Good evening. This is the Chorus Call conference operator. Welcome and thank you for joining the Banco BPM Presentation of Full Year 2018 Results Conference Call. As a reminder, all participants At this time, I would like to turn the conference over to Mr. Tom Lukasen, Shareholder Strategy Investor Coverage and Rating Agencies of Banco BPM.
Please go ahead, sir.
Thank you, operator. As it has not been possible for Roberto to join us here today, a warm welcome to you all from my side, and thank you very much for attending Banco BPM's Full Year 2018 Group Results Presentation. As usual, before leaving the word to our CEO, Giuseppe Castagna, let me just remind you that our presentation is also available on our website under the Investor Relations section, subsection presentations, and that our Q and A session is reserved for financial analysts. Thank you. And let me now hand you over to Giuseppe Castagna to take you through the presentation.
Thank you, Tom. Thank you, everybody. Let's start immediately. It's late in the evening. We can start from Page 5 of the presentation.
We have tried to summarize these last 24 months in order to show you the huge work has been done in different aspects for the banks. We are adding these 24 months to complete the merger to derisk the bank to reorganize the business unit to make the different capital management action in order to sustain the capital ratio. And I am sure that we can say that we were able to give a strong response to the asset quality challenge and that we are ready to return to a sustainable profitability. Let me add that we had This huge de risking of almost $25,000,000,000 net worth 18,000,000,000 through disposal of portfolio for $17,200,000,000 nominal, more than doubling the original target plan of $8,000,000,000 This was a cumulative loan loss provision for 5,000,000,000 completely sustained by our internal organic growth and capital management action. Let's talk about the organic performance.
We were able in the 2 years to have a cumulative PPI of $3,200,000,000 with consistent commercial performance and a very material cost reduction, 8% less versus 2016 and roughly $400,000,000 in reducing costs Starting from the strategic plan 20 sixteen-nineteen, the steady profitability has still further potential as confirmed also by the stress test baseline scenario that we will discuss in a few page. We also were able to realize $1,900,000,000 through capital management action, which allowed us to at the common equity Tier 1 fully loaded pro form a at 11.5% and 13 0.5% phased in. No capital required to shareholders. We were able to do all internally. And we were able to extract value from our factories without basically disposing any of that and only renouncing to a small part of earning, but conserving the capacity to generate profitability also through the better shape of our product factory.
Let's start from the derisking on Page 6. We have reduced more than 60% the total gross book value of our non performing exposure through this project, we will talk about in few minutes, we to $11,800,000,000 of nonperforming exposure visavis30,000,000,000 in end of 2016 and a projection of our business plan, which were $23,200,000,000 So basically $18,000,000 less than the starting point, 11.4 points better than the strategic plan in 2019. On Page 7, you can see that we were able to do this massive reduction, not only through disposal, which amounted to $14,600,000,000 of GBV, but also through cancellation recoveries incurred, which led the total amount to $21,200,000,000 of derisking. On top of that, of course, we had the inflow of these 2 years, which was $3,300,000,000 in order to extend to $18,200,000,000 of total derisking. This was done through different transaction, very well performed on the market.
And you can see on the box the different $17,000,000,000 nominal disposal transaction. The huge derisking allowed us also to normalize asset quality and made strong improvement in NPE ratios, closing basically the gap with competitors and vectoring our net non performing launch in the Italian industry. Let's say that we went down from 24% of the starting point of the strategic plan to 10.8% and 6.5% of net non performing exposure. Just to give you an idea, the comparable for the strategic plan 2019 stood at 17.5percent11.1 percent net. Even better was the recovery in the bad debt to loan ratio went down from 14.9% to 3.6% and the net from 7.1% to 1.5%.
In doing so, reducing dramatically our ratios, which when we started were 430 basis points higher than the Italian banking system and we are now 290 basis points below the average of the Italian banking system. On page 9, you will find some details on the ACE deal, which yesterday was basically closed with the vehicle notes issued and signed in London. So we can give you some precise detail on the final transaction, which stood at 7,400,000,000 right in the middle of our anticipation range, which was between $7,000,000,000 $7,800,000,000 The gross book value excluding the cash in made in these last 6 months and write off stood at 6 $200,000,000 The overall price was 23.6%, better than the average of the guidance, which was 21, 25. The cereal tranche was rated BBB. The GACs will be filed tomorrow and will be fully retained by Bank of BPM.
The equity tranche will be underwritten by Elliott for 95% and by ourselves for the remaining 5%. The benefit that the bank will have from the FWA reduction will be 1,700,000,000 once will be transferred to the equity tranche and the GACS approval. The platform partnership, as you know, will be launched by the first half of this year. On the right side of this slide, it's very interest to check some of the comparable with other transaction made on disposing loans during these last couple of years. Basically, we had 4 big transaction, 2 of which were more or less Comprising the global book, for ourselves was a reduction of 72%, Basically, of the less than $4,000,000,000 remaining, 2 of which are leasing and the other are loans for which we have reason that enable us to dispose immediately or to put into a vehicle, but of course allow us to work out with success of this transaction.
