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 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. Tom Lucassen, 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&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 five of the presentation. We have tried to summarize these last 24 months in order to show you the huge work that's been done in different aspects for the banks.
We had in these 24 months to complete the merger to de-risk the bank, to reorganize the business unit, to make the different capital management action in order to sustain the capital ratio. I am sure 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 EUR 25 billion net worth EUR 18 billion through disposal of portfolio for EUR 17.2 billion nominal, more than doubling the original target plan of EUR 8 billion.
This was a cumulative loan loss provision for EUR 5 billion, completely sustained by our internal organic growth and capital management action. Let's talk about the organic performance. We were able in the two years to have a cumulative PPI of EUR 3.2 billion, with consistent commercial performance and a very material cost reduction, 8% less versus 2016, and roughly EUR 400 million in reducing cost starting from the strategic plan 2016-2019. 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 EUR 1.9 billion through capital management action, which allowed us to stay at the common equity tier 1 fully loaded performance at 11.5% and 13.5% phased in. No capital required to shareholders.
We were able to do all internally, we were able to extract value from our factories without basically disposing any of that, 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 de-risking on page six. We have reduced more than 60% the total gross book value of our non-performing exposure through Project ACE. We will talk about in a few minutes. We stood to EUR 11.8 billion of non-performing exposure, vis-à-vis EUR 30 billion end of 2016, and a projection of our business plan, which were EUR 23.2 billion. Basically, EUR 18 billion less than the starting point, 11.4 point better than the strategic plan in 2019.
On page seven, you can see that we were able to do this massive reduction not only through disposal, which amounted to EUR 14.6 billion of GBV, but also through cancellation, recoveries and cure, which led the total amount to EUR 21.2 billion of de-risking. On top of that, of course, we had the inflow of these two years, which was EUR 3.3 billion, in order to stand to EUR 18.2 billion of total de-risking. This was done through different transaction, very well performed on the market, and you can see on the box the different EUR 17 billion nominal disposal transaction. The huge de-risking allowed us also to normalize asset quality and made strong improvement in NPE ratios, closing basically the gap with competitors and bettering our net non-performing loans 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 plus 2019 stood at 17.5%, 11.1% net. Even better was the recovery in the bad 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 nine, you will find some details on the ACE deal, which yesterday was definitely basically closed, with the vehicle notes issued and signed in London.
We can give you some precise detail on the final transaction, which stood at EUR 7.4 billion, right in the middle of our anticipation range, which was between EUR 7 billion and EUR 7.8 billion. The gross book value, excluding the cash in made in these last six months and write-off, stood at EUR 6.2 billion. The overall price was 23.6%, better than the average of the guidance, which was 21%-25%.
The senior tranche was rated triple B. The GACS will be filed tomorrow, and will be fully retained by Banco 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 RWA reduction will be EUR 1.7 billion 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 interesting to check some of the comparable with other transaction made on disposing loans during these last couple of years. Basically, we had four big transaction, two of which were more or less comprising the global book. For ourselves, was a reduction of 72%, basically of the less than EUR 4 billion remaining, two 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, of course, allow us to work out with success all these transactions. The only transaction that was done in such a percentage vis-à-vis the total disposition of non-performing, 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 two, were, of course, only a relatively small part of the global exposure, 33% and 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 EUR 2 billion of profit from operation, which normalized and came down to EUR 1.8 billion.
Of course, this year, these results were hugely affected, not only by the cleanup on non-performing exposure, which accounted respectfully for EUR 1.9 billion stated and EUR 1.2 billion if we exclude the Project Exodus and Project ACE top-up transaction, but also from cleanup on different items that we decided to wipe up from the balance sheet and related either to integration and final cost of the merger, or are 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 EUR 343 million. Of course, we closed with EUR 56 million of losses stated after charging something like EUR 700 million net of extraordinary items, EUR 1.2 billion negative, EUR 500 million 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 sight deposit, which respectively grew almost 5% and 15%. Sight deposit also grew due to the lack of confidence on the activity on the investment side of our private clients. Of course, we had a lot of increasing in current account, which can be a good reserve for increasing our asset management activity as soon as the market will start to give confidence to our client. We had also a very prudential approach vis-à-vis our securities portfolio. We reduced by EUR 9 billion, the Italian Gov's portfolio, 34%, in diversifying very much our securities portfolio with other jurisdiction bonds. All this 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 two years. Basically, we started our strategic plan with the date of 2015. As you remember, we announced the plan in May 2016. At that time, the reference point was EUR 3.1 billion, and we stood the 2018 balance sheet at EUR 2.7 billion of cost in reducing EUR 400 million, which was much more than the target we expected in three years' time. We were able to do that in two years' time, gaining almost EUR 150 million vis-à-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 point, vis-à-vis 101 basis point for the other Italian bank. The difference of 211 basis point is made by 120 basis point deriving from core revenues and remaining from the optimization of DTAs and the 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 P roject. 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 result. Also in terms of phase in, we were able to close the years with a pro forma of 13.5%.
Let's now go quick through the profit and loss. Net interest income. Another good news, in my opinion, is not considering both IFRS 9 effect and PPA, we basically closed the years with 1.2% of increase. 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.
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 point. 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 second part of the year. The total year-over-year comparison is - 5%. Meanwhile, you can see that last quarter was 4% better than the third quarter. If you see the histograms on the 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 the credit fees, which were increasing from EUR 230 million as an average over the first half to EUR 260 million of the last quarter 2018. Net financial result was affected by last quarter, in which we had a loss of EUR 74 million, which can be explained by a very prudential approach. We had both for completely depreciating the indirect exposure that we held through the Fondo Interbancario Depositi, the SPPI test on non-trading financial exposure and a hedging strategy to reduce the sensitivity of the market movements. In this respect, we were able to reduce sensitivity from EUR 3.5 million per basis point to EUR 1.5 million per basis point with a very prudent approach. By the way, market price movement had a positive impact on last quarter, gaining almost EUR 140 million on September data.
Operating cost, as we were mentioning before, was the real good activity we were able to perform during these two 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. Of course, 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. Personnel expenses were down almost 3%, 2% in last quarter.
In line with our plan, we reduced head count 1,000 people in 2018, and a total of 2,400 people during these last two years, vis-à-vis the projection of 2,200 made for three 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 first year of the plan. Still, the strict 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, EUR 191 million were related to IFRS 9 impacted, fully compensated at NII level. Of course, the vast majority of this will not be there because of the disposal of non-performing loans next year.
Exodus and ACE impacts, as you can see in the box on the upper right of the slide, was accounting for EUR 714 million on top of the IFRS 9 accounting made at the beginning of the year. Of course, ACE, because we did EUR 4 billion more than expected. The normalized, I would say, cost of credit was EUR 1.03 billion. This stand to 98 basis point pre-IFRS 9. Of course, if you consider also the IFRS 9, it goes to 116 basis point. Let's say that during the last quarter, we made also some top-up in coverage 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 bad loans in 2019 of only EUR four billion vis-à-vis the EUR 15 billion we started in 2018. 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, side deposit increasing also in the second year of the plan, almost 6%, Represent 70% of the total direct funding. We have been issuing during the first part of the year also covered bonds and one senior bonds. Of course, in the second part of the year, we didn't have any issue. We will talk about forecasts for next year in a few minutes. Bond maturities.
Very manageable bond maturities, both retail and institutional, globally slightly above EUR 2 billion for each of the next three years. Completely manageable by our bank, both in case of non-TLTRO scenario. Of course, even more if a sort of TLTRO will happen. We, of course, don't have any liquidity problem. Any potential opportunity in the market will be examined only for regulatory safeness. Of course, we don't have, for this year, any problem also in terms of regulatory. 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 auction, which range from covered bond, some senior bilateral repos, would be in the same amount of 2018 in a range between EUR 3.5 billion and EUR 4 billion.
On page 27, these are the ammunition that we have in order to perform this market issue. We have EUR 52 billion of eligible securities growing through the years. The unencumbered are now almost EUR 20 billion. The total liquidity security is almost EUR 22 billion. This amount allow us, of course, to perform the bilateral and the repos medium-term transaction that we already did this year for almost EUR 2 billion. 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 GovBs. We reduced by this last year by EUR 3 billion, further EUR 3 billion, the Italian GovBs to EUR 17 billion, of which EUR 6.6 billion in HTCS, reduced by almost EUR 10 billion, EUR 10 billion in HTC with amortizing profile.
We have also reduced the duration of Italian GovBs under HTCS from 3.4 years in June to 2.7 years in December. As I was mentioning before, the gross HTCS reserves on that securities bettering by EUR 140 million in Q4. On page 29, the main message, having already talked about the reduction in GovBs, is the sensitivity. I mentioned before, one basis point spread the sensitivity down from EUR 3.5 million to EUR 1.5 million in December. There was also a better shape of our classification of Italian GovBs, which started last year, 50/50, nowadays are 37% HTCS and 58% of HTC, without doing any switch on our book, just doing market transaction. Indirect funding, as you know, this has been a very difficult years in terms of market price. The effect of market price affected the performance, reducing by EUR 5 billion the indirect funding.
If we exclude the market price effect, we have an increase of EUR 1.1 billion since last year. Basically, the market effect was around EUR 6.4 billion if you add on asset 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 sight deposit, you see that the real increase, excluding market effects, was EUR 5.4 billion. Of course, to which you have to exclude the EUR 6.4 billion in order to have the EUR 1 billion reduction we had during the year. Let's talk about our customer loans. Of course, the total amount is affected by the massive de-risking, more than EUR 6.5 billion net only during the last year.
We grew the net customer loans from EUR 94.7 billion to EUR 97.3 billion, almost 3%, and even if we exclude the Exodus senior notes, we grew by 2%. It's very important to underline that we produced new mortgages and medium-term financing in 2018 for a total consideration of EUR 20.7 billion, EUR 6.2 billion of which only in the last quarter 2018, showing the still increase this asset, 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 outflows.
You see that this net result was negative in the first year, in 2016, EUR 600 million of more inflows. Meanwhile, it was EUR 1.1 billion of more outflows and cancellation in cure in 2017, and EUR 2.2 billion in the last 2018. Showing the capacity of our bank to have a very effective workout, which, as you know, is much more less expensive and will be the key for the reduction of our NP in the next few years. In terms of net book value, I just mentioned that we reduced since the starting point, EUR 11 billion and EUR 6.3 billion 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.
Even though, of course, we now have 2/3 of our NP exposure made out of UTP rather than bad loans, which is a dramatic change since before ACE. As you can see, was 56% of bad loans before ACE, now is 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 UTP. This, of course, drive to a apparent lower coverage of total NP. Meanwhile, we still stood at a very comfortable 64%, including write-off, or 60% excluding write-off of bad loans and 35% of UTP coverage. UTP coverage increased to 170 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 EUR 1.6 billion of net book value, of which really nothing of unsecured, only EUR 200 million, and EUR 1.4 billion of secured, which now are 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 50/50 secured/unsecured ratio. Some words about the workout activity on page 38, still very effective, 29% more than last year, EUR 600 million of cash recoveries, EUR 1.9 billion of cancellation through Sorry, of existing provision. Also for this year, the real cost of workout was basically less than EUR 30 million, EUR 4 billion, and stood at EUR 67 million of increase in provision.
This gives the way to the next step of our bank will be made consistently in workout activity, both in bad 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 EUR 12.5 billion to EUR 7.8 billion, doing so reducing almost EUR 5 billion in two years, EUR 5 billion net. Also, in this case, a reduction of EUR 4.4 billion, which of course does not have comparison with the original strategy plan, which was much higher than that. On page 40, the composition of UTP 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 that the unsecured non-restructured stand only at EUR 500 million, and is really a very low part of this EUR 5 billion exposure. Page 41 is a new slide. We wanted 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 two years, without disposal, only with workout, 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.
Both for secured and unsecured, if you exclude the restructuring, you end up to something like EUR 4.3 billion, which at a pace of 30% of workout per year, basically will bring, without doing anything, to a remaining part of this portfolio in a period ranging from six to eight years to something between EUR 200 million and EUR 400 million. This amount, if included in the next six to eight years provisioning, means from 3 to 6 basis points more of global provision of cost of risk. 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, common equity tier one.
But as you know, we have already signed the transaction that will be completed in the next two quarter, which will allow us to go back to 11.5 through 28 basis point from NPL disposal and GACS transaction effect on RWA reduction, 25 basis point from the joint venture of NPL platform, and 101 basis point for the agreement with Crédit Agricole. This has been increased even more than we expected, thanks to the increasing portion of profitability that will be given to shareholders for Agos. 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 forma at 11.5% and 13.5% phasing of our capital.
Let's say in a nutshell that we have been, during 2018, implementing and accelerating at maximum pace the path of de-risking, while preserving the capital position through operative performances and capital management action. We also were very much engaged, don't forget, into a real merger between two banks that were obliged in two years to be integrated. IT migration, restructuring, reorganization, and streamline of the business unit. 2019 see us in a very good position to forget about increasing 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. I am ready for your question.
Excuse me. This is the Chorus Call Conference operator. We will now begin the question and answer 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. 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, and 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 the press release. There are something related to a Diamond sale activity, and there has been something like EUR 150 million-EUR 200 million quarter-on-quarter increase. So if you can please clarify what is the contribution of this extraordinary provision specific on this.
A very last question on the slide number 41, I think that should attract most of the interest of the market, where basically you are saying that you have still, after Exodus, EUR 7.8 billion of secured NPA and EUR 4 billion of unsecured NPA. You are giving us the coverage here. You should have received also, other banks have just today disclosed that we have received the request of increasing the coverage to a certain amount in a five, six-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 non-secured non-performing, so that the net cost of this activity at the end of the period would be at best EUR 400 million. Is my understanding correct? Thank you.
Thank you, Mr. Razzoli. Let's start from the first question. It's very easy to see that, of course, the reduction is already quite rightly shown on our slide. We went down from first semester, which was very rich because it was before the Exodus transaction, of course, the ACE transaction. There's been a reduction from EUR 190 million of full year 2018 to something that will go down to EUR 60 million in 2019. Notwithstanding that, of course, the like-for-like will be better as a guidance of this year.
Sorry to interrupt you. You said that most of it has already been incorporated in the Q4 NII, right?
Q4, because in the Q4 you have EUR 30 million. Next year will be half of this amount. Basically EUR 15 million per quarter, more or less.
Okay. Thank you.
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 Diamond was one of that. All in all, the global amount we provisioned in the fourth quarter, if you put together Carige, the impairments on real estate and software, the anticipated closing on branching cost, the integration cost, the CIV cost, and Diamond was an amount of almost EUR 300 million. Of course, this is the figure that we are prepared to show to you. For the third question, was on page 41. Yes, I think you understood well. It's not that easy because, as I said, we don't have any instruction about what we should have to do. Repeatedly, ECB told us that they won't issue any obligation on the stock.
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 two years, we will be able to completely offset the stock present in our book. Almost completely, of course. Please.
The next question comes from Christian Carrese with Intermonte. Please go ahead.
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, take into account also MREL and regulatory changes. You said EUR 3.54 billion issue could be done in 2019. What do you expect in terms of markdown, let's say, cost of funding? The second question is on common equity tier 1, 11.5% common equity fully loaded is a good number. You said that you are expecting some capital generation in 2019. If you can share with us if there is any visibility on what could be the common equity tier 1 by year end 2019. Finally, on cost of risk, you said you're expecting a very low cost of risk or much lower than this year.
As a matter of fact, you are saying that you don't see any major change from ECB different approach on the stock of NP. You said the 3, 6 basis points maybe could be the impact. What should we expect in terms of cost of risk if you can give us a range, let's say. Thank you.
Thank you, Mr. Carrese. 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, we will stand to private transaction and only covered bonds. Of course, we have also in our funding strategy to issue some senior bond. Even if we go to the market with senior bond, we should slightly decrease our cost of funding. This is without taking into consideration the potential maneuver on renewal of TLTRO facilities. The eventual facilities will be 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. With a very reduced cost of risk, we can be able to produce a quite effective pre-tax income. As you know, for our capital generation, pre-tax income is what counts, because thanks to DTA 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, with some question marks about the market and the macroeconomics, because we are assisting in the last weeks to a worsening of the market condition and the macro views in terms of GDP, in terms of volumes and so on.
We still think that we can have a cost of risk in line with our original guidance of 65 to 70 basis points.
Thank you.
The next question is from Alberto Cordara with Bank of America Corporation . 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. That has been quite amazing, I think. In terms of my questions, just moving to something different, if you can give us a bit overview 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 a part 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.
If you can give us also a bit overview, I think you might have discussed, I may have lost some of the things that you said, but on these actions from the ECB on calendar provisioning on the stock, what that imply 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 Italian govies. We are just checking, of course, opportunistically, if we can take advantage from some movement in the market. More or less, as far as related the NII contribution, we don't think we can emphasize the Italian govies stock in our portfolio. The second question was the addendum. Frankly speaking, it's very difficult to give you an answer. It will depend on the inflows, so on the macro.
We are, of course, working very hard in order to, let's say, also reorganize our way of approaching inflows of NP in order to, of course, now that we have a lower stock, to immediately be aggressive on the new inflows. We still need some few weeks, or maybe in the next quarter, I will be able to give you some more hint about our expectation. There are two critical points, which are the amount of inflows and capability of the bank to tackle immediately, first of all, to avoid the inflows, and secondly, to tackle immediately this amount.
Many thanks. Thank you very much.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Good evening. A couple of questions. First section is on capital. 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 16, LGD waivers, ABI guidelines, and so on and so forth? Now that you have clarified where your capital position is, it will be helpful to know that there's nothing brewing that we are not aware of. In light of the very strong de-risking, do you envisage any change in the Pillar 2R in the context of the 2019 SREP? Second block of questions 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 two things on this.
If you can give us an idea of what is the cost in terms of basis points of this. On the various commentaries you add, which I find quite helpful in that slide, are you implying that if you wanted to, the EUR 11 billion of unencumbered assets could be refinanced in the same manner, if you wanted to? On MREL, referring to different slide, which is 26. How much of the EUR 5.3 billion of senior bonds, which mature between now and 2021, you need to refinance for regulatory purposes, whether it's NSFR, whether it's MREL, i.e., do you need to roll over everything? Are you willing to do some of it retail? 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. Vercellone. First question, of course, I need to keep answering the same way every time. It's 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. 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 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 better results, the amount of which is difficult to say because, as you know, ECB is not really aligned to the maturity. I wouldn't say that our P2R 2019 would take in account all the disposal that we have done during the years. Normally, they line up with the bank some months ago. Depending on how many months before the bettering of our bank. Let me say, in relative terms, vis-à-vis other competitors, I feel that our bank will have an appreciation because of this strong de-risking. MREL, basically, again, we don't need any increase in issuing bonds. Basically, our funding plan have 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 bonds are concerned, if I understood well the question, this depends on MREL attitude. As you know, is still in discussion the issue about retail to be considered bail-in or not. Let's check. For the time being, we don't have any program to issue retail bonds. Yes, I can confirm that also the equity part of losses of ACE is already included into 2018 accounts.
On the long-term repos?
Long-term repos. Of course, I cannot give you exactly the price because we have to go to the market again. I don't want to give some advantage to my counterparties. Let's say that, of course, it's much cheaper than any public issuing.
Thank you.
The next question is from Sean Nordqvist with Goldman Sachs Group, Inc. Please go ahead.
Hi, good evening. I have a few questions. First, on the tax rate. I picked up that you feel that the capital formation will be equated by pretty much the pre-tax profit into 2019. Can you tell us what you think the effective tax rate is going to be for the next maybe couple of years, if you can? My second question is, there is a slide in there where you show what you've done in terms of the cost reduction with the merger ongoing, et cetera. I just wanted to know whether you'd wager the cost number for this year and next. 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?
Lastly, by the way, do you believe that there is a need to counter the profitability headwind at present with another wave of cost cut that can only be done inorganically, maybe from BPM and also at system level? Lastly, I just wanted to ask now that you de-risked the NPL portfolio so much and now that you anticipate a manageable cost of risk, will you start accruing dividends in 2019 through the year? Thank you very much.
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. What I was mentioning is the impact on capital of the pre-tax 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 t ier 1. Of course, the net result will be affected by the tax rate, but not the common equity tier 1 increase. Cost reduction. We still, of course, want to take advantage from the many maneuvers we have done during these two 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. Of course, we have to be prudent about that. As far as administrative cost, we feel that the same result of this year is a good target reduction for general administrative costs. I agree completely with you that, of course, we would never be able to have EUR 400 million cost cutting if we did not merge between the two banks. Of course, if you want consistent cost cutting, you have to merge. In order to merge, you also have to consider many other aspects which go by the macro situation, the willingness of other counterparties, the strength, and I would say, the consideration of regulator and so on.
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.
Very good. Thank you very much.
Thank you.
The next question is from Riccardo Rovere with Mediobanca. Please go ahead.
Yes. Good evening to everyone. 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, I didn't get what your previous answer was. If you can just repeat because I just didn't get it.
Hi, Mr. Rovere. 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, the market impact on our model, and also the operational risk. We, frankly speaking, don't have a precise number. We think could be in the region of 20 basis points, 20 to 30 basis points.
Sorry, Mr. Castagna. Does the 20 basis points include also IFRS 16 or it's just TRIM?
Sorry, I didn't get well your question. For us, 16, of course, is not embedded in our number. Could be something between 10, 15 basis points.
10, 15. Okay. 3 and 20. This is what I get.
Yes. This is a forecast.
Okay. Perfect. Thanks.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Good evening. I've got three questions from my side. The first one is, 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 extended. The third one is on NPLs. I think inflows this year, you showed in one of the slides, were around EUR 1.6 billion, EUR 1.7 billion. The recoveries or the workout actually has been around EUR 2.5 billion. 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 year such impact on our accounts. Let's say that we go back to normal profitability. I cannot give you a complete 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. You were mentioning the default rate. In our budget is below 1.5%.
You're expecting a decline of inflows this year versus 2018?
Yeah. What was the question about TLTRO?
Yeah. The TLTRO, what would happen in terms of revenues if the TLTRO was not extended by the ECB?
If it's not extended for this year, of course, it doesn't change anything in any case, because this year we will bring the, I think it's EUR 80 million contribution that we normally have from TLTRO advantage. The problem will be more for next years, but we have to wait and understand to which condition, which maturity, and so on, in order to understand also the sides of our new TLTRO.
Thank you.
The next question is from Robert Dafforn 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? 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. Oh, 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 waiting for the second.
Sorry. The second question on slide 41. You currently have EUR 11.8 billion of gross NPEs, EUR 6.7 billion of net NPEs. This slide seems to suggest that in six years, you will have a net book value of NPEs will go from EUR 6.7 billion to EUR 400 million. What cost are you assuming that you will be able to achieve that de-risking 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 de-risking?
Okay. Let's start from the GACS. First of all, of course, we are very confident that we can be able to close the transaction by 6th of March. We have been in constant contact with MEF and the GACS responsible during these last two months. They are well aware of our portfolio. Let's say that is a very unexpected situation in which GACS shouldn't be approved. Nevertheless, it doesn't change so much. The only impact for us is that we will weight the senior tranche, not 0%, but 60%. Of course, a slight decrease in RWA reduction. Frankly speaking, we don't envisage this possibility.
Recognition will happen in any case?
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 exit- restructuring, because as you know, for the restructuring, also in the recommendation of ECB, there is the potential exclusion of restructuring. 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 two years, to go down 32% per year.
If this will happen also in the next six to eight years, we will be able to reduce the stock to the amount I mentioned before.
Excluding?
Of course, excluding any impact of a disposal, only with workout.
Excuse me, this is the operator. The connection with the questioner has been lost. The next question is from Domenico Santoro with HSBC. Please go ahead.
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 six to eight years you will be left, if the run rate in terms of the risk goes on this way, with a net book value of EUR 400 million, EUR 200 million. That approximately in terms of further provision, that will mean 3-6 basis points in terms of capital. That is the situation in six, eight 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 or three years within the business plan, no impact on capital and earnings. Why is that? Is it because the vintage of the portfolio is lower compared to what we read, basically the ECB 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, instead, the ECB addendum was considering the restructuring, or there is something else that I'm missing here. So just the visibility for the next two, three years, that will be very helpful to dissipate any risk of additional provision, and impact on capital. Then my understanding is that there was a reclassification of UTPs into non-performing in Q4. You mentioned construction specific positions. Now, in order to avoid this keep going, would you consider something also transformational in the UTP area in terms of disposal? This is a question that we already asked you in the past. Thank you.
Okay. Thank you, Mr. Santoro. We were discussing about showing or not this slide, but because of the many rumors of the market, we were really happy to share with you a potential approach, in any case, to our outlook of cost of risk. Whatever will be, we don't know what will happen about stock recommendations on, whatever will be our way of the risk in the bank will be massively through workout. As much as we have done a lot of disposal in the first two years, we feel we are in the position to work out at the same pace we are doing in the first two years.
If we are able to do that at the same pace, we will have a potential impact, not in terms of common equity tier 1, but in terms of increasing cost of risk in something between 3- 6 basis point per year. So something very negligible. 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 time my view, in my opinion, UTP are company, entrepreneurs, people working, brands, sporting, and so on.
We will do our best. Our approach will be always in order to deal with these companies and try to get to 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 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 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 Anna Adamo 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 me what is the book value of your stake and whether you are looking to sell this stake as part of the 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? Lastly, on your exposure to Carige 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 what is happening around Nexi. 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 between 2% or 3%, I don't remember exactly. Maybe exactly 2.5%. We will consider also depending on the success of the IPOs, the strategy we 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 a large exposure-
The question was on the income tax, whether there was DTA recognition in the quarter.
Yes, there were DTA recognition, I think in the range of EUR 55 million-EUR 60 million. The last question was on TLTRO or I didn't get.
It was Carige Tier 2, whether you have impaired your exposure.
Carige. I already mentioned that we completely devalued the indirect exposure that we have through the Fondo Interbancario.
Okay.
Gentlemen, there are no more questions registered at this time. Do you perhaps have any closing comments?
Okay. 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 and weeks. Thank you, everybody. Good evening.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.