Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM third quarter 2018 results presentation. 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, Head of Shareholder Strategy, Investor Coverage, and Rating Agencies of Banco BPM. Please go ahead, sir.
Yes, thank you. Unfortunately, Roberto is not available today. In any case, good afternoon, good evening to all of you, and thank you very much for attending our Q3 2018 group results presentation. As usual, before leaving the word to our CEO, Giuseppe Castagna, let me remind you that our presentation is also available on our website under the investor relations section, stroke presentations, and that our Q&A session is reserved for financial analysts. Thank you. Let me now hand you over to Giuseppe Castagna.
Good evening, everybody. Thank you for being with us for this Q3 presentation. Let's start on page five, a topic that you well know, but maybe same argument seen with a different view. We would recall the step that we add up to now with the de-risking, also in view of the new ACE transaction. Let's say that the first histogram, December 15, is the starting point when the number we presented with the three-year business plan. The follow histogram 2016 is the starting point of our merger. As you can see, meanwhile, we were always focused on disposals, which we see very clearly that were more than EUR 8.5 billion during the last 22 months and up to EUR 9.5 billion in the three year. A big contribution to the risk came also from recoveries, cancellation, and workout.
The global amount is almost EUR 6 billion only in the last 22 months, which became something like EUR 8.5 billion if you consider also 2016. This is just to say that our strength to recover is not only related to the disposal activity or NPL, which took, of course, the high in the last couple of year, but also in a very efficient workout machine, both in UTP and in bad loans. The final step, September 18, we have nowadays EUR 18.5 billion gross GBV, EUR 10 billion of which are bad loans, which are the bulk on which we will concentrate the ACE transaction. EUR 8.4 billion is the amount resulting from almost EUR 30 billion when we started in 2016 of UTP, which only with the workout came down to EUR 8.4 billion.
On page six, just to give a global amount to this exercise, the total de-risking in these 21 months was up to EUR 14 billion, on which of course we have to restart the inflows over the last couple of years, which were EUR 3 billion. Global net GBV reduction is EUR 11.5 billion. Let's pass to some update on the ACE transaction. As you know, the project is related to the de-risking for the final part of our de-risking plan with ECB, which would need only EUR 3.5 billion. We have in mind to integrate this disposal with a much bigger amount, and I will give you some information also on the bid beauty contest, which is now in course.
Apart from the portfolio, of course, you know that there is also the possibility to sell the NPL business unit, the platform, in order, of course, to give also to the buyer the opportunity to continue a very efficient and successful operation. On the due diligence, we are in the last, I would say, days, a couple of week remaining. Three consortia, they have examined more than 40,000 documents. They've employed more than 600 people on the due diligence. The global amount, the potential global perimeter is up to EUR 8.6 billion, which respect to the EUR 9.2 billion or EUR 9.3 billion that we announced in August, is a reduction only due to position excluded because of legal constraint, contractual status, and which would have hinted the possibility to proceed with the same.
Next step is to receive the bid. To select the winning consortium, to decide the final size and the perimeter of the portfolio to be disposed, and examine the possible sale of the NPL unit. On top of that, you know that after the 3rd of August, in the last weeks, was also signed by the government and approved by the Corte dei conti, the new GACS extension. We have also this opportunity to consider an alternative scheme with respect to the straight sale. Let me stress also that in September, we terminated our quarter with a quite sound capital position. We have increased both common equity tier one phase-in to 13.2% and fully loaded to 11.2%. Notwithstanding, as you know, the impact of BTP portfolio performance, which of course eroded some few basis point. Some words on page nine also on the results of the stress test.
Very satisfactory scenario under the baseline scenario, which prove the generational value which our bank is capable to effect, with results which are amongst the best in Europe, and also the resilience that we provided to obtain in the stress test scenario. Of course, you know that due to the rules of the exercise, being one of the few or maybe the only bank under a merger, and due also to the fact that there was not allowed to consider the results of 2018, there is some peculiarity which have had some impact on our common equity tier one fully loaded, especially. Let's say that the exercise did not allow to filter out some merger-related extraordinary expenses, non-recurring expenses, especially out of personnel and IT integration, which on a cumulate horizon of three years, amounted for something like EUR 500 million, which were penalizing our final results.
The same is, of course, for the Exodus transaction, which logically, being effected in June, was not considered due to the exercise, was considering the result at December 2017. The global effect that would have brought our results between 7.5%-8%, also under stress scenario and fully loaded. Let's pass to the nine months results. On page 10, you have the stated performance, which is affected by some extraordinary transaction and some effect related to IFRS 9, but you see that we have reached some consistent results, both in terms of total income and especially also in the reduction operating costs. The net income amounted to EUR 525 million, which of course is not confrontable with the nine months of 2017, which was a much lower result.
