon. I have three questions. The first one is on net interest income. I would like to understand your approach on TLTRO III and the tiering. Have you done already some calculation on what you want to take up and the impact in 2020 from tiering? Still on net interest income, also, I would like to understand the commercial policy, because I see a slight slowdown in terms of loans growth. Are you trying to increase the customer spread rather than volumes, or you still think that you can grow higher than the sector average? The second question is on commission. A good quarter, no big seasonality. We saw almost EUR 6 billion inflows in terms of direct deposits year- to- date. What are your thoughts there?
What do you think will be the possibility to switch into assets under management in 2020, if you can elaborate a little bit more on clientele risk appetite, if it's improving the current low interest rate environment. The third question is on capital. Just a clarification on slide 24. The add-on impact imposed by ECB. What kind of impact, when they will be removed, what could be the impact? Maybe I missed, during the conference call, the positive impact on capital, and there are other actions, I think some participation that could be non-core participation that could be sold in the next couple of years. Also, there is the ProFamily non-captive business that should be finalized by year-end. I would like to understand what is the capital ratio that you want to have. Just 12%, or maybe more between 12.5% and 13% going forward. Thank you.
Thank you, Mr. Carrese. TLTRO and tiering. This is another basically new decision because we had our funding strategy done without TLTRO, as you know, because we mentioned that many times in the previous meeting. Nowadays, we are reconsidering everything. I read that also other bankers are considering, due to the more interest in rates, but moreover, on the three years to rate maturity of the TLTRO, which of course account very much in terms of NSFR, to reconsider also our potential strategy on borrowing money. Of course, it's not yet decided. It will be done through the business plan. Consider that, if I'm not wrong, the contribution of TLTRO is about EUR 5 million per EUR 1 billion. It's quite easy to understand how much it accounts for our numbers, having EUR 21 billion right now.
The tiering is quite new and interesting also for us, because we were not depositing in ECB just because it was too expensive. Nowadays that we have almost EUR 5 billion of room to deposit at zero, we will exploit this opportunity, which should give us something in the region of EUR 20 million of contribution in NII. Of course, also this will depend on how we will be able to manage this enormous amount of liquidity that is still coming into the banking system, and also in our bank. If we are able to stay with the EUR 5 billion position, of course, the EUR 20 million will be all in our NII. If we still will increase this number, this will erode, step-by-step, the EUR 20 million.
All our activity will be devoted to have the right growth or reduction, especially from corporates and institutional investor in liquidity, in order to try to offset the disadvantages and to keep full advantage from the tiering. Commercial spread. Yes, I mentioned before, I made this slide just to show you that the new loans are luckily enough already experiencing a quite good increase in the total rates. Why we have reduction in the average spread? Because, of course, the loans maturing comes from three, four, five years ago and are still at five higher spread, but the new loans production is much higher and will be still higher in the future vis-à-vis last year. Commission is, I would say, the name of the game for us.
I think everybody, starting from us, but also the market, I think, undervalued the restructuring process in which we were involved during these three years with, as I mentioned before, this new portafoglio advisory approach. Nowadays, our people understood what to do. Luckily enough, the performance of the bank are quite good in terms of return of this investment. We have a lot of room for switching into further asset under management, and this will be the key driver also for the business plan. Last, first of all, let me precise, which is not an add-on, is not being imposed by anybody, it's just a request that we were not able to perform just because we didn't expect that the request would have been done, having already the new model request in place. Of course, we are running the calculation for the old model in parallel.
I hope by next quarter to give, with some hopefully gaining on this 40 basis points, the right number, still will be a number related to the past, not to the future. I think that the overall situation will come out clearly by the final IRB validation from ECB, which should come in the first half of 2020. Let's say that is a good margin that we have taken apart in order to offset any potential downside. Again, Common Equity Tier 1, we are not worried at all about Common Equity Tier 1 growth. We know that we can grow organically in order to increase from 12 to 13, even without any capital management action. As you know, and will be indicated in the business plan, we have plenty of financial participation, which we want to dispose also for the threshold.
As you know, we have still a threshold which is higher than what we want to be in terms of financial stakeholdings, DTA and so on. The more we can free up, the more capital we can free up. Again, I think we have something in the region of EUR 200 million to optimize in order to bring further capital.
With limited impact on profits, I presume.