But the only transaction that was done in such And I'm in such a percentage visavis total disposition of nonperforming was the one related to Bank 2, As you see, it was 85% and was completed at 20.5% of price. The other transaction, The other 2 were of course only a relative small part of the global exposure, 33% 28% and were performed at different prices. This is important to demonstrate that the quality of our total portfolio was very good and incomparable with other competitors. Let's talk about the organic performance. We were able to generate in 2018 almost $2,000,000,000 profit from operation, which normalized and came down to $1,800,000,000 Of course, this year, these results were hugely affected not only by the cleanup on non performing exposure, which accounted respectively for $1,900,000 stated $1,200,000,000 if we exclude the Exodus and Ace Top Up transaction, but also from cleanup on different items that we decided to wipe up from the balance sheet and related to either to integration and final cost of the merger or our transaction that were related to commercial transaction made before the merger.
In order to enable the bank to be really ready to start performing very well in 2019. The net profit was normalized at $343,000,000 Of course, we closed with $56,000,000 of losses stated after charging something like $700,000,000 net of surgery items, 1.2 negative, 500 positive. On page 11, we have the main driver of our performance, which were basically the increase both in loans and in current account and site deposit, which respectively grew almost 5% 15%. Side deposit also grew due to the lack of confidence on the activity on the investment side of our private clients. And of course, we had a lot of increasing in the current account, which can be a good reserve for increasing our asset management activity as soon as that market will start to give confidence to our client.
We had also a very prudential approach visavisoursecurities portfolio. We reduced by $9,000,000,000 the Italian GOVES portfolio, 34% in diversifying very much our securities portfolio with other jurisdiction bonds. All these maintaining always a very safe liquidity position as we show in the lower part of the slide. Let's make a focus on the cost cutting that we were able to do during these 2 years. Basically, we started our strategic plan with the date of 2015.
As you remember, we announced the plan in May 20 16. And at that time, the reference point was $3,100,000,000 and we stood the 2018 balance at $2,700,000,000 of cost in reducing $400,000,000 which was much more than the target we expected in 3 years' time, but we were able to do that in 2 years' time, gaining almost $150,000,000 vis a vis next year strategic plan target. On Page 15, we try to give you some hints about the capability of the bank recognized also by the stress test to generate profitability and capital. As you can see, the increase of Delta on Common equity Tier 1 for our bank was 312 basis points visavis101 basis points for the other Italian bank, The difference of 211 basis points is made by 120 basis points deriving from core revenues and remaining from the optimization of DTAs and threshold in our capital accounting. Let's finish this executive summary with the capital results.
We are very happy to announce that we are in the high part of the fork we announced a few months ago when we started with the ACE project, we were thinking to conclude In a fork between 11% and 11.5%, fully loaded, we ended up with 11.5%, which in our opinion is a very good results. And also in terms of phased in, we were able to close the years with a pro form a of Let's now go quick through the Profit and loss, net interest income and other good news in my opinion is not considering Both IFRS 9 effect and the PPA, we basically closed the years with 1.2% of increase. Also the last quarter was flat. If you consider also the IFRS 9 effect, we stood at 8.5% more than last year. On Page 17, you have some data about the asset spread and the commercial spread, we were able in some way to stop the reduction in commercial spread through an increase of spread in the asset side.
Of course, the maturity that are coming normally are related to transaction executed few years ago when the spread were higher. So it will take some time to show the complete recovery of what we have in mind for this year, which is an average of increase in the spread of something like 20, 25 basis points. Luckily enough, the cost of funding is still very good. And also in the last quarter, we were able to reduce by 5 basis points. Commission, as you can remember, we had a very bad first part of the year in which we accumulated a delay of almost 10%.
Basically, we recovered in the 2nd part of the year The total year on year comparison is minus 5%. Meanwhile, you can see that last quarter was 4% better than the Q3. If you see the histograms on the right side of the slide, You can see that meanwhile the management advisory fee basically were still performing very poorly due to the market situation, we were able to recover into the commercial and credit fees, which were increasing from $230,000,000 as an average of the first half to $260,000,000 of the last quarter 2018. Net financial result was affected by last quarter in which we had a loss of $74,000,000 which can be explained by a very prudential approach. We had both for completely depreciating the indirect exposure that we had through the Fundo interbank carrier deposit, the SPPI test on non trading financial exposure and an hedged strategy to reduce the sensitivity of the market movements.
In this respect, we were able to reduce sensitivity from 3.5 $1,000,000 per basis point to $1,500,000 per basis point with a very prudent approach. By the way, market price movement had a positive impact on last quarter, gaining almost $140,000,000 on September data. Operating cost was As we were mentioning before, it was the real good activity we were able to perform during these 2 years. Also during 2018, we had a reduction of 4.5%. The last quarter was affected by the write off and adjustment that we were mentioning before, in this case related to integration cost and adjustment on property not used in operation.
This is related to branches that we closed. As you know, we closed this year something like 500 branch. We were obliged to account the renting of this branch till the final maturity of the contract. Of course, we are confident that we can recover some of these costs in dealing with the different properties. Personal expenses were down almost 3%, 2% in last quarter, In line with our plan, we reduced the debt account 1,000 people in 20 18 and total of 2,400 people during these last 2 years visavis the projection of $2,200 made for 3 years in the business plan.
Administrative expense, of course, was maybe the best result, we were able to perform 6% lower than last year, very consistent with the 1st year of the plan. And still the C control will help us to have results in line also for next year. Let's pass on Page 23 to loan loss provision and cost of credit. We try to give you details on the different aspects of our provisioning. Of course, 191 $1,000,000 was related to IFRS 9 impacted fully compensated at NII level.
Of course, the majority of this will not be there, the vast majority of this because of the disposal of non performing loans next year. Exodus and this impacts, as you can see in the box On the right of the slide was accounting for $714,000,000 on top of the IFRS 9 accounting made at the beginning of the year. Of course, it's because we did $4,000,000,000 more than expected. And the normalized, I would say, cost of credit was 1,000,000,003, This stand to 98 basis points per IFRS nine. Of course, if you consider also the IFRS 9, it goes to 116 basis points.
Let's say that during The last quarter, we did we made also some top up in coverage for especially in the infrastructure and construction sector due to the crisis that we are experiencing in this sector. The very good news I think is to say that we will have a starting point of better loans in 2019 of only 4,000,000,000 visavis the $15,000,000,000 we started in 2018 and this will produce automatically a very consistent reduction of cost of credit for 2019. Let's pass to the balance sheet. Direct funding, as I was announcing at the beginning, site deposit increasing also in the 2nd year of the plan, almost 6% and represents 70% of the total Direct funding, we have been issuing during the 1st part of the year also covered bonds and 1 senior bonds. But of course, in the second part of the year, we didn't have any issue and we will talk about fore here in few minutes.
Bond maturities, very manageable bond maturities, Port, retail and institutional, globally slightly above $2,000,000,000 for each of the next 3 years, completely manageable by our bank, both in case of non TLTRO scenario, but of course, even more if a sort of TLTRO will happen. We of course don't have any liquidity problem and any potential opportunity in the market will be examined only for regulatory security safeness. Of course, we don't have for this year any problem also in terms of regulatory, But we would like to start doing something if the market allow us to do. The amount that we forecast to do in a mix of option, which range from covered bond, some senior bilateral repos would be in the same amount of 2018 in a range between $3,500,000,000 $4,000,000,000 On Page 27, these are the ammunition that we have in order to perform this market issue. We have $52,000,000,000 of eligible securities growing through the years.
The unencumbered are now almost $20,000,000,000 and the total liquidity security is almost $22,000,000,000 This amount allow us of course to perform the bilateral and the repo's medium term transaction that we already did this year for almost $2,000,000,000 and we can be able to do again also in 2019. Let's talk about Securities portfolio on Page 28, we have had a very cautious approach also In terms of reducing the exposure to the Italian govies, we reduced by in this last year by $3,000,000,000 further $3,000,000,000 the Italian govies to $17,000,000,000 of which $6,600,000,000 in HTCS reduced by almost $10,000,000,000 $10,000,000,000 in HTC with amortizing profile. We have also reduced the duration of Italian Novis under HtCS from 3.4 in June to 2.7 in December. As I was mentioning before, the gross HETCS reserves on net securities vectoring by $140,000,000 in Q4. On Page 29, the main message having already talked about the reduction in the office is the sensitivity.
I mentioned before, one basis point spread sensitivity down from 3.5 $1,000,000 to $1,500,000 in December. There was also a better shape of our classification of Italian GEO GOVIS, which started last year, fifty-fifty nowadays are 37% HTCS and 58% of HTC without doing any switch on our book, but just doing market transaction. In direct funding, as you know, this has been a very difficult year In terms of market price, the effect of market price affected the performance reducing by 5,000,000,000 the indirect finding, if we exclude the market price effect, we have an increase of 1,100,000,000 in terms since last year. Basically, the market effect was around 6 $400,000,000 if you add on assets under management and asset under custody. You can see it better this amount On Page 31, if you add up also the growth into current account and side deposit, you see that the real increase excluding market effects was $5,400,000,000 of course to which we have to exclude the $6,400,000,000 in order to have the $1,000,000,000 reduction we had during the year.
Let's talk about our customer loans. Of course, the total amount is affected by the massive derisking more than $6,500,000,000 net only during the last year, we grew the net customer loans from $94,700,000,000 to 97.3 $1,000,000,000 almost 3%. And even if we exclude the ex senior notes, we grew by 2%. It's very important to underline that we produced new mortgages and million term financing in the 2018 for a total consideration of $20,700,000,000 $6,200,000,000 of which only in the last quarter 2018, showing the potential opportunity to still increase these assets, of course, keeping an eye to the macroeconomic situation. Let's talk again about disposal.
I think this Slide 34 is very interesting. In order to check that we were able to reduce the stock, I would say the final wave of our bad loan disposal has been generated not only by disposal that you see in clear blue, but especially through a better management of inflows and out flows. You see that this net result was negative in the 1st year in 2016 or 600,000,000 of more inflows. Meanwhile, it was $1,100,000,000 of more outflows and cancellation incurred in 2017 $2,200,000,000 in the last 2018, showing the capacity of our bank to have a very effective workout, which as you know is very is much more less expensive and will be the key for the reduction of our RMP in the next few years. In terms of net book value, I just mentioned that we reduced since the starting point $11,000,000,000 $6,300,000,000 only in the last year and in doing so reducing the net bad loan ratio down to 1.5%.
Let's have a look on Page 36 to the sharp drop in bad loans. And Even though, of course, we now have 2 third of our NPE exposure made out of OTP rather than bad loans, which is a dramatic change since before ACE, as you can see was 56% of net loans before ACE, now it's 33%, which is also very different and very better, I would say, compared to the Italian market, which stood more or less at the same level of our pre ACE transaction, 58% of bad loans, 40% of OTP. This of course drive to apparent lower coverage of total NPE. Meanwhile, we still stood at a very comfortable 64% including write off or 60% excluding write off of bad loans and 35% of OTP coverage. OTP coverage increased 270 basis points during the last year.
A quick focus on bad loans, some detail. I think it's very effective to check that of our GBV, we stand now to $1,600,000,000 of net book value, of which really nothing of unsecured, only $200,000,000 $1,400,000,000 of secured, which now have 86% of the total exposure of bad loans. Also this shape, secured, unsecured, which is gross 75.25 is very different from the Italian banking system, which stands still at the fifty-fifty secondured, unsecured ratio. Some words about the workout activity on Page 38, still very effective, 29% more than last year, dollars 600,000,000 of cash recoveries, dollars 1,900,000,000 of cancellation true, sorry, of existing provision. So also for this year, the real cost of work out was basically less than $30,000,000 $4,000,000,000 and stood at $67,000,000 of increase in provision.
So this gives the way to the next step of our bank will be made consistently in workout activity both in med loans and in UTP. As far as the UTP are concerned, on Page 39, you see the same slide we showed before, The reduction without basically disposal other than single name disposal is dramatic. We went down from 12.5 $1,000,000,000 to $7,800,000,000 doing so reducing almost $5,000,000,000 in 2 years, dollars 5,000,000,000 net, Also in this case, a reduction of $4,400,000,000 which of course does not have comparison with the original strategic plan, which was much higher than that. On Page 40, the composition of OTP loans, Almost the same of bad loans, a bit lower part of secured versus unsecured, 63 versus 37, still better than the Italian banking system. Let's stress And it's really a very low part of this $5,000,000,000 exposure.
Page 41 is a new slide. We want To be, as usual, very open on the potential outlook of our existing stock, We are giving you some information. We were able on the track record of these 2 years without disposal, only with work out to reduce the net non performing exposure by 32% year on year. This brings to the number you can see on the right part of the slide. So both for secured and unsecured, if you exclude the restructuring, you end up to something like $4,300,000,000 which at the pace of 30% of work out per year basically will bring without doing anything to a remaining part of this portfolio in a range in a period ranging from 6 to 8 years to something between $200,000,000 $400,000,000 This amount, if included In the next 6 to 8 years, provisioning means from 3 to 6 basis points more of provision on global provision or cost of risk, so really negligible.
A final slide, Page 43, on the common equity Tier 1 ratio. The evolution, 11.9% was the starting point fully loaded. We went down to 11.2% in September. Then we have this ACE transaction and the negative effect of our loss, which make us standing at 10% as stated, the common equity Tier 1. But as you know, We have already signed the transaction that will be completed in the next two quarters, which will allow us to go back to 11.5% through 28 basis points from NPL disposal and GAC transaction effect on FWA reduction, 25 basis points from the joint venture of NPL platform and 101 basis points for the agreement with Credit Agricole.
This has been increased even more than we expected, Thanks to the increasing portion of profitability that will be given to shareholders for Argos. I would say that considering the dramatic reduction of the risk profile of the bank is really for us a good result to stand pro form a at 11.5% 13.5% phasing of our capital. Let's say in a nutshell that We have been during 2018 implementing and accelerating at the maximum pace the path of de risking while preserving the capital position through performances operative performances and capital management action and we also were very much engaged, don't forget into a real merger between 2 banks that were obliged in 2 years to be integrated IT migration, restructuring, reorganization, a streamline of the business unit. 2019 see us in a very good position to forget about Increase in disposal, we have of course budget or very low amount of cost of risk And we can be focalized into profitability through leveraging our competitive position as the Third Italian Banking Group. We feel that we have built up a solid performance and we can really deliver good result during 2019.
Thank you very much. And I am ready for your questions.
The first question is from Giovanni Razzoli with Equita. Please go ahead.
Good afternoon to everybody. Two questions. The first one on NII. I was wondering whether in the next quarter, we should assume A deceleration of the NII related to the interest that you won't accrue anymore on the NPL disposals as a part of the ACE project, if you can please quantify the impact of this, if any? The second question is a detail of the extraordinary provisions that you have taken, I read in the press release, there are something related to a diamond sale activity and there has been something like €150,000,000 to €200,000,000 quarter on quarter increase.
So if you can please clarify What is the contribution of these extraordinary provision specific on these? And then very last question on the Slide number 41, I think that that should attract most of the interest of the market. We are basically you are saying that you have still after Exodus 7,800,000,000 of secured NPA and €4,000,000,000 of unsecured NPA, you are giving us the coverage here. You should have received also your other banks have Just today disclosed that we have received the request of increasing the coverage to a certain amount in a 5, 6 year time, what you are telling us here is that you are in the condition to cut by 30% per year the gross book value in terms of secured and unsecured nonperforming, so that the net cost of this activity at the end of The pieces would be at best €400,000,000 Is my understanding correct? Thank you.
So, thank you, Mr. Vazoli. Let's start from the first question. It's very easy to see that, of course, the reduction is already quietly, rightly shown on our slide. So we went down from 1st semester, which was very rich because it was before the Exodus transaction, of course, the East transaction.
So there's been a reduction from $190,000,000 of full year 'eighteen to something that will go down to $1,000,000 in 2019. And of course, this will notwithstanding that, of course, the like for like will be vector as a guidance of this year.
Sorry to interrupt you. So you said that most of it has already been incorporated in the Q4 NII, right?
Q4, because in the Q4, you have 30,000,000 Next year will be half of this amount. So basically $15,000,000 per quarter, more or less. The second was on the extraordinary write off or better say provision. We had a quite consistent amount of voices which were affected in this regard. Of course, also the diamond was 1 of that.
All in all, the global amount we provisioned in the 4th quarter, if you put together Karish, the impairments on real estate and software, the closing anticipating closing on branching cost, The integration cost, the CIB cost and the high amount was an amount of almost 300,000,000 And of course, we this is the figure that we are prepared to show to you. For the 3rd question Was on Page 41, yes, I think you understood well. It's not that easy because we don't have any, As I said, we don't have any instruction about what we should have to do. And repeatedly, ECB told us that they won't issue any obligation on the stock, but because we perceive the market to be very worried About that, we wanted only to show you that with normal workout that we have been performing during these last 2 years, we will be able to completely offset the stock present in our book, Almost completely, of course.
The next question comes from Christian Carrezza with Intermonte.
Good evening, everybody. The first question is on net interest income. If you can share with us also what do you expect in terms of cost of funding ticket account also more And regulatory changes, you said €3,540,000,000 issue could be done in 2019. So what do you expect in terms of markdown, say, cost of funding? The second question is on common equity Tier 1, 11.5 percent common equity free labor is a good number.
You said that you're expecting some capital generation in 2019. If you can So we asked if there is any visibility on what could be the common equity of 1 by year end 2019? And finally, on Costa Vista, You said you're expecting a very low cost risk or much lower than this year. So in as a matter of fact, you are saying that you don't see any major change from ECB different approach on the stock of NPE. So you said the 3, 6 basis points maybe could be the impact.
So what should we expect
Thank you, Mr. Carveza. On cost of funding, notwithstanding the market situation, we feel that through The kind of transaction I was explaining before, we will be able to slightly reduce Still for 2019, the cost of funding, of course, we have to have a very attentive look at the market. We will take the opportunity to go to market for public issuing. Otherwise, who will stand to private transaction and only covered bonds.
Of course, we have also in our funding strategy to issue some bond senior bond. And even if we go to the macro, the senior bond, we should slightly decrease our cost of funding. This is without taking in consideration the potential maneuver on renewal of TLTRO facilities. So the eventual facilities will even better the cost of funding. Of course, I cannot give you a guidance For common equity Tier 1, 2019, otherwise I give you the results of 2019.
Let's Be confident that we can of course have a PPI income slightly better than we did normalized this year and with a very reduced cost of risk, we can be able to produce a quite effective pretax income. And as you know, for our capital generation, pretax income is what counts because thanks to DDA and threshold, we factorize all the amount of pre tax income into our capital. Finally, cost of risk. Again, I can confirm that with a prudent approach And again, with some question marks about the market and macroeconomics because we are assisting in the last weeks to worsening of the market condition and the macro views in terms of GDP, in terms of volumes and so on. But we still think that we can have a cost of risk in line with our original guidance of 65 to 70
The next question is from Alberto Cordara with Bank of America Merrill Lynch. Please go ahead.
Good evening. First of all, congratulations for this massive deleveraging that you've been able to achieve without calling shareholders into supporting this via capital. So that has been quite amazing, I think. In terms of all my questions, just moving to something different, if you can give us a bit of a view On your action on your Italian treasury portfolio, Both in terms of the sensitivity that you now have on Italian sovereign spreads and in terms of future strategy whether you plan to replace parts of the bonds with new one or whether you plan to maybe expand this portfolio? Just wanted to have a bit more color on these specific issues?
And then if you can give us also a bit of a view, I think you might have discussed and may have lost some of the things that you said, but on these actions from beyond calendar provisioning on the stock or was that implied for Bami going forward? Thank you.
Good evening. For our securities portfolio, of course, we worked very hard in order to neutralize any potential negative effect of the Italian govies. Of course, hedging with international govies. We don't foresee in our budget an increase of Vistarengo. We are just checking of course opportunistically if we can take advantage from some movement in the market.
But more or less as far as related to the NII contribution, We don't think we can emphasize the Italian GOV's stock in our portfolio. The second question was at the addendum. Frankly speaking, it's very difficult to give you an answer. It will depend on the inflows, so on the macro. And we are of course working very hard in order to, let's say, also reorganize our way of approaching influence of NPE in order to, of course, now that we have a better stock a lower stock to immediately be aggressive on the new inflows.
So, we still need some few weeks or maybe in the next quarter, I can I will be able to give you some more hint about our expectation? But there are 2 critical points, which are the amount of inflows and capability of the bank to tackle immediately the first of all, to avoid the inflows And secondly, to tackle middle of this amount.
The next question is from Andrea Bertolone with Exane. Please go ahead.
Good evening. A couple of questions. First section is on capital. So the usual question that we ask you Every quarter, have you got anything to tell us on regulatory headwinds going forward, whether it's TRIM, IFRS LGD waivers and API guidelines and so on and so forth. Now that you have May clarify where your capital position is, it will be helpful that There's nothing brewing.
It's helpful to know that there's nothing brewing that we are not aware of. And also in light of the Very strong de risking. Do you envisage any change in the Pillar 2R in the context of the 2019 SREP? 2nd broker question is on funding. I'm referring to Slide 27, where you point out that you have already executed bilateral secured repos, which are medium long term.
I'd like to know 2 things on this. If you can give us an idea of what is the cost of in terms of basis points of this? And on the various commentaries you add, which I find quite helpful in that slide, are you implying that if you wanted the €11,000,000,000 of unencumbered assets could be refinanced in the same manner if you wanted to. On MREL, so referring to different slide, which is 26, How much of the $5,300,000,000 of senior bonds, which mature between now and 2021, you need to refinance for regulatory purposes, whether it's NSFR or whether it's MLL, do you need to roll over everything? And are you willing to do some of it at retail?
And the final question is just a clarification. I just wanted to make sure that the loss on the junior tranches and mezzanine tranches of Project Ace was already booked in the Q4 provisions or elsewhere in Q4? Thank you. Thank you, Mr. Bertcellone.
First question, of course, I need to keep answering the same way Every time is not in my hands. In my hands was to show the supervisor that we were much better than we promised and we understood that this was a very important step in order to get a potential avoiding of course any impact on LGD. But of course, we have to wait. In any case, as I maybe also tell you some other time, we are also working on some model change on our model in order to keep at a, I would say, minimal level any potential issue related to the disposal. I would be really very disappointed with this massive reduction, we wouldn't have the possibility to get a possibility to avoid any increase.
Strongly de risking, you say, so you expect P2R bettering. Of course, we always expect. Again, it's not in my hands. Still, we didn't receive the final letter. I can say that we really are confident that we can have some that we can have some better results, the amount of which is difficult to say because as you know, should be is not really aligned to the maturity.
So I wouldn't say that our P2R 2019 we'd take in account all the disposal that we have done during the years. Normally, they line up the banks some months ago. So, depending on how many months before the battering of our bank. But let me say, in relative terms vis a vis other competitors, I feel that our bank will have an appreciation on because of the strong derisking.
MREL,
Basically, again, we don't need any increase in issuing bonds. So basically, our funding plan has a mix of these instruments. Let's say that in order to maintain a safe buffer, we would have an amount in line with the maturity that you see in the next few years. As far as retail bond If I understood well the question, this depends on MREL aptitude. As you know, is still in discussion, The issue about retail to be considered bail in or not.
So let's check. For the time being, we don't have any program to issue retail bonds. And yes, I can confirm But also the equity part of losses of ACE is already included into 2018 accounts.
And on the long term reapers?
Long term reapers. Of course, I cannot give you exactly the price because we have to go to the market again. So I don't want to give some advantage to my counterparties. But let's say that, of course, it's much cheaper than any public issuing.
The next question is from Jean Louis with Goldman Sachs.
Hi, good evening. I have a few questions on first on the tax rate. I didn't I picked up that You feel that the capital formation will be equated by pretty much the pretax profit into 2019. Can you tell us what you think that the effective tax rate is going to be for the next maybe couple of years, if you can? And my second question is, there is a slide in there where you show how you where you've done in terms of the cost reduction with the merger ongoing, etcetera.
I just wanted to know whether you'd wager The cost number for this year and next, I mean, have we finished on the cost reduction? Or do you see any further scope To optimize this by any meaningful amount or are we essentially back to normal optimization day to day? And lastly, by the way, do you believe that there is a need counter the profitability headwinds at present with another wave of cost cut that can only be done inorganically, maybe from BBPM and also at system level? And lastly, I just wanted to ask now that you derisked the NPL portfolio so much and And that you anticipate a manageable cost of risk. Will you start accruing dividends in 2019 through the year?
Thank you. Let's start from the first question. Maybe I was not that clear. The tax rate is more or less the normal one, around 33%, a bit lower. But what I was mentioning is the impact on capital of the pretax profitability.
Because of our DTA and our threshold, every time we get some profit, we can add this profit basically gross of taxation to our common equity Tier 1. Of course, the net result will be affected by the tax rate, but not the common liability Tier one increase. Cost reduction, we still of course want to take advantage from the many maneuver we have done during these 2 years. I was mentioning that still in 2019, We will be factoring the closing of this 500 branch we did in 2018, almost 1,000 people less In 2019, of course, in terms of personnel, we will have also to consider that there is a new contract, which is discussed between Italian Banking Association and the unions. So, of course, we have to be prudent about that.
But as far as administrative cost, we feel that the same result of this year is a good target reduction for general and administrative costs. I agree completely with you that, of course, we would never be able to have $400,000,000 cost cutting if we did not merge between the 2 banks. So, of course, if you want consistent cost cutting, you have to merge. But in order to merge, you also have to consider many other aspects, which grow by the macro situation, the willingness of other counterparties, the strength and I would say the consideration of regulator and so on. So for the time being, as I said many times, we don't consider consolidation for our bank.
We think we can have a good 2019 on a standalone basis. About dividends, in our business plan, which we are still trying to perform, of course, with the different scenario we have since we produced the business plan, we had a dividend forecast for 2019. Now we are working on a different scenario. Let's start in the few months to see if we really can generate the profitability we expect And we will be even more clear also on this aspect.
The next question is from Riccardo Rovere with Mediobanca. Please go ahead.
Just a quick follow-up actually, something I didn't get. If you expect any headwind again on capital From IFRS 16 and TRIM model changes, sorry, but I didn't get what your previous answer was.
If you can just repeat because I just didn't get it.
Hi,
Mr. Robert. Good evening. Frankly speaking, I was answering to a different question, which was about I think the potential waiver impact and so on. Of course, we will have this year the TRIM impact on the market impact on our model and also the operational risk.
We frankly speaking don't have a precise number. We think it would be in the region of 20 basis points 20 to 30 basis points.
Sorry, Mr. Constantania. Does the 20 basis point include also IFRS 16 or it's just in TRIM?
Sorry, I didn't get well your question. So IFRS 16, of course, is not embedded in our number, be something between 10, 10, 15 basis points.
10, 15. Okay. And 3, 20. This is what I get.
Yes, this is a forecast.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Yes. Good evening. I've got 3 questions from my side. The first one is faster if you can give us an indication on trading income this year after the very weak result in Q4? The second one is on the TLTRO, if you can tell us which would be the revenue loss if the TLTRO would not be And the third one is on NPLs.
I think inflows this year you showed in one of the slides were around $1,600,000,000 $1,700,000,000 So the recovery so the workout actually has been around $2,500,000,000 Is that a good run rate you think for 2019 on both sides? Thank you.
I hope I got all your question clear. On trading income, of course, as I mentioned, we were very much affected by this last quarter. We don't foresee next actually impact on our accounts. So let's say that we go back to normal profitability. I cannot give you a concrete guidance, but will be in any case better than this year results.
On the TLTRO, I put this afterwards because I didn't get exactly. The inflows of I mean, you were mentioning the default rate in our budget is below 1.5%.
So you're expecting a decline of imports this year versus 'eighteen?
Yes. What was the question about TLTRO?
Yes. On the TLTRO, what would happen in terms of revenues if the TLTRO was not extended by the ACV?
Now, if it's not extended for this year, of course, doesn't change anything In any case, because this year we will bring the I think this $80,000,000 contribution that we normally have from PLTRO advantage. Of course, the problem will be more for next years, but we have to wait and understand at which condition, which maturity and so on in order to understand also the size of our new TLTRO. Okay. Thank you.
The next question is from Robert DeForn by Bybrook. Please go ahead.
Good evening. My first question is on the GACs being applied to your ACE portfolio sale. Is the size of that GACs absolutely fixed? What are the risks to the closure of that transaction. So is it a set amount that you know you're going to have GACs for?
Or is there any risk left in that transaction? My second question focuses on Slide 41. I'm on now. Sorry, can you hear me? Did you hear my first question on ACE?
Yes. The first one is very clear. I am more sorry. The
second question on Slide 41, You currently have €11,800,000,000 of gross NPEs, €6,700,000,000 of net NPEs. This slide seems to suggest that in 6 years, you will have a net book value of NPEs will go from $6,700,000,000 to $400,000,000 What cost are you assuming that you will be able to achieve that derisking with? Are you saying that it will be done at current book values? Or is there an additional cost that you're assuming going forward to achieve that derisking?
Okay. Let's start from the that we can be able to close the transaction by 6th March. We have been in constant contact with math and the GACs responsible during these last 2 months. They are well aware of our portfolio. So let's say that is a very unexpected situation in which GAC shouldn't be approved.
But nevertheless, it doesn't change so much. The only impact for us that we will wait the senior tranche not 100%, not 0%, sorry, but 60%. So, of course, a slight decrease in RWA reduction. But frankly speaking, we don't envisage this possibility. The recognition of course will happen in any case because of the subscription of the equity tranche of 95% of the equity tranche also without the GACs.
Go back to Page 41. I am sure that being the first time somebody shows you this table is a bit complicated to understand. Of course, we are only talking about current stock, not new inflows In the next year, we are splitting the current amount into gross, net and ex Restructuring, because as you know, for the restructuring also in the recommendation of ECB, there is the potential solution of restructuring. And I was saying that if we perform the normal current recovery rate sorry, decay rate, workout rate of the current exposure, we have been able during these last 2 years to go down 32% per year. If this will happen also in the next 6 to 8 years, we will be able to reduce the stock to the amount I mentioned before.
Of course, excluding any impact of disposal, Charlie would work out.
Excuse me, this is the operator. The connection with the questioner has So the next question is from Domenico Santoro with HSBC. Please go ahead.
Hello. Hello. Hi. Good evening. Thank you for the presentation.
Just a clarification again on this Slide 41. If my understanding is correct, you said that In 68 years, you will be left if the run rate in terms of derisking goes on this way With a net book value of €400,000,000 €200,000,000 that's approximately in terms of further provision that will mean 3, 6 basis points in terms of capital. That is the situation 6, 8 years. In the meanwhile, my question is what will happen? I know that you issued already a press release saying that you don't expect for the next couple of 3 years within the business plan, no impact on capital and earnings.
Why is that? Is it because the vintage of the portfolio is below is lower compared to what we are at basically DCB is looking at? Is it because you and you said already, yes, you don't include the restructure. So this is helpful also because in my understanding, Is that the ECB addendum was considering the restructuring? Or there is something else that I'm missing here?
So Just the visibility for the next 2, 3 years, that will be very helpful to dissipate any risk of additional provision and impact on capital? And then my understanding is that there was a reclassification of OTPs into nonperforming in Q4. You mentioned construction specific positions. Now in order to avoid this keep going, would you consider something also transformational in the OTP area in terms of disposal? This is a question that we already asked you in the past.
Thank you.
Okay. Thank you, Mr. Santoro. Let me just really, We were very discussing about showing or not this slide, but because of the many rumors of the market, we were really happy to show with you to share with you a potential approach in any case to our outlook of cost of risk. So whatever will be, we don't know what will happen about stock recommendations on, whatever will be, Our way of derisking the bank will be massively through workout.
As much as we have done a lot of disposal in the 1st 2 years, We feel we are in the position to work out at the same pace we are doing in the 1st 2 years. If we are able to do that at the same pace, We will have a potential impact not in terms of common equity L1, but in terms of increasing cost of risk in something between 3 to 6 basis points per year, so something very, very negligible. This is why we wanted to give you this indication. Of course, we don't know exactly what will happen about restructuring, not restructuring and so on. For sure, the restructuring, we are not rushing into doing anything wrong because they are repaying and we will wait patiently that they will repay and because the majority are secured, we are also sure that they will repay in the lack of time that we will be given.
In terms of UTP, also in this regard, I expressed many times in my view. Brands, sporting and so on, our we will do our best And our approach will be always in order to deal with these companies and try to get to the most possible the most of our possibility, these people back to performing. Of course, there is a danger rate, which we consider every year is already incorporated in our cost of risk. Let's say that we hope that we can be even better, but this is depending on the also on the macroeconomic situation. In terms of disposal, we don't think we will do Apart maybe from this small amount of leasing that we are dealing we were dealing together with ACE, But we don't think we can do many transaction, more single disposal or transaction of this kind, which allow us to with a very few small sacrifice to reduce the NPE ratios.
Okay. Thank you. Very clear. Thanks for clarification.
The next question is from Adamu with Autonomous Research. Please go ahead.
Hi, good evening. Thanks for the presentation. I have a few questions, if I may. The first question is on your stake in the payment company Nexi. I understand that the business is looking to IPO in the coming months.
Could you remind us what is the book value of your stake and whether you are looking to sell this stake as part of a potential IPO? That's my first question. The second is just a clarification on the income tax. Have you recognized any DTAs this quarter coming from the new rules on IFRS 9 deductibility? And lastly, on your exposure to Carige J Tier 2.
Am I right in assuming that you have impaired your exposure in full? Thank you very much.
Okay. Let's say that we are following very closely the all the all what is happening around Nexi. So let's say listing, potential merger and so on. We are a very good client of Nexi. We are also a stakeholder, quite big amongst the other banks, even though we have a participation of between 2% or 3%, I don't remember exactly, Maybe exactly 2.5%.
And we will consider also depending on the success of the IPOs, the strategy you will have in order to dispose or not our stake. As far as the TLTRO, I'm not sure I got your question. We have an answer for you.
No, the question was on the income tax, Whether there was DTA recognition in the quarter?
Yes. There was a DTA recognition, I think, in a range of $55,000,000 to $60,000,000 And the last question was on TLTRO or I didn't get that?
It was a car agent, Tier 2, whether you are seeing parity or
Carla, I already mentioned that we completely devaluated The indirect exposure that we have through the Fondue and Talbarcari.
Okay.
Gentlemen, there are no more questions registered at this time. Do you perhaps have any kind of closing comments?
Okay. So if there is no other question, thank you very much for your participation. And I'm sure we will be in touch during the next few days weeks. Thank you, everybody. Good evening.