On page 11, we wanted to give you an adjusted performance, excluding the one-off items which were related to the capital management transaction we performed during these last three quarters, and also excluding the IFRS 9 effect, especially from NII and low LLP. In this respect, we are still experiencing a slightly better net interest income vis-à-vis last year. Total income slightly below last year due to the reduction of commission that we experienced especially in the second quarter, and you will see that we are also recovering this part of the fee driven business. Operating costs very consistent, down to EUR 2,056 million, more than EUR 120 million below last year results, still in reduction. +4% profit from operation, a reduction in LLP due to the IFRS 9 adjustment, consistent reduction that we will see, especially in Q3, and profit before tax and net income almost doubling last year result.
Again, on page 13, NII, I would examine first the normalized results, which exclude the effects of IFRS 9 and PPA. You can see both on a year-over-year comparison and also on a Q-on-Q comparison that the result is positive, 1.7%, 1.4%. Meanwhile, the stated result is affected for the year-over-year comparison by the effect of IFRS 9, and on the quarter by the effect of the reduction of non-performing loans due to the Exodus transaction, with basically half the contribution of IFRS 9. But on a like-for-like, we have experienced a growth of 1.5%. Net interest spread is on a progressive spread, 1.52% in the quarter is down to 1.47%, especially for the reduction of both funding spread down to 49 basis points, but also reduction of eight basis points on asset spread.
This is consistent with our policy had in the first part of the year, which of course, brought to new transaction in the third quarter of the year for the record amount for our bank of EUR 5.5 billion of medium-term new transaction. Let's just consider that the global budget for this year was around EUR 17 billion. In just one quarter, we realized one third of the total budget. Especially, this was reached with transaction with mid-cap and large corporates, in which we increased in the quarter by 6%-7% the total loan. Net fees and commission, which we experienced a reduction last quarter of around 9% on a year-over-year comparison, is recovering.
We are now still in a low figure in respect to last year, but down to 6.7% with the results in the Q3, which is equal to the Q2 results, which we consider quite satisfactory, taking into account both the August included into the third quarter, which you know, there is always a slowing down of the activity in the branch. Also, of course, the hike of the spread and the peculiar situation in the market in Italy, which of course, made very difficult to increase the investment for our client. Very good the results, especially in commercial banking and in credit fees, which offset the slight reduction in management and advisory fees. Also quite sound, the net financial results, plus EUR 43 million on the first nine months comparison, EUR 47 million in the third quarter.
Both results are very good for us, taking into account the reduction of capital sensitivity to government bonds that we adopted during the last quarter. We reduced by EUR 3.2 billion government bonds held in HTCS, and reduced from EUR 3.5 million to EUR 2 million per basis point the sensitivity of our Italian govies. Let's pass on page 17 to operating cost. Also for this aspect, I want to show also the roadmap of the last couple of years. The results are very good, less 6% year-over-year and almost 2% on the quarter. We still are embedding some ammunition in order to reduce further these costs. To make you understand the road that we had in cost reduction, we wanted to show the strategic plan figures.
We started with the end of 2015 cost up to EUR 3,086 million, with an objective to go down in 2019 to EUR 2,858 million. Nowadays, on an annualized comparison, we are down to EUR 2,723 million. Still again, we have next year that we think we can still encompass and embed some further consistent reduction vis-à-vis our objective. Personnel and operating costs are reflecting exactly what I was saying before. 4% reduction in personnel, 1.3% on the quarterly basis. We went down from 25,000 people at the beginning of the merger to 22,640 in September. We think we can terminate this year below 20,300 people due to the last final step of exodus of anticipated solidarity scheme. Administrative expenses are down 8% year-over-year and almost 5% quarter-over-quarter. The main significant cost savings are applied to advisory services, maintenance, rentals, advertisement, transport, and insurance.
On page 21, we have the loan loss provision. We are going down both on a total figure and especially if we consider the IFRS 9 impact, which of course is going down due to de-risking that we are affecting. The figure that we register in the nine months 2018 have allowed us to go down to 100 basis points, to 99 basis points, and in Q3, we had EUR 267 million of provisioning compared to the EUR 360 of the second quarter, of course affected by the Exodus transaction. Without considering the Exodus, we are experiencing a reduction of 13% of LLP. Let's go to the balance sheet. We have, on page 23, direct funding. We are still experiencing a stable growth in current account and site deposit, up 5% in the nine months, 1.2% in last quarter.