Without impact on profitability. I am talking about the remaining ProFamily activity, the Cariati factory, the SelmaBipiemme, so things that frankly speaking, don't give so much contribution to our profit and loss.
Thank you very much.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Good evening. Apologies, I had to leave the call for five minutes. Apologies if some of the questions have already been asked. The first question is on capital, on the EUR 2 billion voluntary add-on. Specifically, your calculations, in order to add this add-on, are based on taking into account PD and LGD series up to what year? Is it 2018? Is it H1 2019? Is it 2017? Is everything captured until now? You will have to re-update it again? Also related to this, in the model you put in to the ECB for validation, have you already taken into account of the EBA guidelines requirements? That is still to be done in future years? Also on capital, can you make some comments on operational risk in Q4? You had stated in the past that there could be a negative impact. That's it on capital.
Fee income. Last year in Q4, it was a very strong quarter. It benefited from a very strong contribution from structured finance, or that's what you had said at the time. Shall we expect something in line, or it would be prudent to say it will be lower because it was really an extraordinary quarter on that front? On senior bonds maturing on the funding side in 2020, 2021, can you give us the average cost, something that compares to what you put on page 12? Finally, on the unrealized gains of EUR 860 million on bonds at amortized cost, are these gross or net of taxes? You said before that they are a good buffer for potential restructuring and so on, but is it quite simple to unlock them if you want to, or not? Thank you.
Give me the senior. Okay. Let me remind again, just to stress that it's not an add-on, but it's something, I would say, self-inflicted. It take into account, generally speaking, because again, we didn't have the possibility to run the figure with the, I would say, current IRB model, because we were already on the new one. We made a conservative estimation of this EUR 2 billion, considering both 2017 and 2018. Of course, including whatever we could have included, but this is already in the application for the new model. The EBA guidelines, as I mentioned also before, in part were already included in the previous validation that we obtained in 2018, and of course, for the one that we knew afterwards are included in the new request for validation. I do not-
Excuse me for interrupting. Basically, that's it on this front, in terms of regulatory headwinds. Everything we know, it's either in this buffer or anyway in the model that you put in for validation. Is that correct?
I would say that if you remind, we had also some buffer from the previous validation because there were some add-on imposed. I would say that for the new one, now we have two buffer. One was the previous add-on, the second one is the current that we put on the balance sheet this quarter. Is that clear?
Not really, in the sense that what we all want to know is, shall we factor in certain additional negative components for the future or not?
Sorry, Mr. Vercellone. I am not, of course, the regulator, otherwise I would have out self-imposed the validation, not the MOC. For the time being, I can only self-impose the MOC. Of course, hopefully, as you can have experienced during these three years, we were always delivering and performing also in the different step with the procedure that we had with ECB. At the best of our capability, there shouldn't be any other things. Of course, I have to wait for the validation because I am not the one that has to decide the numbers. Of course, we think a good job, which is still better if we consider this further buffer, let's say.
On operational risk, is there still something coming in Q4?
I don't think so. We are running month-by-month. I don't know if you are mentioning to some particular situation or the famous Diamanti case. If it's for Diamanti, we still are running. We are now up to more than 1,000 transactions with clients, fully in line with our provision. We don't forecast any other things. I don't think we will have any other potential backfire from that. Commission for Q4 will be, I would say, of the different nature from last year, not very different, probably from the results. Last year we had, as you rightly remember, the contabilization of a big tranche of structured finance transaction all in Q4. This year maybe will be a bit less. We are recovering a lot in terms of assets under management.
If you have a look to the slide on page 14, last year in Q4, we had EUR 2.5 billion of placement of investment product. I really hope that we can be almost EUR 1 billion better that figure in Q4. What else? Senior bond maturing. We have two kind of bond. The tranche subordinated would be 5.5% and the senior 2.5%, are both covered or swapped, of course. Most probably we can have better price. Last, unrealized gains are considering gross. As you can remember, in terms of capital, the gross for us is equal to the net because of the DTA, that make a lot of difference.
Okay. Thank you.
The next question is from Domenico Santoro with HSBC. Please go ahead.
Hi. Good evening. Thanks for the presentation. Two follow-ups from my side. On the capital, I understand that you have a lot of positive reserve here, and you might decide in the plan whether to action at some of them, of course, calibrating the impact.
On the P&L, when it comes to UTP and the sovereign. A bit beyond next year, I was wondering whether you have any message on Basel IV instead, and the operational risk that kicks in first. The second is on the new definition of defaulted loans. I was just wondering whether you have any idea on how the NPE perimeter, it might change, and whether this is going to kick in in the fourth quarter, please. Then I had a very similar question to one of the colleague on the buyback of shares, but actually, it was answered before. I mean your stock is, of course, trading at a very low valuation. From what I have understood from the course, for example, of the Spanish banks, the regulator is more open to consider buyback of shares.
There is more Austrian bank that had been approved a buyback of shares recently. I'm just wondering whether there is any discussion with the regulator on this. You might be inclined to do that because, of course, you are far away to be considered a stock, I mean, for income funds. The buyback of shares, it might help significantly the valuation at this point. Thank you.
Thank you, Mr. Santoro. Frankly speaking, we don't have big material rather than big foreseen amount of headwind for both 2020 and 2021. 2022, of course, there will be the EBA guidelines. Most of them, we think we have already applied in the exercise we tried to explain before. There will be, of course, something on the AMA, starting from 2022. I think we will be more precise also in the presentation on the business plan. Let's just consider, please, that I don't know if, frankly speaking, this exercise of announcing the headwind is quite consistent. For instance, if you go back to the past, the potential impact of whatever came, Basel III and so on, was considered much higher that has been as a matter of fact.
I would say, especially with us, we were running the bank with massive de-risking, with a lot of headwind that comes from different validation. Frankly speaking, we are still here growing in common equity tier 1. Just to make an example, the impact of IFRS 9 was calculated to be what basis point? 42 basis point in 2016, ended up to be 20 basis point. Everything is just an estimation which do not consider that the bank is a moving company, in which, of course, we try to better our capital absorption to make move in order to offset potential headwind. Again, I think our story of these three years can show that we were very much able to offset all of this.
Frankly speaking, for the next two year, I think we will be much better than in the past, because again, since this quarter, finally, we don't have any pro forma. We know that we are running with our capital generation and producing enough capital. Also considering, of course, especially for the future, the possibility of paying dividends. What was the last one? Buyback, sorry. We are working on everything. This year is a lot of years that we don't give satisfaction in terms of payment back to our shareholders. Let's, first of all, give us the possibility to understand the amount, and then we will consider what is better to do, also considering the amount that will be available for paying back shareholders. I'm not yet in the position to tell you.
All right, thank you. About the new definition of defaulted loans, please.
Yes. This comes basically starting from January 2022. We will make the application, I think, first quarter 2021. We have a really preliminary estimation, which range in a range of tenths of basis points. Still, of course, we are not working on that. Right now, we don't think it's possible to give you some number. It's yet to come in the next two years. We will do the application by time.
The 10 basis points is applicable on the loan loss provision, correct?
I mean, Capital requirement, of course.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi. Thank you. Let me see. I have a few questions. Some of them might have been answered, so apologies for that. Have you accrued any dividends so far, for 2019 in the CET1 ratios? Also, on CET1 ratio, there was 40 basis points of margin of conservatism. That's on a phased-in approach. Is the number different on a fully loaded basis? Do you have an approximate date for the business plan presentation? That's it. Thank you.
No. The first question is no, because as you know, we don't have to ask for the capitalization of the Q3 profitability, because it's not fully audited. We have basically all the contribution that we can have in the second part of the year is available for potential distribution. Yes, the MOC is calculated, basically it's phased in, but the fully loaded is not much different, a few basis points. Again, the business plan presentation, we have not yet the data, but we think in the first quarter would be the right time.
Okay, thank you.
The next question is from Adele Palamà with UBS. Please go ahead.
Yes, hi, good evening. I have two questions. Can you give us a bit of color on the decline trend of the contribution from the equity accounting investment? The second question is on the asset quality. I was wondering if you are planning to do further sale of NPLs, and if you are planning to do it, what is the price that you expect? If you can give us the default ratio for the quarter. Thanks.
Sorry, could you repeat the last question, please?
Yes. If you can give us the default ratio for this quarter on NPEs.
Sorry, I didn't get the first one. Was on Diamanti? No.
No. The first one is on the contribution from the equity accounting investment, the second line of the P&L. There is a decline trend, if you can give us a bit of color on that.
Global amount for equity participation up to 30th of September is EUR 97 million, of which in the third quarter, EUR 28 million. Okay?
Yes, but there is a declining trend quarter-on-quarter. If you can give us a bit of color on that. Like from EUR 33 million goes to EUR 28 million.