There is almost EUR 4 billion of increase in current account, which now amount for 63% of total deposit. Of course, we are also experiencing a comparative reduction in more expensive source of funding like the bonds and CDs and time deposits. Bond maturities, luckily enough, very manageable amounts. We have almost completed our reduction of retail bond maturities. As you see, there is still EUR 1.3 billion expiring by the year-end, then only EUR 400 million for the next two year. For institutional bonds, we have only in the next two and a half years, global EUR 4 billion, EUR 2 billion for each year, 2019 and 2020, of institutional maturities. This, of course, we consider a very manageable amount and put us no pressure vis-à-vis the replacement to tap the market. The liquidity position is still very sound.
Of course, in September, we have experienced some reduction due also to the needs of refinancing the depot activity, the custodian bank activity, which was giving us something like EUR 4 billion of liquidity. We went down from EUR 52 billion to EUR 50 billion. Nowadays, we are already up from EUR 14 billion of unencumbered asset to EUR 17 billion, and in any case, together with other liquid and unencumbered securities, we are up to almost EUR 20 billion of available assets. We started also utilizing this asset in order to refinance the debt with bilateral transaction, and we still have the majority of these eligible asset made out of Govies. LCR at 133% and NSFR above 100%. Let's talk on page 26 about our restructuring of our securities portfolio. There was a reduction in the last quarter of almost EUR 2 billion.
The most important reduction was out of our Italian Govies in HTCS, down to EUR 6.5 billion, more than EUR 3.5 billion from the beginning of the year. Meanwhile, we grew EUR 1 billion in Italian Govies under HTC. Non-Italian Govies grew to EUR 10.1 billion, 36% of total Govies, especially France, U.S., German, and some Spain Govies. The gross HTCS reserves is negative for EUR 330 million compared to EUR 200 million end of June. A focus on the Italian Govies and on HTCS and on the sensitivity reduction to the spread evolution on page 27. You can see on the underscore that every basis point we have reduced our sensitivity from EUR 3.5 million to EUR 2 million in September vis-à-vis Q2. There is less global exposure in HTCS, down from EUR 15 billion in Q2 to EUR 11.9 billion in Q3, EUR 2 billion down in Italian Govies, EUR 1.3 billion down in non-Italian Govies.
The duration went down from 3.4 to 2.9. The global Italian Govies, which stood to EUR 18.2 billion, 35% of which are under HTCS and 55% under HTC. On the bottom of the slide, there is also the phase-in of this EUR 6.5 billion reduction in Italian Govies portfolio, of which EUR 6.1 billion out of HTCS. As you can notice, the majority of the reduction was done before the spread increase. We went down to EUR 25 billion to EUR 19 billion in March 2018, and then in the last couple of quarters, we just adjusted the percentage of Italian Govies between HTCS and HTC. On page 28, indirect funding. Good performance of funds and SICAV. Still, in the third quarter, we registered some need to reorganize our bancassurance joint venture, which, as you know, started in the second Q 2018. The results are already good in the fourth Q, also for bancassurance.
The total amount, of course, are affected by the market valuation of the stock. As you can see on page 29, the global effect, excluding the market price, is an increase between current account assets under management and assets under custody of around EUR 4.2 billion globally. On page 31, net customer loan. I would bring you on the top right of the slide. We are increasing, especially our core customer loans activity in the last quarter, up 1.7%, as I was telling you already commenting this asset spread, 3.4% by beginning of the year, 2.1% if we do not consider the senior notes of Project Exodus. Up to September this year, we granted new loans to household for EUR 2.7 billion and almost EUR 12 billion to corporate, of which EUR 5.5 billion only in Q3. Let's pass to the NPL stock reduction.
Here we mentioned the net NPLs reduction, which almost halved by the beginning of the plan to EUR 9 billion. Exactly EUR 5.5 billion UTP, EUR 3.5 billion of bad loans. The reduction in Q3 was, of course, more in UTP. We ended up the Project Exodus transaction in the second quarter, and nowadays we have reached 3.3% of net bad loan ratio, vis-a-vis an original 2019 plan, which would have brought us to 4.2%. Conservative levels of coverage are maintained. Let's say that we had some write-off this quarter, so the bad loans appear to reduce the coverage from 66% to 65%, but if we include the write-off, this come up to 69%, as well as the global NPLs coverage comes from 50.6% to almost 54%, thanks to the write-off. A focus on the bad loans details on page 34. We, of course, start from the beginning of the year.
The net book value, again, down to EUR 3.5 billion, of which only EUR 0.6 billion unsecured, which represent 18% of our global net exposure. In terms of coverage, we have the net exposure covered 81% and the secured portion covered 57%. Let me remind that the GBV is represented by 68% of the secured asset and only 32% of unsecured, vis-a-vis an industry average 50/50. On page 35, notwithstanding a material lower starting point in GBV under management due to the disposal that we have experienced in these last two years, the global amount of workout is still very good and is increasing not only in percentage but also in global amount.
As you can see, vis-a-vis last year, we are having 51% of more workout activity with an annualized recovery rate up to 5% and a GBV reduction from internal workout up to almost 11%. Also with a very negligible impact on the profit and loss of only EUR 42 million related to the EUR 2.1 billion of reduction in GBV. On page 36, this is just to show the consistency of our NPL bad loans recovery unit. We passed from 2.5% and 2.8% of 2015, 2016 to 4.3% in 2017 and 5% in 2018, annualizing the first nine months. A focus also on the UTP loans, total consideration GBV EUR 9.5 billion, beginning of the year. Nowadays, we are down to EUR 8.3 billion, with considering the provision are down to EUR 1.5 billion of unsecured, covered 47%, and EUR 4 billion of secured with a coverage of 26.5%.
Almost half of this amount is under restructured loans, which as you know, are normally performing and paying interest and installments, and are under procedure checked every installment. Also, on the evolution of UTP ratios is very consistent on the low right part of the slide, well below the original strategic plan, and with good results on the last quarter 2018. The last slide is related again to the evolution of common equity tier one. We were able to pass from 10.8% due to the capital management action already forecast to 11.32%, and then down again to 11.2% due to the Q3 variation of HTC reserves, partially offset by the net profit result of the quarter. Also, in terms of phase one, we are up to 12.9% in June, which became 13.2% in the third quarter. That's all for me.
If you have any question, of course, I will be happy to answer.
Thank you, sir. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. The first question comes from Del Hold one second. One moment for the first question, please. Okay. The first question comes from Jean-Louis of Goldman Sachs. Please go ahead.
Hi there. Good evening. Thanks for the presentation. I just wanted to ask you two things. The first one relates to your outlook statement at the end of the press release. I find it to read slightly more cautious than what was the one in Q2. I just wanted to know whether you would be able to give us some measures or some of the quantitative things that you have in mind backing the change in tone from the outlook statement. For example, in terms of loan volumes or fees or these type of things into next year. The second one I wanted to ask was on the NPL de-risking. You've nicely shared a lot of detail about the offer process for the project before year-end.
I just wanted to understand at which level of gross book value sale you would find that maybe you'd consider strengthening the capital with, for example, asset disposals or this type of thing. What are the protection mechanism that you envisage for tier one ratio?
Okay, thank you. The outlook is not that easy during this time to have a clear idea of what could happen in the macro. What I say that we are experiencing a stable growth, I would say both in terms of loan volume and also of deposit. The only effect nowadays is the reduction due to the market value of asset under management and asset under custody. We still see a willingness by client entrepreneurs to invest. Of course, there is a sort of reflection in this moment due to the macro situation, to the negotiation from the Italian government and the EU, and of course, everybody's a bit wait and see for what's happening. We have done a lot of work with our client during the first six months of the year.
This is coming good and has been very good in the third quarter, notwithstanding a difficult situation. The pace is good. Of course, there will be some repricing also for us, especially starting from 2019. Of course, high-quality financing is still very welcome and we want to increase also our market share. In terms of contribution of capital in order to affect the de-risking, of course, I think everybody knows that we were able in the past, and are considering for this quarter, to have a restructuring and reshape of our consumer finance activity. We are working very hard on many sides in order to find the best possible and most valuable solution. We are confident that we can get some results together with the announcement of the de-risking in order to give you the full picture of our sources and asset disposal.
I cannot say much more just because we are under negotiation during these weeks, let me give some couple of weeks in order to be more precise.
Okay. Can I ask what's the expected contribution in your business plan from Agos, then?
Let's say that we have almost EUR 80 million-EUR 90 million of net profit per year.
Thank you very much.
Okay.
The next question is from Christian Carrese of Intermonte. Please go ahead, sir.
Yes, good evening. Just a clarification on the disposal of NPLs. Looking at the spread, the CDS spread went up in the last few weeks. We know that you are trying to make the GACS for the ACE transaction. Do you expect, in terms of GACS, to see a much higher cost due to the CDS increase, or it is something that is manageable? The second question is on the risk provisions. I saw EUR 72 million booked in the quarter. If you can clarify what is the nature of this provision, it is related to the overdraft. This could have an impact in the future commercial policy and the fees trend for 2019. Thank you.
Okay. Thank you, Mr. Carrese. I would say, of course, you know that we have a dual track, so we can decide depending on the cost, what is more feasible for us and more valuable for us. Still, we believe there is a convenience in utilizing the GACS opportunity. Of course, we can know the real cost also at the end of the road, not nowadays. Nowadays, it is still manageable and still convenient. In terms of other provision, also thanks to the good extraordinary contribution we had during also this quarter, there is some amount that we accounted due to the compliance with the tighter regulation in terms of current account overdraft and so on, to be applied to customers.
This is a one-off?
Sorry. Yes. This is the one-off, of course.
Just a follow-up on the disposal. My last question is on capital managerial buffer. What kind of common equity Tier 1 ratio fully loaded you have in mind after the capital management action on NPLs and consumer credit?
No. Ideally, we would stay as we are, doing a very consistent transaction on the de-risking. We are considering a consistent amount of the de-risking, which should be financed by our capital management action.
Thank you.
The next question comes from Mr. Andrea Vercellone of Exane. Please go ahead, sir.
Hi. Four questions. The first one is a follow-up on NPL sales. I don't quite understand how the GACS option comes into play. Is it just a standalone option, i.e., if you do not reach a satisfactory agreement with the interested counterparts on pricing, then you would proceed on your own with a GACS? Or can the fact that GACS transactions usually are done at higher prices somehow be factored in the price you may be offered, because they can do the GACS on your own? If you can elaborate a little bit on this. The second one is on funding. You have a lot of liquidity at the moment. However, there are regulatory ratios kicking in terms of MREL at some point. You probably don't have the final requirement yet. At some point, you do need to issue something, I believe.
Can you just give us a qualitative idea as to, in more normal market conditions, what type of instruments are you planning to issue over the next two years, 12 to 18 months, and whether you would consider restarting re-issuing retail bonds as at least one of your competitor is doing. The third question is on costs. Historically, particularly on the Banco Popolare side, there's always been positive cost seasonality in Q4. This was also the case last year for Banco BPM combined. Shall we expect costs dropping again in Q4 due to positive seasonality? The fourth one is just a clarification. Is there anything strange in provisions for risk and charges of EUR 71 million? Seems a very high amount. It's quite unusual. Thank you.
Okay. I answered the first three, then maybe I didn't catch very well the fourth one. GACS, as I mentioned before, is sort of dual track. All the three bidders are very much engaged on this option, so I expect that everybody will provide different quotation for both the opportunity, straight sales versus GACS. We will try to pick up the best potential opportunity, of course. It's not something that we will do on our own, but something that we will do with a partner that we are going to selection through this bidding contest.
Just one clarification. If you go for the options on GACS, obviously you don't know the price. You stated before that in an ideal world, you plan to announce the conclusion of the de-risking process together with capital management transactions. But if you don't know the price of the de-risking process, how are you planning to square that?
Yes. Don't let me open all our option, but we are confident that with the kind of proposal we will receive, we will be able to have a fair idea of the GACS valuation, due also to the experience that we have done with our Exodus transaction, and also to the fact that, I would say, for instance, we mention it on the slide, rating agencies are already working on these portfolios. We are pretty sure to have a fair idea ahead of time, of course.
Okay.
Regulation ratios, of course, is something applying in the next months. We are very much focused right now in the main target that we have up front, but we are of course, considering also that. As I mentioned, we have already done some bilateral transaction just to taste the market for almost EUR 1 billion. We are trying to employ all our asset, not only of course covered bond, but also more sophisticated transaction. We don't expect for the time being to go back to retail markets, to the retail bond markets. Meanwhile, we are looking for opportunities. We are already offering a lot of reversal inquiry transaction, time by time, we will decide which would be the best option.
Of course, I am sure that also due to the liquidity attention that next year will be brought also by the regulator, we will have the right time to analyze in details the needs for 2020 and give you in the next quarter some more detailed and precise coverage as for source of fund is. Cost, no, I don't expect, neither last year as far as I remember, we had just a small increase, but for instance, was still a small decrease last year. This year we have, of course, tried to account on a quarterly basis in order not to have a surprise in the last quarter. As far as I know, we should go to the level that I very clearly stated also in my presentation. Unfortunately, I didn't get your fourth question.
It's just a detail on the quarterly results. You booked a EUR 71 million provision for risk and charge in the quarter. I'd like to know a bit more about it, given that it's quite big.
Yes. I answered to Mr. Carrese, it's mostly related to CIV, so to the overdraft of clients. As you know, all the banking system had some request to reconsider the exact cost to be applied to clients, and most of them were driven by prudential approach for these new rules. Is mainly one-off.
Okay. Thank you.
The next question comes from Riccardo Rovere of Mediobanca. Please go ahead, sir.
Hi, good evening to everybody. Couple of questions, if I may. The first one is on risk-weighted assets. If I get it correctly, they are down significantly in this quarter. I was wondering what is driving that aside from the deconsolidation of the NPL. Still on this topic, I remember in past conference calls, you mentioned that you were, let's say reasonably, how can I say, confident to get an LGD waiver by ECB. Is that still the case, or you think this is not the case anymore? Still related to that, before selling the consumer finance unit, which contributes not a negligible part of the group, do you think there is some room maybe in your credit exposure to reduce risk-weighted assets, that maybe do consume capital but do not add much to the profit of the bank?
Okay. Yes, the RWA were down mostly because it's written on page 39, because we kept the GACS senior notes on the Exodus transaction. Globally, we had an impact of reduction of RWA. On LGD waiver, I'm sorry, every quarter, I have to answer to this question. Unfortunately, I don't have any answer up to now. As you know, we have done an application beginning of the year, when the plan was much lower than the effect of our de-risking strategy. Let's wait another few weeks in order to complete and understand the magnitude of our de-risking, but I am pretty sure that with this opportunity, in some way, we will reach the target that we announced.
On the consumer finance, let me be quite clear, even though, of course, again, we are in the middle of some discussions, I don't want to embarrass anybody, I don't want to be embarrassed. I am not saying that we are selling our consumer finance activity. I'm just saying that we are optimizing our consumer finance activity. We have two product factory, which basically do the same business. We are trying to understand the best way to make out some capital, trying to keep the maximum of the profitability that we still have from our consumer finance activity. I am not going to sell the activity, of course.
Okay. Thanks, Castagna.
The next question is from Giovanni Razzoli of Equita SIM. Please go ahead, sir.
Good afternoon. Good evening to everybody. I have a couple of questions. The first one is important to me to understand the timeline of this much awaited de-risking plan. By mid-November, if you receive the binding offers on the NPL disposals, would you be in the condition to also define the overall plan involving also the consumer credit, or shall we wait another couple of weeks or by year-end, you will have a clearer picture of all the moving parts? This is my first question. Would you commit to us that if by mid-November, the overall picture will be defined, you can share with us all your thoughts into a conference call or presentation that everything will be once and for all defined, we will have all the moving parts clear in mind. My second question is, again, on capital.
You have mentioned that you have several elements to shore up your capital position. I was wondering if you can share with us what could be instead the headwinds that at sector level you may face. I'm referring to the TRIM process. Is the process ongoing? If you expect something in the next couple of quarters, what about the update of the risk parameters of the internal models? Shall we expect something by year-end shall we expect some headwinds on the capital? Thank you.
Okay. Again, it's quite embarrassing to talk to you during some very hard negotiation. As you know, time is a part of negotiation normally. If I say to you, by this date, I will have something, this already give my counterpart some advantage or disadvantage. Please don't ask me to be more precise that I already did, I already write down on my presentation. I say that there is an official expiry date for the presentation of the offer, which is mid-November. Of course, we are very much interested to receive the best possible offer, to analyze this offer in order to give in a couple of weeks time, since we will receive a comparable offer, which I already said is a sort of dual track, GACS trade. We need some time to understand what is the best way.
As soon as we do, as we receive the offer, we make up our mind in what is the best potential solution, of course, I will have a conference call with all of you announce the global sides of my de-risking. I never told anybody in the market that I am doing something without having the capital to do what I say. For sure, if you will have a presentation, you will know exactly how we will finance our de-risking. The two things should come together.
Okay, that's clear.
Four, three might be, frankly speaking again, maybe it's because we are very much concentrated on these aspects which for us are very crucial, very important. We don't have any worries, and not even any information which anticipate any of the future impact. Our model, as you know, were validated, maybe the last one to be validated with the new rules, so we do not expect any major change. We are talking frequently, and we will see together with the other banks, the effect also of these new rules when they will come.
Thank you.
The next question is from Anna Adamo of Autonomous Research. Please go ahead.
Hi. Thanks for taking my questions. On the NPL disposal, you mentioned EUR 8.6 billion of gross book value. I would like to understand whether this number include also partial write-offs exposures, which are currently off balance sheet. On Agos, can you remind us what is the book value of the stake, and whether this is fully deducted from CET1? Thank you.
Okay. Thank you, Ms. Adamo. Yes, in EUR 8.6 billion, there is the global consideration, so there is also some hundreds of write-off. We don't have many because, as you know, we have reinstated the vast majority of them. For Agos, yes, they are fully deductible because, as you know, we are above the threshold, and our stakeholdings on our book is EUR 685 million.
Okay, thank you.
The next question is from Delphine Lee of J.P. Morgan. Please go ahead, madam.
Yes, thank you for taking my questions. I just have two. On funding, just wanted to clarify, sorry if I missed this, on TLTRO, how much is actually deposited in the ECB, and I can see that some of it is in your investment portfolio, but just want to have a little bit of the split. Should we understand that you have basically the flexibility and you're thinking about not refinancing the EUR 1.7 billion of institutional bonds next year using the TLTRO amounts? Secondly, on NII, just wondering what the impact could be from the repricing that you mentioned, which mainly occurs in 2019. Just wanted to understand a little bit of the magnitude, if you have any color to give. Thank you very much.
Good evening, Ms. Lee. On the TLTRO, I have on page 25 of our presentation, there are all the assets employed with facing the TLTRO financing. Very few of them are Govies. The majority are retaining cover bonds, ABS, and self-securitization. Most of them are quality marketable securities, and they of course, are on top of the EUR 20 billion of unencumbered liquid asset that are available for refinancing right now, apart from the TLTRO. Repricing, again, I see that is an opportunity and an obligation because, of course, we have also a very strong sensitivity to the increase of interest contribution. Our sensitivity for every 40 basis points of increasing on price is EUR 170 million, so of course, we will try to exploit, of course, any opportunity arising from the market.
Just as a follow-up, if I may, on the repricing. This is mainly related to market rates, short-term rates on EURIBOR. Do you see also the Italian banks in general repricing a little bit the loan book to adjust for this higher funding cost?
Yes. As I was mentioning, most of the increase in loans of this quarter came from negotiation started a few months ago. Normally you have a time for granting new loans, which takes some months, especially in the big transaction. Of course, there is different timing to market for increasing pricing. We have started already, of course, for the mass market activity, but we are foreseeing also to be compliant with regulation in most proper activity starting by beginning of the year. The spread sensitivity is not only to EURIBOR, but to any increase of price that we are applying.
Great. Thank you very much.
The next question is from Hugo Cruz of KBW. Please go ahead, sir.
Hi. Thanks for the time. Couple questions. One on some of your other banks that have reported so far have been talking about the need to reprice the loans. Could you give us your comments on that? Then on the LCR and NSFR, how do the ratios look like if you remove the TLTRO? Thank you.
Sorry, what I could tell you more on pricing? I don't understand very clearly.
I was just wondering, apologies if you answered this already, but some of the other banks that have reported so far have started to talk about the need to reprice loan rates.
Yeah, of course. Yes.
Do you think that could have any impact on cost of risk, loan growth? How much do you think you can reprice over the next few quarters? Any comments on that would be appreciated.
I don't think so. Repricing means that you are going to reprice also good client and not only to shift your lending propension versus lower PD rates. Of course, we are going to try to, especially if the market is going in the same direction, I think that it's very feasible, repricing also with the good rating names. I don't think this will bring to a lowering of the quality of our assets. Again, on LCR, we are right now 133%. We have, of course, projection end of the year to be higher than that. NSFR is still well above 100%. We don't foresee also in terms of TLTRO nowadays any problem due to this maturity in 2020.
Okay, thank you.
The next question is from Ignacio Cerezo of UBS. Please go ahead, sir.
Good evening, Giuseppe. Hopefully quick questions from me. The first one is whether the GACS price, and judging by your conversations with prospective buyers, has deteriorated much from the levels we saw before the summer. The second one is if you can sort of share with us your best approximation to cost of risk next year in the maximum NPL disposal scenario, i.e., the EUR 8 billion, EUR 8.5 billion, if you think you can normalize the cost of risk closer to the 60, 70 basis points you have mentioned in the past. The third question is on whether Anima could be part of the funding sources, basically for the de-risking. Thank you.
Thank you. We don't have nowadays the possibility to calculate the exact cost of the guarantee for GACS because this will be determined at the end of the road. In basically almost in March, if we go for a GACS. Nowadays, our projection is that also with an increase, with the foreseeable increase due to the current level of CDS, a GACS could still be convenient vis-à-vis a straight sale. Of course, this depends on which kind of offer we will receive, and on that we will apply all the threshold of the GACS cost and sensitivity in order to understand which kind of transaction would be better for us. Cost of risk, yes, this is exactly the reason why we are focusing so much on de-risking.
We are willing to reach the level of our peers, having also a very good level of disposal as a project. For sure, within the next year, we will be able to have a consistent cost of risk vis-à-vis our competitor. Anima, right now is not in our perimeter for disposal. Let's say that we are very fond of our asset under management activity. Nowadays, we don't see the need. In any case, it's very easy for us to change our mind because as you know, it's a one-side decision. Even though I decide to sell a stake, the day after this is liquid on the market. Meanwhile, if you have to reach an agreement with somebody else, we have to work a lot in order to align the interest and to try to keep the most of the possible value.
That's why I'm not talking about Anima. It's really not nowadays in our plan, because still we need to have some good reserve for the future.
Excellent. Thank you.
The next question is a follow-up from Mr. Riccardo Rovere of Mediobanca. Please go ahead, sir.
Yes. I'll be quick. I've noticed that the gross amount of total bad loans came down by roughly EUR 1 billion in the quarter, which is no doubt a remarkable achievement. Is this entirely due to internal workout, or was it affected also by write-offs, cancellazione or something like that?
It's mostly out of workout. That's why I had this page five presentation, just to give the idea of how big is our workout activity. Of course, there could be also some few cancellation, but the vast majority of it comes from internal workout, both from UTP and bad loans, of course.
Perfect. Thanks.
One moment for the next question. The next question is from Mr. Alberto Cordara of Merrill Lynch. Please go ahead, sir.
Hi, good evening. My question is more of a system question. Yesterday we heard from Messina Intesa that there is a mentality that Italy is getting into some kind of Armageddon. The reality is very different. I just would like to have your view on what we should expect in the economic cycle next year and if there is any risk in your view that Italy may slide into the recession again or this risk is very remote. Also, in terms of primary formation of NPLs in terms of flows, if we should expect the trend to continue being positive or maybe there is going to be an inflection point at some stage. Thank you.
No, frankly speaking, unfortunately, I didn't follow Mr. Messina conference call, I don't know exactly what he was referring to. Let's say that, of course, we have experienced some uncertainty on the market, and we know very well. I think both of us know the situation in Italy. There is, I think, more pressure by this confrontational attitude rather than our real economic environment. Frankly speaking, I don't see any recession at the door. Neither we have some clue about recovering of inflows of deteriorating loans. For the time being, let's cross finger. Things are, of course, mostly affected by this tough negotiation, and this different view on growth by the Italian government vis-à-vis the European Commission. Frankly speaking, I don't think we can see and say right now that there is some sort of pro-recession at the door.
The view of the market, particularly the fixed income market on BTPs, is a view that is not really based on what you can experience on the ground or not. The reality seems to be very different than where the market is indicating us to be.
I think most of the spread is due to this very hard negotiation, to the risk that Italy could take some extreme decision, not related to the real economy.
Clear. Many thanks. Thank you very much.
Thank you.
The next question is from Domenico Santoro of HSBC. Please go ahead, sir.
Hi, good evening. Just a quick follow-up to the answer you gave to the colleague before on the question regarding loan loss provision. Have I understood correctly that you, in case of a disposal of the non-performing loans book, you expect a cost of risk which is more in line with your competitor? If I look at your direct competitor, the cost of risk nowadays is around 50 or 60 basis points. Is this a level that you consider realistic after the disposal, or in a couple of years, or the risk profile of your business, it doesn't allow this sort of provisioning run rate? Then just a detail, the negative one-off in Q2 because of the disposal of the equity tranche discount. We know that there was a mistake in the way the cash flow had been calculated by the rating agency.
I was just wondering whether you have an update there and whether there might be some renegotiation of the price, and maybe one-off can be recovered. Thank you very much.
I would say yes and yes. To be very sharp, I would say 50, 60. I feel that we are in the same territory, maybe a better one vis-à-vis many of our competitors. We are only granting very good quality loans. Once we have solved our problem with our heritage, I am sure that cost of risk should go down in line with our competitor. Also, the calculation we are doing, of course, if you are able to de-risk the bank, the sights that you were mentioning should go to this level. Also, we are working, of course, on that, let's say misinterpretation or mistakes related to the Project Exodus valuation. Of course, again, we are not the only part in cause, so we have to deal with many different counterparty. Of course, our target is to recover the majority of the lower value that we experienced.
Great. Thank you.
Mr. Castagna, at this moment, there are no questions registered, sir.
Okay. Thank you very much, everybody, and see you next, not next quarter, but next time. You have the possibility to hear about our transaction. Bye.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.