Yes. In the fourth quarter, it should be a bit up. I have to say that the major difference comes only from one of our stakeholdings, which is in the consumer finance, where Agos decided to have a different accounting policy on some aspect. Basically, they are making the same money of last year, but deciding to account in a different way and giving us a slowly lower distribution rather than last year.
The next question is from Noemi.
Sorry, I have still to answer. I am collecting data, sorry. Just a minute.
Okay.
Okay. The default rate, I have the data for the full nine months, is 1.2%, going down from 1.4% as at June. Of course, the quarter is much lower. For NPL disposal, if I understood the question, we don't have any specific project yet. We are, as I mentioned before, working more on UTP. We are also looking around to understand if some of the transaction made by some competitor is replicable or not. Of course, we will be able to decide better what to do once it will be much clearer, the situation for transaction in UTP. Which I don't believe can be done the same way as bad loans in the terms of massive disposal.
Sorry, as a follow-up, the default rate that you gave us, is that gross or net basis?
Is gross.
Thank you.
Thank you.
The next question is from Noemi Peruch with Mediobanca. Please go ahead.
Good evening. I have three questions from my side. The first one is on asset quality. Could you disclose the size of the NPE write-offs in the quarter? The second one is a follow-up on capital. Can you please clarify whether the TRIM impact you took in Q2 included already the review of the loan default portfolio and also the retail portfolio? Finally, what is the contribution to NII from the non-captive business of ProFamily, and in which line shall we find the related PPA contribution? Thanks a lot.
What do you intend exactly for NPE write-off? Again, there was no material position write-off, but of course, we have a continuous write-off procedure, which, of course, where we don't see a possibility to either recover or we prefer to amount to close the provision on some of our dossier. We prefer to do that. I am trying to give you the increase of number so you can make your calculation. Just a minute.
Thanks.
The low default portafoglio. Yes, the low default portafoglio is included into the TRIM because it's still the large portafoglio, which was all under the TRIM review. Sorry, the third one?
The third one is the contribution to NII from the non-captive business of ProFamily and also in which line can we find the PPA contribution. As a follow-up on capital, was also the retail portfolio included in the TRIM impact you took in Q2? Thanks.
The retail portafoglio is also included into the TRIM, as far as your last question is concerned. I thought we mentioned the lower contribution from ProFamily is on page nine, is EUR 3.2 million in the quarter, so it's part of the negative difference in NII, is the first figure we mentioned on page nine.
Sorry. I was talking about the non-captive business of ProFamily. Thank you.
Captive. The non-captive? This is the captive, what we lost already. We have the captive. Let me check it. If there is some other question, I will come back with this. I think it's something like
The next question is from Thomas Desvaux with Goldman Sachs. Please go ahead.
Hi. Thank you for the details on the bond maturing in the next few years. Would you mind giving us what you plan to issue, and if possible, by type of instruments? Thanks very much.
We have a forecast of basically issuing the same amount which are maturing. Of course, we are considering potentially to also fill some bucket in the different years, but the vast majority will be senior and of course, only MREL issuing.
Thank you.
The next question is from Giovanni Razzoli. Please go ahead, sir.
Sorry, can I go back one minute to the question of Mediobanca? We found the contribution from non-captive is nine months, EUR 2.7 million.
The next question is from Giovanni Razzoli with Equita. Please go ahead.
Sorry, I don't want to open a discussion on whether it's better to pay a dividend or a buyback, but as far as I'm concerned, as line number 25, you have mentioned a possible dividend distribution, which is quite straightforward vis-à-vis the buyback. In my view, if you deem that your stock is undervalued, you can pay back money to shareholders via buyback, and it's up to shareholder to decide whether the stock is undervalued or not. More importantly, the buyback is a flexible measure, which in my view implies that you are not fully confident about the particular structure, while the dividend is more straightforward. I strongly believe that if it's a possible dividend distribution in light of the progresses that you have made on capital profitability and NPE ratio, it should be a dividend distribution, not a buyback. Thank you.
I think it's what I answered also to some other question. We have the obligation to do the best we can for shareholders, we are considering the best option. It's the first year. I'm already very happy to give you this announcement, leave me still the remaining time in order to give you some more detail.
Thank you. We're on the same page.
Gentlemen, there are no more questions registered at this time.
Okay. Thank you very much for your attention. Good night.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone.